The New Wage Policy, 2019
As Margaret Mead rightly said - “Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”
INTRODUCTION
On the same note, The Narender Modi administration began considering a plan in 2015 to consolidate India's 44 labor laws into four codes in order to rationalize labor laws and improve ease of doing business. The Code on Wages will prove to be a milestone and incorporate to give respectable life to 50 crore unorganized sector workers.
This code on wages 2019, which is yet to be implemented in April 2021, received Presidential assent on the 8th of August in 2019, after getting the nod from both the Parliament Houses.
This code has subsumed 04 labor regulations which are important for the worker’s well-being. Among the four acts are – The Payment of Wages Act, 1936 belonged to the pre-independence era, The Minimum Wages Act, 1948 is also 71 years old, The Payment of Bonus Act, 1965 & The Equal remuneration Act, 1976 are also subsumed in the code.
This code simplifies all of the above-mentioned legislation and brings them all together under one roof. By taking both the sectors i.e., organized and unorganized into account, it has broadened the view of how “employer” and “employee” should be seen now. Because of this, all these former legislations which are now under the new code have more impact and applicability. For example, formerly the Minimum Wages Act and the Payment of Wages Act were applicable only to workers whose earnings were below a particular slab, and that too only if they worked in scheduled employment. But the new wage policy, covers all kinds of employees, employers, organizations from any kind of employments unless stated otherwise.
Under this Code, the minimum wages and the payment of wages provisions cover all establishments, employees, and employers as defined unless specifically exempt (the member of the Armed Forces of the Union and apprentice engaged under the Apprentices Act, 1961 are specifically excluded from the definition of employee).
The salient features of the Code are listed down below:
1. Minimum Wage - Many unorganized sector workers like agricultural workers, painters, persons working in restaurants and dhabas, chowkidars, etc. who were then out of the ambit of minimum wages will now get legislative protection of minimum wages after the bill becomes an Act.
This code also ensures that minimum wages along with timely payment of wages to all the employees and workers. It has been ensured in the bill that employees will be getting monthly salary shall get the salary by the 7th of next month, those working on weekly basis shall get the salary on last day of the week and daily wagers should get it on the same day.
2. Definitions - There are currently 12 different definitions of wages in the different Labour Laws leading to litigation which leads to difficulty in its implementation. Under the new Policy, the definition has been simplified and is expected to reduce litigation and will entail a lesser cost of compliance for an employer.
The Code was brought in to standardize the meaning of the term “wage” to in turn bring in uniformity in the way the rules apply. The new definition consists of three parts-
i) an inclusion part,
ii) specified exclusions and;
iii) conditions that limit the quantum of exclusions.
The definition includes basic pay, dearness allowance, and retaining allowance. It specifically excludes components such as statutory bonus, the value of house accommodation and utilities (light, water, medical, etc.), employer contribution to provident fund/ pension, conveyance allowance/traveling concession, the sum paid to defray special work expenses, house rent allowance, remuneration payable under the settlement, overtime allowance, commission, gratuity, retrenchment compensation.
The exclusions that have been specified cannot exceed 50 percent of all remuneration and if that happens it will be counted as wages under remuneration. This was done to discourage employers from bringing in compensation policies that reduce wages to below 50 percent of the total remuneration.
3. 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.
4. Floor wage - According to the Code, the central government will fix a floor wage, taking into account the living standards of workers. Further, it may set different floor wages for different geographical areas. Before fixing the floor wage, the central government may obtain the advice of the Central Advisory Board and may consult with state governments.
The minimum wages decided by the central or state governments must be higher than the floor wage. In case the existing minimum wages fixed by the central or state governments are higher than the floor wage, they cannot reduce the minimum wages.
5. Transparency - Many changes have been introduced in the inspection regimes including web-based randomized computerized inspection scheme, jurisdiction-free inspections, calling of information electronically for inspection, the composition of fines, etc. All these changes will be conducive for the enforcement of labor laws with transparency and accountability.
6. Limitation Period - There were instances that due to a smaller limitation period, the claims of the workers could not be raised. To protect the interest of the workers, the limitation period has been raised to 3 years and made uniform for filing claims for minimum wages, bonus, equal remuneration, etc., as against the existing varying periods between 6 months to 2 years.
7. 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.
8. 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.
9. Advisory boards - The central and state governments will constitute advisory boards. The Central Advisory Board will consist of: (i) employers, (ii) employees (in equal number as employers), (iii) independent persons, and (iv) five representatives of state governments. State Advisory Boards will consist of employers, employees, and independent persons. Further, one-third of the total members on both the central and state Boards will be women. The Boards will advise the respective governments on various issues including (i) fixation of minimum wages, and (ii) increasing employment opportunities for women.
10. Other provisions - Authorized governments have to appoint Inspectors-cum-Facilitators (in the place of Inspectors), to carry out inspections. They advise employers and employees for better compliance. This will do away with any malpractice or loose ends in the inspection. The code has also increased the penalties that will be levied for non-compliance depending on the seriousness of the offense. An offender can be penalized with imprisonment for three months and/ or with a fine of up to INR 100,000.
EFFECT ON EMPLOYEES
All thanks to the government’s new compensation rules, salary slips, provident fund (PF) and gratuity components, take-home pay, and even balance sheets of India Inc will be impacted. The new definition of wages now caps allowances at 50% of total compensation. Therefore, the basic pay will now be 50% or more of the total pay from April.
In a nutshell, the following points come forth,
1. Since the non-allowance part is usually less than 50%, the pay structures will change.
2. The Provident Fund (PF) contributions of the employees and employers will increase.
3. Since PF will go up, the take-home pay will reduce.
- The take-home pay will reduce but social security and gratuity will increase. Since the basic pay will go up, gratuity, which is calculated on the basic pay, will also increase.
- The increase in gratuity and PF contribution may equate to higher costs for companies.
However, for executive salaries, allowances make up 70-80% of total compensation. The new wage code will not allow salaries to be structured with higher allowances for the purpose of lower social security contributions.
According to an excerpt from an article in Economic Times, industry experts have their own take on the wage code:
Saraswathi Kasturirangan, partner, Deloitte India said, “the increase in wages for purposes such as PF, gratuity, etc., will impact employers’ costs as well as employee take-home pay”.
Xpheno co-founder Kamal Karanth said: “Gratuity payout hike will increase the cost impact for employers when it comes to CXOs. And CXOs will see an increase in their net income from gratuity by almost 1-1.5 times, thanks to this new wage code.”
According to Vishal Grover, practice reader (retirement solutions), Aon India, organizations have started to inquire about the potential changes in the compensation structures and their impact on the wage bill.
“Initial set of inquiries have come from organizations whose basic pay to gross pay ratio is much lower than 50% and which foresee a significant impact on their wage bill,” Grover said. As per Aon India, the typical basic pay to gross pay ratio is in the range of 30% to 50% across industries.
“Therefore, all organizations which have a basic pay to gross pay ratio of less than 50% would be adversely impacted through higher payroll costs,” Grover added.
Staffing firms, which have the majority of their workforce in the lower to middle-income pay brackets, also foresee some tweaking at their end to align to the new wage definition.
“To meet the new definition, it is necessary to tweak the wage structure. As a consequence, a portion of house rent allowance shall also be included for the purpose of determining the contribution to the social security scheme like PF,” said Rituparna Chakraborty, co-founder of Teamlease Services.
EFFECT ON COMPANIES
The new wage code makes it mandatory for fixed-term employees to receive gratuity, whether or not an employee is fulfilling the condition of the 5-year completion. After the policy is implemented, companies may face an increase of 3%-10% in their wage or salary cost with the subsequent increase in gratuity and encashment of the leave.
To review the potential changes in the salary structure, companies are running various models so that compliance with the wage code becomes smooth and to determine the potential compensation costs. The more important components under analysis include an increase in liabilities in plans such as gratuity and leave encashment especially in organizations with a long-tenured employee base.
The new code is an amalgamation of 29 central labor laws into four codes which include those related to wages and social security.
The term “wage” includes components like basic pay, dearness, retaining, and special allowances under the new code. Allowances like HRA, conveyance, statutory bonus, overtime allowance, and commissions have been excluded for computing wages, which, under the code, should be at least 50% of the total remuneration.
In the present compensation structure that is prevalent across sectors, basic salary is in the range of 30% to 50% of the gross, while allowances make up the balance. Some companies, said experts, plan to take the basic pay to 50% of the remuneration so that the specified exclusions are capped at 50%.
An establishment or organization can take a sigh of relief as it will also be benefited as the number of various registers, returns, forms, etc., not only they can be filed electronically as it is envisaged that through rules, not more than one template will be prescribed by the concerned authority.
EFFECT ON LABOUR LAWS
The codes on wages, industrial relations, social security and occupational safety, health and working conditions have been introduced with the promise of making India’s labour laws modern and better suited to the needs of changing business environment. Covering almost all categories of employees, the new codes aim to expand the social security net, regulate conditions of employment and streamline conditions relating to health and security at a workplace. The changes though come at a time when several states have already diluted their labor laws due to the pandemic-induced economic slump.
Layoffs Made Relatively Easy
Among the new labor laws, arguably the most controversial is the Industrial Relations Code that now includes the existing laws related to trade unions, industrial disputes, and working conditions in industries. The old laws were formulated in the pre-independence era and were condemned by many for favoring workmen and unions in a manner that distorted employment practices and prompted companies to hire contract labor to circumvent the laws.
One of the reasons behind this was the mandate that said industries employing more than 100 workers have to take permission from the government to temporarily refuse work or terminate workers. Another reason was the lengthy and convoluted procedure to take approval from various departments for shutting business.
With the new laws, these mandates will now apply to factories mines or plantations that employ more than 300 workers. As many as 14 states have already increased this threshold to 300 workers and so, the industrial relations code only makes this position universal.
EXTENDING SOCIAL SECURITY NET
A gig worker is someone who earns through activities outside the employer-employee relationship. A platform worker takes up work through online platforms to provide services outside the employer-employee relationship.
The Code on Social Security enables the government to extend social security benefits on health, maternity benefit, old age protection, education, or disability cover to the unorganized, platform, or gig workers. Experts however have pointed out that such workers may end up paying for their own social security.
Conclusion
In conclusion, education about the policy and its implications on their operations is necessary for both employers and employees. Since the policy is yet to take effect, it is a little early to comment on the impact it will have on the industry. The transition will not be smooth as this directly affects the take-home salary. Like every new policy, this one too will take a little trial and error to get molded properly.
Another roadblock could be the ambiguity and suddenness of the implementation. Industries should have been given a little more time to get used to the idea.
REFERENCES
Business Development | Account Management
4 年Thank you for sharing ..Very insightful read about The new wage policy ...
Business Analyst | Power BI Developer | SAP CPQ Functional Consultant | MBA 20-22 SIMS, Pune
4 年Good read. Thank you Bharti Verma
Tech Strategy and Transformation Consultant
4 年Well Written