The government has recently introduced four new labour codes which subsume 29 current central labour laws (relating to wages, social security, occupational safety and industrial disputes) out of which, the earliest one was dated 100 years old!
These codes, likely to be effective from April 1 (though the date of entry into force is yet to be notified), have already been passed by Parliament and have received presidential assent, while the draft rules are in the process of getting finalised. As these changes are expected to become effective in less than two months from now, some of the areas which will impact employers and employees are as follows:
Change in the definition of ‘wages’: The most interesting change brought about by the new codes is the definition of ‘wages’, which would apply uniformly across the four codes. There is a specific list of exclusions and only the components specified under this list can be excluded for computing wages. However, the total exclusions cannot exceed 50 percent of the total remuneration. To understand this better, let us look at the below situations:
In Employee 1’s case, the components which can be excluded as per the definition of wages (B and C) are less than 50 percent of total remuneration and accordingly the remaining components (A and D) will be considered to compute wages.
However, in Employee 2’s case, as the total of exclusions (B and C amounting to Rs 56,000) are more than 50 percent of the total remuneration, the excess amount (Rs 6,000) will also have to be considered to compute wages. Hence, in this case, the wages as per the new definition would amount to Rs 50,000 (A+D+6,000).
The new definition of wages will impact the calculation of various benefits such as gratuity, Provident Fund contributions, leave encashment, overtime payment, etc. However, some of the existing social security schemes, such as Provident Fund, Pension scheme, ESI and EDLI scheme will remain in force for one year from the date of commencement of the Code on Social Security, 2020.
Increase in gratuity pay-outs: According to the new labour codes, employers will have to calculate gratuity pay-outs (for all employees entitled to gratuity) as per new definition of wages. One interpretation is that this would result in higher gratuity pay-outs. Also, fixed term employees will now be eligible for gratuity, if they are employed for a period of one year or more.
Social security for gig/platform workers: Employers today, are increasingly hiring gig/platform workers who work outside traditional employer-employee relationship. However, such workers are usually not eligible for social security benefits. For the first time, social security benefits will extend to gig and platform workers.
The central government will frame and notify suitable social security scheme for gig/platform workers for various social security benefits. Also, there is a requirement for aggregators to contribute a specified percentage of their turnover to the social security fund. Therefore, employers employing gig/platform workers should take cognisance of these changes.
Changes to HR/payroll policies and processes to be aligned with new labour codes: The new codes have endeavoured to provide enhanced protection to employees and workers. There are host of provisions to give effect to the same. Accordingly, employers would need to bring necessary changes in their payroll/HR policies and processes such as full and final settlement within two days, payment of salary within specified timelines, tracking overtime, changes in leave encashment policy, issuance of appointment letter to all, additional safety provisions for women employees, etc.
The success of the reforms will depend on the effective implementation of the changes brought about by the codes. It is just the right time for employers to start evaluating the changes required and the impact on the overall cost to the company as well as HR/payroll processes and policies, to be ready for the expected implementation of these codes in April.
At the same time the employees should also be aware of the impact that the new labour codes may have on their salary.
(Ankur Agrawal, Manager, EY India contributed to the article).
Rama Karmakar is Partner, People Advisory Services, EY India. Views are personal.
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