What are we set to gain from the labour code?
The idea for introducing the new Labour Wage Code, 2019 ("Code") was to universalise, consolidate and to create uniformity amongst all labour laws in India, and to include workers of the organized and unorganized sectors. India has had a history of labour legislation, many of which overlap with each other in terms of coverage, thereby resulting in confusion for both employers and employees alike. The Code subsumes the following four laws: (i) the Payment of Wages Act, 1936; (ii) the Minimum Wages Act, 1948 (iii) the Payment of Bonus Act, 1965; and (iv) the Equal Remuneration Act, 1976.
What does the new code entail on wages?
The new definition of "wage" under the Code stipulates that wage will include 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 in respect of his employment or of work done in such employment, and includes basic pay, dearness allowance and retaining allowance, if any.
What does the definition specifically exclude?
The definition of wage specifically excludes – (a) bonus; (b) the value of house-accommodation; (c) contribution by employer to any pension or provident fund ("PF"), and the interest accrued thereon; (d) any conveyance allowance/ travelling concession; (e) any sum paid to the employed person to defray special expenses entailed on him; (f) house rent allowance; (g) remuneration payable under any award or settlement between the parties or order of a court or tribunal; (h) any overtime allowance; (i) any commission payable to the employee; (j) gratuity payable on termination; (k) any retrenchment compensation or other retirement benefit payable to the employee.
The Code further provides that the allowances provided under the heads 'a' to 'i' should not exceed 50% of the total remuneration paid to the employee. In case such allowances exceed 50% of the total remuneration, the excess amount paid to the employee will form part of wages.
Analysis
This change will impact the basis for calculation of wages for the purpose of contribution towards benefits like PF and gratuity. Earlier employers would structure their salaries into base wage and other perks so as to ensure that benefits are being paid on the base wage only. However, given this change, benefits will now have to be calculated on at least 50% of the total remuneration of an employee. This will in turn also reduce the take home salary of employees.
The Supreme Court in the matter of theRegional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir and Ors.1dated February 28, 2019, observed that many employers in the wage structure have been camouflaging essential parts of basic wage as 'other allowances' in order to exclude the same from calculation of salary for ascertaining PF contribution.
For instance, if we assume basic salary to be INR 10,000 per month for a person who earns INR 30,000 per month as cost to company ("CTC"), for the purposes of PF, the contribution under the present laws would amount to INR 1200, leaving the rest as in-hand salary for the employee.
However, once the Code comes into effect, (basic salary will stand increased to INR 15,000 as per the new definition of "wages"). The employee's in-hand salary would now dwindle down to INR 26,400 as the augment in basic wages will now lead to an escalation in PF contributions (for both the employee and employer), reducing the take home salary of the employees.
Neither employees nor employers appear to be happy with the change to the definition of wages. For employees, anything that impacts take home salary and changes their tax outcome is not welcome. Similarly, for India Inc to change its pay structure across the board will be a herculean task. Further, the amounts to be paid to PF will also stand increased thereby resulting in a higher compliance burden for all companies. Given the reduced take home salaries, employees will demand hikes in emoluments such that their cash in hand is not affected. Given the strong pushback from all involved, the coming into effect of the Code is therefore constantly being deferred by the government.
Footnote
1. AIR 2019 SC 1240
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