The New Wage Rules 2021 - Explained

Let's understand the definition of Wages as per Labour Law

A wage is monetary compensation (or remuneration, personnel expenses, labor) paid by an employer to an employee in exchange for work done. In a wider sense, wages mean any economic premium paid by the employer under some contract to his workers for the services delivered by them.

So, you might ask, what exactly does the New Wage Policy consist of? Well, the New Wage Policy consists of:

(i) Basic Pay

(ii) Dearness Allowance

(iii) Retaining Allowance

but does not include-

(a) Any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment.

(b) The value of any house-accommodation, or of the supply flight, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government.

(c) Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon

(d) Any conveyance allowance or the value of any traveling concession

(e) Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment

(f) House rent allowance, etc.

A layman person might look at the wage policy in one glance and say "Now that the Government has said that you can exclude HRA, Conveyance, etc. let's keep Basic as just 10% and put entire amount of 90% into allowance.' But, you can't do so now! How? Let's understand this in the below section.

Can you explain with an example?

Suppose your company pays you 100Rs as salary with 40Rs as Basic and 60Rs as HRA but after this new wage policy, company has to pay 50Rs maximum as HRA and this excess of 10Rs will be added to the Basic. What this means is your basic and Dearness Allowance can't be lesser than 50%(overall remuneration).

Usually, most companies keep less than 50% of the non-allowance part of the employee's salary so that they have to contribute less to EPF and gratuity and reduce their burden. But after the new pay code is implemented, companies will have to increase the basic salary.

Applicable on whom?

Your basic and Dearness Allowance can't be lesser than 50%(overall remuneration).

Let's first understand the definition of Employee - A worker means any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether terms of employment be express or implied, and includes working journalists. So, all such skilled, semi skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical workers are covered under the new wage policy.

What are the changes after this New Wage Policy :

• Take-home salary will be reduced - after the new pay code is implemented, companies will have to increase the basic salary. This will reduce the take-home salary of employees, but increase PF contributions and gratuity contributions. Also, the employee's tax liability will be reduced, as the company will add its PF contribution to the employee to its CTC.
• Another point to be noted is that the minimum wage cannot be split into Basic or HRA or any other allowance now. It has to be given as Basic and Dearness Allowance only.
• Household budget will be affected - Employees will have lower cash in hand than they did every month. This can worsen the household budget, loans, SIP, etc. Usually, 40 per cent of the salaried class goes into paying EMIs, including home loans, car loan EMIs. It can be difficult to manage if the take-home salary is reduced by 10 per cent according to the new pay rules.

Let's understand the Maths behind this:

Let's suppose your current salary is ?10,000 a month, and the basic salary is ?4,000. That means, your salary reaches ?10,000 by taking into account allowances, etc. So, the employee and the company contributed PF at 12-12% comes to Rs 960. This makes your take-home salary Rs 8,840. We are assuming only professional tax deduction and no other deductions in our calculation.

With the new wage bill coming into pay, the basic salary will go up to ?5,000. Therefore the total PF contribution will go up by ?240 to ?1,200. And this will reduce your take-home salary to ?8,600 a month, which is ?240 less than the previous salary.

Different perspectives:

Given that the Labour Code has already raised several questions on account of various interpretations suggested by experts, it is imperative that the employers provide some guidance to the employees on what are the changes and what should they expect post the effective date. 

1. As employers prepare for the requisite change in their processes, policies and compensation structures, it is important that employees also start understanding how the codes will impact them and start a dialogue with their employer to discuss the nuances of the change.
2. In practice, most companies would include both the employer contribution to PF as well as gratuity entitlements as part of CTC. Hence, an increase in gratuity payout will reduce the quantum of special allowance and the take home pay of the employee.
3. From a PF perspective, contributions to PF on wages beyond the statutory wage ceiling are not mandatory. This is based on the provisions of the PF scheme as they stand today, as well as the principles arising from the Supreme Court ruling in the case of Marathwada Grameen Bank.

Road Ahead-

1. The Wage Code regulates the wages and bonus payments in all employments and has a broad based applicability, it is important for both employers and employees to understand the nuances and impact of the new law.
2. Tax experts, however, say that although the intent is simplification as well, there are various aspects even under new definition of wages (e.g. definition of remuneration in kind, inclusion of variable pay, valuation rules for remuneration in kind etc.) which need to be clarified and addressed before the implementation of the new codes.
3. There is definitely a need to look at the employment contract and the internal policy of the organisation to ensure that these are aligned with the position being adopted. There would be an impact on PF in respect of employees with wages below the statutory wage ceiling as well as international workers.
4. Overall, it is important for organisations to analyse the impact of the change in the definition of wages.
5. In a nutshell, while the new wage code decreases the take-home salary of an employee but increases the PF contribution. This might impact you in the near term but in the long run, it will help build a larger retirement corpus.