Code on Wages Creates Maze for Workers

In an attempt to provide a universal definition of wages across labour laws, the new code bills have defined wages in a manner which may lead to a restructuring of the wage component of workers. This change may benefit some workers but not all workers, some of them may find themselves with less take-home pay.



THE Ministry of Law and Justice had notified the Code on Wages, 2019. On August 8, 2019, it became the first of four labour-related codes of law—formulated to simplify, consolidate and update the existing labour laws—that received the President’s assent. These four codes replace the earlier twenty-nine laws related to various aspects of labour regulation.

The Second National Commission on Labour had submitted its report in June 2002. It had recommended that the existing labour laws should be amalgamated into five broad categories of industrial relations, wages, social security, safety, welfare, and working conditions.

To facilitate the implementation and also remove the multiplicity of definitions (specifically the definition of wages) and authorities and to safeguard the welfare and benefits, the Workers Code on Wages Act, 2019, was introduced by amalgamating the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976.

Section 2(y) of the code on wages defines wages as inclusive of basic pay, dearness allowance, and retaining allowance, all expressed in terms of money or capable of being so expressed, and meant to create expressed or implied employment.

The term “wages” does not include bonus payable under any law, the value of any amenity or any service excluded by order of any appropriate government, the contribution by an employer to the pension or provident fund of an employee, nor the interest it earns, or the conveyance allowance or travel concession, house rent allowance, and the remuneration payable under any award or settlement or order of a court or tribunal, overtime allowance, commission, gratuity, retrenchment compensation, retirement benefits.

The specified exclusions, however, may not exceed 50 percent of the total remuneration. If it does exceed the total remuneration, the excess amount shall be deemed as remuneration and will be considered as a part of the wages. This aims to ensure that companies do not adopt compensation structures that result in wages being reduced below 50 percent of the total earnings of an employee.

The new definition of wages will affect the employers as well as employees. As planned, the definition of wages is now consistent across all four labour codes and multiplicity of definitions have been avoided, thereby removing possible confusions. The computation of wages will include basic pay, dearness allowance, retaining allowance, and it specifically excludes house rent allowance, conveyance, statutory bonus, overtime allowance, and commissions.

Most employers today have salary structures in which the basic pay varies from 25 to 40 percent of the total remuneration, while allowances make up the remaining wages. Employers contribute 12 percent of the salary towards the Employee Provident Fund contribution. To calculate this 12 percent, the employer takes into account the basic pay and dearness allowance.

The salary is structured in such a way that the basic pay and dearness allowances are generally less than 50 percent of the total salary. However, to comply with the new code, the companies or employers will have to increase the basic pay component of salaries (or remuneration). This will result in a proportional rise in gratuity payments and also a hike in the employer’s contribution to the Provident Fund.

Therefore, expenses will increase for the employer as the cost per employee will go up, as gratuity is mandatorily paid to employees who have worked for a fixed term.

Though the employers are not required to change their Cost To Company (CTC) structures under the new law, however, if the existing CTC structure consists of basic salary plus other components to be less than 50 percent of the total remuneration, the employer will have to rethink the CTC structures.

The new definition of wages under the law will have a direct consequence on the employees as well as their take-home salary will reduce. However, employees will get tax benefits from the new code. The Employees’ Provident Fund Scheme enjoys a maximum tax concession (EEE-Exempt at the time of contribution, accrual, and withdrawal). Therefore, it will encourage employees to make larger contributions to their retirement funds.

An employer is required to contribute 12 percent of at least Rs. 15,000 as a provident fund contribution, where the salary is more than Rs. 15,000 under the Employees’ Provident Fund Scheme, 1952. For those whose salaries are Rs. 15,000 or less, as well for mid-range salary earners, the new definition of wages will ensure a higher provident fund contribution and savings. The increase in retirement corpus of employees ensures employees’ social security. However, as an obvious corollary, the new code will have the immediate effect of reducing cash-in-hand.

This reduction will have a direct impact on the investments, expenditures, and lifestyles of the salaried employees in the low-to-middle income brackets.

(Aanchal Singh and Gauravjeet Narwan are advocates based in Delhi. The views expressed are personal.)


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