India’s information technology sector has taken a hit on profit margins in the December quarter on account of additional expenditure incurred on new labour codes, which have introduced a new definition of "wages" along with other changes.
Tata Consultancy Services (TCS), Infosys, and HCLTech have attributed the drop in profit margins to new labour codes, which consolidated 29 laws under four new codes and came into force in November.
These are "one-time expenses" due to the transition phase, a labour ministry official said. "The companies going forward will formulate their remuneration package accordingly. We must remember the codes were finalized and implemented after due consultation from all stakeholders, including the industry," the official told Moneycontrol when asked about the higher costs. The official spoke on condition of anonymity.
The code, which was in the works for over five-year years, is aimed at making doing business in India easier and streamlining compliance.
While companies are still in the evaluation stage of the compliance cost, lawyers who advise the companies told Moneycontrol that the industry is seeking uniformity in rules across states. Common rules will reduce compliance costs, as IT companies operate in multiple jurisdictions and employ a large workforce.
Moneycontrol reported on January 15 that TCS, Infosys and HCLTech incurred a combined Rs 4,373 crore in exceptional charges (one-off expense) due to the implementation of the labour codes.
Tata Consultancy Services (TCS) reported a Rs 2,128 crore exceptional charge, Infosys Rs 1,289 crore and HCLTech Rs 956 crore.
What is the new ‘wages’ definition?
The Code on Wages mandates that a minimum of 50 percent of an employee’s remuneration include basic pay, dearness allowance and retaining allowance, which are collectively referred to as "wages".
All other allowances such as HRA, conveyance and special allowance, cannot exceed 50 percent of the total remuneration.
If allowances account for more than 50 percent of an employee’s remuneration, the excess amount will be automatically added to "wages" for statutory calculations.
It simply means the base for the calculation of the provident fund and gratuity has now increased, and more money will flow to those accounts.
At present, the monthly contribution to the EPFO account is calculated by deducting 12 percent of their basic pay. A matching contribution made by the employer to the EPF account. This formula has not changed but the definition of basic pay has to include more components.
Similarly, the formula for calculating gratuity has not changed – multiplying 15 days of salary out of 26 working days to basic pay and years of service; but the base has.
As a result, the "take-home" or "in-hand" pay of employees shrinks.
The companies that don’t want to reduce the in-hand pay of their employees will have to structure their costs to companies in a way that they are compliant with the new labour codes. And hence, they will have to shell out extra money.
Until now, no rule mandated the percentage of remuneration to be used in calculating EPF and gratuity. According to experts, for years, employers relied on a familiar formula of keeping the three components around 25–40 percent of CTC.
This structure served a very specific purpose. It inflated the special allowance portions of a salary, which helped employees receive a larger in-hand amount every month, purely because the basic pay base was low, and special allowances were not accounted for when calculating EPF and gratuity. That is no longer the case.
Moreover, fixed-term employees (contractual employees hired for a particular period) have now become eligible for gratuity after one year of service. This has "significantly increased the incidence and actuarial provisioning for IT firms that rely heavily on project-based staffing," said Parag Bhide, Partner at AQUILAW.
Earlier, only those employees who completed five years of service in a company were eligible for gratuity.
What are the other compliance-related expenses?
The companies will have to now pay the employees for their leave balance. If an employee’s leave balance exceeds 30 days at the end of the calendar year, the company must pay for those extra days, which was not the case earlier.
Also, if an employee resigns or is terminated, the company must now pay out all the earned leave balance within two working days. Previously, companies often took 30 to 45 days to pay this amount.
"These rules increase provisioning and periodic cash outflows, which will scale up with headcount," explained Abe Abraham, Partner, Cyril Amarchand Mangaldas.
"Eight‑hour per-day norms and weekly caps on work hours (subject to state rules and thresholds) can necessitate shift redesign, increased overtime pay-outs, and staffing buffers," Abraham added.
The Code on Wages mandates that if an employee is working an hour more than 48 hours a week, the person will have to be compensated with an amount that is twice the normal pay (of that employee) for an hour.
For women who work night shifts (through consent), the companies will have to ensure prescribed safeguards (such as transportation and security). This also increases compliance costs for them.
What are experts saying?
The labour codes were enacted with the overarching objective of simplifying India's complex labour laws, promoting ease of doing business, and, crucially, enhancing the welfare, social security, and safety of the workforce, experts say.
Rather than diluting the core intent of the law, the focus should be to facilitate smoother implementation and provide greater clarity, they say.
"The biggest challenge for businesses has been the lack of finality and uniformity in the rules across states. Expediting the notification of comprehensive and consistent Central and State rules would significantly reduce ambiguity and compliance costs for companies, especially those operating across multiple jurisdictions," said Preetha Soman, Partner, JSA Advocates & Solicitors.
Rajesh Sivaswamy, Senior Partner at King Stubb & Kasiva Advocates and Attorneys, said, "The objective of the labour codes is long-term workforce protection and simplification, and wholesale rollbacks may not be desirable. However, phased implementation, sector-specific clarifications or transitional relief for knowledge-driven industries like IT could help balance employee welfare with global competitiveness."
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