Wage Code | Expanded definition of wages likely to impact take home pay

With an objective to provide major impetus to labour reforms, the government has enacted four new labour codes. These codes regulate wages, social security, occupational safety, health and working conditions, and industrial relations.

Improving ease of doing business, reducing complexity and compliance, ushering more transparency and efficiency in dealing with labour laws seems to be some of the objectives set out by the government while replacing the existing 29 legislation into four codes.

While all these codes are law of the land, the date when they become effective is yet to be notified. The final set of rules, regulations and schemes (both central and state) are also being awaited.

These codes have introduced several new concepts including recognising new categories of workers such as gig workers or platform workers. One of the most pertinent change introduced in the Code on Wages, 2019, is the standard and expansive definition of term ‘wages’ to be considered for calculating various employee retiral and statutory liabilities such as Provident Fund (PF), Gratuity, Employee State Insurance (ESI), etc. The new definition is an inclusive definition and is extremely wide in its coverage.

Currently, multiple definitions prevail in the different legislation for the purpose of calculation of the same terms — wages / basic wages, etc. This led to practical challenges in the administration of salary structures as well as computation, payments of social security benefits, employer/employee contributions, etc. The interpretation of the terms wages/basic wages, etc. has been an ongoing contentious issue for employers. Hence, an attempt seems to have been made for harmonisation and simplification in defining the very foundation of calculation of quantum and eligibility of various social security-related benefits.

The new definition of wages under the Code on Wages, 2019, comprises three elements — meaning and inclusion part, prescribed exclusions, and conditional inclusion. It has been stipulated that the specified exclusions (such as statutory bonus, House Rent Allowance, conveyance allowance, etc.) shall not exceed 50 percent of all remuneration, and in the event of exceeding, such excess amount shall be deemed as remuneration and will be considered as ‘wages’.

Also, the definition entails that in case an employee is given remuneration in kind, the value of such remuneration up to 15 percent of total wages payable to the employee shall also be deemed to form part of wages. If compared to majority of definition of wages/basic wages under the existing labour laws, bonus/variable pay was mostly excluded. However, the wages under the code of wages, seems to include variable pay/bonus. Also, the concept of including remuneration in kind is also a change that could enhance the numeric calculation of wages.

There are few aspects even under new definition of wages (e.g. valuation of remuneration in kind, timing of inclusion of variable pay, manner of computation etc.) which warrant clarification from the government.

In any case, this expansion in definition of wages will have an impact both on employers and employees. This could potentially lead to an increase in the statutory liabilities towards PF, ESI, Gratuity, and other retiral. There may also be increase in the coverage of employees in the organisation and many of the currently excluded employees may now come under the purview of such labour laws/social security benefits (e.g. ESIC, PF etc.).

Due to the wide encompassing definition of wages, the liability of gratuity/leave encashment, etc. is also potentially likely to see an upward trend. Additionally, gratuity shall be payable to fixed-term employees, provided they complete minimum one year of employment.

The financial impact of the new wages definition on the compensation cost, particularly in form of potential higher contribution towards social security benefits, and accordingly any modification to the salary structure or cost to company structure, as the case may be, should be assessed by the employers before implementation of these codes.

On the other hand, on account of employee contribution being mandatory in few schemes such as PF, etc. there may a need to determine the corresponding impact on the net take home income for the employees.