The New Wage Code in India

The government, in an attempt to promote ‘Make-in-India’ initiative, is bringing in various legislative, administrative and e-governance related changes to facilitate the ease of doing business in India. The Labour Code is one such step in that direction. As part of labour law reforms, the Government of India has undertaken rationalisation of 29 labour regulations and subsume them into 4 labour codes namely,

• The Code on Wages, 2019 that has included 4 legislations relating to wage rate, time of payment, bonus, equal opportunity and remuneration
• The Code on Social Security, 2020 that integrates nine statutes including the statutes governing Provident Fund, ESIC and Gratuity 
• Code on Industrial Relations which consolidates three enactments relating to industrial relations and trade unions
• Code on Occupational Safety, Health and Working Conditions that amalgamates 13 labour laws relating to safety and health standards

This labour code is all set to be implemented in the new financial year starting in April 2021. Companies are in the process of interpreting the new statute and assessing the financial, operational and legal impact on the company. However, there is anxiety among employees on the uncertainty surrounding their wages, their take-home pay and retirals. Experts say its too early to decide the impact of the code as of now as it brings about major changes in the compensation schemes all over the country.  

The major elements of the new policy are:

• The definition of ‘wages’ under the new Code is an inclusive definition and includes all remuneration, but excludes certain allowances and benefits such as house rent allowance, overtime allowance, statutory bonus, employer contribution to provident fund / pension etc. If the value of exclusions exceeds 50% of the total wages, then the excess amount would be included in the wages. Further value of remuneration in kind is also to be included up to 15% of the total wages. One needs to note that this would mean that wages under the new code would be at least 50% of the total wages. Given that today most companies have their basic salary of around 35% to 45%, this would amount to a change for them.
• Same methodology for setting Minimum wages all across India - At present, many of the states have their own minimum wages. Through Code on Wages, there will be a common methodology to fix the minimum wages has been simplified and rationalized by doing away with the type of employment as one of the criteria for fixation of the minimum wage. The minimum wage fixation would primarily base upon the geography and skills of the worker or employee. The Code prohibits employers from paying wages less than the minimum wages. Minimum wages will be notified by the central or state governments. This will be based on time, or the number of pieces produced. The minimum wages will be revised and reviewed by the central or state governments at an interval of not more than five years. While fixing minimum wages, the central or state governments may take into account factors such as (i) skill of workers, and (ii) difficulty of work.

• Overtime - The central or state government may fix the number of hours that constitute a normal working day. In case employees work in excess of a normal working day, they will be entitled to overtime wage, which must be at least twice the normal rate of wages. Also, interestingly, the government may also change the existing time limit of overtime under the new Labour Law, which that means, even for working more than 15 minutes beyond the scheduled hours, companies will have to pay their employees for this. That is, after the completion of working hours, if an employee works for even 15 more minutes, the company will have to pay for it
• The wages for calculating gratuity will no longer be limited to basic salary and dearness allowance alone. wages for the purpose of calculation of gratuity and provident fund contributions will have to be at least 50 per cent of employees' total pay. To comply with this rule, employers will have to increase the basic pay component of salaries, leading to a proportional increase in gratuity payments and employees’ contribution to the provident fund. This will mean that the gratuity costs for organisations will go up significantly.
• The labour codes would not only provide social security to organised sector employees but also to informal sector workers like gig and platform workers. This means that the entire workforce of over 50 crore in the country would get social security coverage under the new legal framework from April onwards. Gig and platform workers are those who are not on the rolls of an organisation and they are not entitled to get various social security benefits.
• Organisations will retain the ability to structure wages as tax efficient as possible, with the caveat that if excluded components exceed 50% of the gross, they'll be counted as wages till the 50% limit.
• PF contributions for International Workers (about whom the Social Security Code is completely silent at present) which are currently uncapped can now potentially be limited to 50% of the gross.
• Deductions: Under the Code, an employee’s wages may be deducted on certain grounds including (i) fines, (ii) absence from duty, (iii) accommodation given by the employer, or (iv) recovery of advances given to the employee, among others. These deductions should not exceed 50% of the employee’s total wage.

In addition, the Code facilitates implementation by removing extraneous provisions, providing uniform definitions, reducing overlapping enforcement authorities, reporting and filing requirements, and thereby reducing the compliance requirements and the costs associated therewith for employers. That apart, it aims to promote transparency and accountability in the enforcement of labour laws, which is an ambitious but urgent measure.

Only time will decide the implications of this policy as it gets implemented in April 2021.