The Code on Wages, 2019 - Know the Impact on your Salary Structure

More than 50 crore workers have been engaged in the organized and unorganized sectors of our nation and even after 74 years of Independence, 90% of workers working in the unorganized sectors are denied access to all the social securities. In what has been termed as a revolutionary step by the Central Government to disentangle the web of multiple labour legislations by the codification of 29 laws into 4 Codes, it remains to be seen as to how these reforms will actually ensure “Ease of Doing Business” in India. While commendable steps have been taken, this Article aims at exploring the soon to be implemented, Code on Wages, 2019 under the New Labour Codes (“NLC”) from a holistic point of view which directly or indirectly impacts at least 50 crores working population of the country.

Background

The Second National Commission on Labour (2002) (“NCL”) observed that the existing legislation was complex, contained archaic provisions and inconsistent definitions.[1] Labour is a subject of Concurrent List, therefore, the decisions with respect to the Labour Laws can be equally made by the Parliament and State legislatures. The NCL, with a view to enhancing ease of doing business in India, recommended consolidation of laws related to labour into the following groups:

1. Wages;
2.  Safety;
3.  Industrial Relations;
4.  Social Security; and
5. Welfare and working conditions

The Ministry of Labour and Employment, in 2019, introduced 4 labour codes on:

1.  Wages
2.  Social Security
3.  Industrial Relations
4.  Occupational Safety, Health and Working Conditions. 

The Code on Wages, 2019 (“Wage Code”)

The Ministry of Law and Justice, Government of India notified the Wage Code in August 2019. As per Clause 1 of the Wage Code, it shall come into force on such date as the Central Government may by notification in the official gazette deem fit. As of date, it is expected that the Wage Code may be implemented and notified with effect from 01 April 2022.

The Wage Code subsumes the provisions of the Payment of Wages Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965; and the Equal Remuneration Act, 1976.

The Wage Code extends to the whole of India and is applicable to all establishments, employees, and employers, unless exempted.

Section 2(w) of the Wage Code introduces a uniform definition of wages. The definition will be applicable to all the existing labour laws subsumed in the 4 Codes.

The definition of wages comprises of following 3 elements:

1. Meaning and inclusion part;
2. An exhaustive list of exclusions; and
3. Conditional inclusion.

The definition prescribes that if the sum total of the excluded components (except Gratuity and Retrenchment Compensation) exceeds 50% of the total remuneration payable to an employee, then that portion of the amount which exceeds 50% shall be added back to the definition of wages. This definition has a wide-reaching impact in the current scenario as the amount prescribed in the special allowance (which is generally included in the current salary structures) will be added back to the wages (if the payroll structures are left unchanged). Further, the conditional inclusion entails that in a case an employee is given remuneration in kind, the value of such remuneration can be up to 15% of the total wages payable to the employee. 

The definition has a wide-reaching impact on both, the employer as well as the employee. For employers, the definition induces an increase in the pay-outs in the form of provident funds, employee state insurance, gratuity and other retiral benefits. This is because in the extant provisions, the employers are fulfilling the statutory liabilities on basic wages which are around 30% to 35% of all remuneration. Additionally, although not notified, there is a high possibility that the wage ceiling limit might increase or cap at INR 21,000. In such a case, the coverage of employees may also increase, as the excluded employees may now come within the ambit of the laws. For employees, there are chances that their net take-home income may decrease on account of an increase in the mandatory employee contributions under schemes such as PF.  

While the attempt to universalize the definition is a laudable step towards India’s objective of ‘Ease of doing Business', the following are the few aspects that warrant clarification:

1. Whether performance bonus/ bonus forming part of employment contracts are wages?
2. What will be the treatment of variable components?
3. Definition of ‘remuneration in kind’?
4. Meaning and extent of ‘defraying special expenses’?

Following are some of the notable changes introduced in the Wage Code

1.  Separate definitions of ‘worker’ and ‘employee’. Definition of ‘worker’ includes working journalists and sales promotion employees while the definition of employee includes persons carrying out managerial and administrative work.

2.  The concept of Floor Wages is introduced in the Wage Code. Central Government has the authority to determine the floor wage by taking into account the minimum living standards of workers in a manner that may be prescribed in near future (may vary on the basis of geographical areas). The effect of such a floor wage would be that the appropriate government under no circumstances can fix the minimum wage rate lower than the fixed floor wage.  

3.     The Wage Code raises the responsibility of the Employer to ensure proper wage structuring and timely reimbursement of wages to all the employees. Earlier, the provisions were only applicable to employees drawing wages less than INR 24,000/- per month.

4.    Limitation period for filing claims by the employees is increased to three years (from the date when claims arose) as against the extant provisions which provide a time limit from six months to two years.

5.   The authority’s role has now been broadened as inspectors-cum-facilitators wherein they are also required to provide compliance advisory to employers and workers alongside conducting inspections.

It may be stated that Wage Code is the right step towards India’s aspiration of boosting employers’ confidence while balancing employees’ rights. However, it remains to be seen as to how the final rules and other three codes complement the Wage Code.

---

[1] Government of India Ministry of Labour, Report of the National Commission on Labour, Volume II, 2002, New Delhi 

For any further queries, clarifications, and suggestions, please feel free to contact the undersigned author or write to us at protalkz03@gmail.com.