An assessment of impact of changes on Labour Code on Wage Structure

IMPACT OF LABOUR CODES ON WAGE STRUCTURE

INTRODUCTION

Labour reforms when implemented would make Indian economy more productive and competitive.When implemented, the industries would need to file just one return for all four Codes. The ultimate goal of the government is to see India in top 10 nations in ease of doing business index of World Bank with completion of long-pending labour reforms. These reforms could start a chain-reaction in the economy. With ease of compliance would come increased formality, which will lead to proliferation of larger enterprises and more organized jobs, which, in turn, will ensure that more firms and workers’ pay taxes, increasing government revenues.

The Code on Wages, 2019 has introduced a universal definition of wages that has been incorporated across the three other Labour Codes as well. This definition is a marked departure from the multiple varied definitions of the term across different enactments. While the attempt to universalize the definition of such a key term is commendable, much remains to be seen with regards to its effects on wage structuring, payroll, and statutory benefits.

The new definition of ‘wages’ contains basic pay, dearness allowance and retaining allowance as inclusive aspects of remuneration. Whereas bonus, house-rent allowance, overtime allowance, conveyance allowance, gratuity, and commissions amongst others, form a part of excluded allowances. The operative condition in the definition being, that if any of the excluded allowances barring gratuity and retrenchment/retirement benefits exceed 50% of all the remuneration, then the amount which exceeds that threshold shall be deemed as remuneration and added to wages under this definition.

OVERVIEW OF THE DEFINITION AND ITS EFFECT

Wages as defined under Section-2(y) of the Code on Wages, 2019 or Section-2(zq) of the Industrial Relations Code, 2020 or Section-2(88) of the Code on Social Security, 2020 and Section-2(1) (zzj) of the Occupational Safety, Health and Working Conditions Code, 2020 reads uniformly. Thus, for all of the twenty-nine central labour laws subsumed into four labour codes, ‘wages’ has the same meaning

The definition divides the scope of wages into inclusive components and excluded allowances. The proviso under the definition stipulates that the excluded allowances cannot exceed fifty percent of the total remuneration earned through the inclusive components under the definition. The amount exceeding this fifty percent threshold would be treatedas deemed wages and added to the same.

Inclusive Components:

The definition provides as follows:-

“Wages means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed inrespect of his employment or of work done in such employment, and includes”

The components made part of this inclusive part are basic pay, dearness allowance and retaining allowance.

Excluded Allowances:

1. The definition goes on to exclude the following from the scope of wages and applies the proviso to the same:-
   1. 1. 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.
   2. 2. The value of any house-accommodation, or of the supply of light, 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.
   3. 3. Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon.
   4. 4. Any conveyance allowance or the value of any travelling concession.
   5. 5. Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment.
   6. 6. House Rent Allowance
   7. 7. Remuneration payable under any award or settlement between the parties or order of a court or Tribunal.
   8. 8. Any overtime allowance
   9. 9. Any commission payable to the employee.

Effect of the Proviso:

The following table explains the proviso’s effect:-

We shall analyze the effects of this new definition on various statutory benefits under labour laws such as the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; the Employees’ State Insurance Act, 1948; the Payment of Gratuity Act, 1972 and the Payment of Bonus Act, 1965 . The impact of this new definition will be compared to the pre-existing definition operative in the above enactments. Following this, their effects shall be juxtaposed to determine the utility of having a universal definition of wages in the context of statutory benefits.

The Employees’ Provident Fund:

Employees’ State Insurance:

Gratuity:

Minimum Wages:

Bonus:

IMPACT ON PAYROLL

The consequences of the new definition on payroll can be summarized as follows:

1. 1. Salary Structure
   1. i. HR and payroll personnel will have to be wary of cases where employees are earning more than 50% of their total remuneration through their excluded allowances. This will lead to the application of the proviso and inclusion of the excess as deemed wages. If this process continues over time, it could lead to wages being inflated and thus statutory contributions for EPF and ESI steadily increasing over time.
   3. ii. The Supreme Court decision in the Surya Roshni and Vivekananda cases provided that where an allowance or emolument is paid universally, necessarily, and ordinarily, the same is liable to be included as part of basic wages for the calculation of EPF contributions. The new definition of wages has adopted a via media between complete exclusion of allowances and the Supreme Court decision that for all practical purposes included all allowances.The intent behind the same is to ensure that employees receive at least 50% of their wages in the form of fixed components.
   5. iii. On a more positive note, the new definition is likely to be beneficial for those in entry-level jobs as earlier their wages for statutory contributions included several emoluments which lead to higher amounts being deducted towards EPF and ESI contributions. Whereas, under the new labour codes the scope of wages vis-à-vis statutory contributions has reduced meaning that the take home salary of those in entry level jobs will be higher. This will benefit employees as they will have an added incentive to enter formal modes of employment and will reduce costs for employers as well due to reduction in the quantum of contribution.
3. 2. Payroll Management
   1. i. The issue of fluctuating wages is one payroll personnel should pay close attention to. For example, those employedin executive positions or employees earning large sums of money through performance bonuses can be affected as year-end bonuses can lead to an increase in wages if the proviso becomes applicable. Even in cases where gratuity has to be paid, if an employee draws a large bonus in his last month of employment, this can lead to the quantum of gratuity increasing drastically.
   3. ii. This involves making the requisite changes to payroll processes as well as any payroll management software that is being used.
   5. iii. Chapter-II of the Code on Wages, 2019 provides for payment of wages for overtime work to employees under Section-14. While the provision is applicable only to those drawing minimum wages, it provides that employees doing overtime work shall earn at an overtime rate at twice the normal rate of wages for every hour or part thereof worked in excess of normal hours. Thus, this is another aspect that needs to be taken into consideration as overtime allowance would fall under the excluded allowances.

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This information provided in this article is purely for educational & learning purpose. The viewers to take appropriate professional advice before taking any implementation based on the given content.

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