NEW WAGE CODE IN INDIA: Impact on Salary and Compliance explained.

Introduction

Labour Laws refer to the legal framework that regulates and controls the relationship between employers and employees.  These laws govern various aspects of employment such as wages, working hours, leave policies, health and safety measures, social security, and Industrial relations.

Independent India has a highly complex framework of Labour Laws.  The first major Act to be introduced was the Factories Act of 1948. This Act regulates the working conditions in factories and includes safety and health measures, working hours, and leave policies.  Other Key labour laws include the Industrial Disputes Act, the Payment of Wages Act, the Minimum Wages Act, the Employees state Insurance Act, and the Employees’ Provident Fund and Miscellaneous Provisions Act.

Over the years, successive governments have continued to introduce new Labour Laws and amendments to update existing ones to be in consonance with existing economic and social conditions.

The 2nd National Commission on Labour (2002) had recommended that the existing Labour Laws should be broadly grouped into 4 Labour Codes.  Based on these recommendations, the Ministry of Labour and Employment, Government of India, had introduced 4 Bills in 2019 to provide a simpler and more coherent system to regulate and control the relationship between the employers and employees.

The Bill consolidates 29 existing labour laws into 4 Labour Codes, and these are:

1.  The Code on Wages, 2019
2.  The Code on Social Security, 2020
3.  The Industrial Relations Code, 2020
4.  The Occupational Safety, Health and Working Conditions Code, 2020.

Through the enactment of the 4 Labour Codes, 1228 sections were amalgamated into 480 sections, and 1436 rules were reduced to 351.  31 multiple Returns have been replaced by a single electronic return and the number of forms have reduced from 181 to 73, and the Registers to be maintained by the employers have reduced from 84 to just 8.

In this article, we explain the features of the Code on Wages, 2019, and highlight its impact on salary and compliance.

The Code on Wages, 2019

The Code of Wages is a well formulated effort to regulate wages and bonus payments in all forms of employments be it any industry, trade, business, or manufacturing industry.  The Code on Wages, 2019 amalgamates 4 existing Acts, namely, the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act,  1965, and the Equal Remuneration Act, 1976.

The main focus of the Code is to balance the rights of employees and facilitate ease of compliance for employers.  It safeguards the interests of employees through universal minimum wages, ensuring dignity and timely payment of wages.  The Code supports women employees through equal pay and representation, thus fostering inclusive participation.  These measures will generate greater employment and promote workplace equity, and give a boost to productivity and labour welfare, thus strengthening economic growth, generate employment and promote workplace equity.

Minimum Wages and National Floor Wage

One of the most important changes is the universalization of Minimum Wages and the introduction of the National Floor Wage.  As per the Code, all employees have a statutory right to Minimum wages.  The Central Government will fix the National Floor Wage based on the minimum living standards, and the State Governments can set the Minimum Wages.  However, no state government can set a minimum wage that is below the National Floor Wage.

Floor Wage and Compliance

The National Floor Wage not only stabilizes labour costs by creating a universal wage baseline for organizations across multiple states, but also ensures simplified compliance.  By ensuring that no state can set its Minimum Wage below the floor level, it reduces regional wage disparity and compliance risks of tracking multiple fragmented state laws.  These changes allow companies to standardise their national payroll structures and HRMS Logic, thus simplifying administrative tasks and providing a clear and strong foundation for financial planning and cost projections across multiple locations.

Equal Pay for Equal Work

One of the important features of the Code is its support for women workers by ensuring equal pay for equal work. This will ensure that there is discrimination among employees on the basis of gender (including Transgender identity) in matters relating to wages for the same work or work of a similar nature.  This obligation has been extended to all genders in respect of conveyance allowance, house rent allowance, and any remuneration payable under an award or settlement.

The Code not only promotes workplace quality, but also mandates that overtime work must be compensated at a rate of at least twice the normal rate of wages, thus providing a uniform standard for all workers.

The Mandatory 50% Rule

One of the most important provisions in the Code on Wages is the mandatory 50% rule.  The Code stipulates that the core statutory components of pay, i.e., Basic Pay, Dearness Allowance, and Retaining Allowances, must constitute 50% or more of the total Cost to Company (CTC).  This means that the excluded components of remuneration, such as House Rent Allowance (HRA), Conveyance Allowance, Overtime Allowance, retirement benefits including PF & NPS, and other Tax-friendly Allowances, must not exceed 50% of the employees’ total remuneration (CTC).

The 50% rule is a mandatory provision that restructures the salary by ensuring that the core salary component (Basic Pay, DA etc) are at least half of more of the total take home salary (CTC).  The effect is two-sided.  On the one hand, the monthly take-home salary is likely to decrease marginally because statutory deductions like PF increases as they are calculated on a higher basic pay.  On the other hand, the employees’ future savings and security shows significant increase as the higher basic Pay boosts mandatory PF contributions, thus generating a substantially higher Gratuity payout on retirement, resignation, or termination.

Payment of Wages – Timeline

The employer is mandated to pay wages to all employees within the timeline fixed for each period.  This will enable all employees to receive their wages on time, thus providing wage protection.  The wage payments have to be digitized through a Bank account & Electronic mode. The employer is required to issue wage slips to the employees as per the time fixed for each wage period.  The same is tabulated below:

The responsibility of paying all dues rests with the employer, and in case of a claim relating to non-payment, the onus is on the employer to produce the proof.

In case of resignation or retrenchment, termination, or becoming unemployed due to the closure of the unit, wages shall be paid within 2 working days.

Payment of Wages

The employer cannot make any arbitrary deductions from the wages of employees except those that are specifically authorised by the Code.  Under the Code, an employee’s wages can be deducted on the following grounds:

1.  Fines imposed.
2.  Absence from duty.
3.  Towards accommodation provided by the employer.
4.  Towards recovery of Advances/Loans given to the employee.
5.  Towards Income-tax or other statutory levy.

The total amount of deductions shall not exceed 50% of the employee’s total wage in any wage period. In case the authorized deductions exceed 50%, it cannot be deducted in full in that wage period; instead the excess amount must be recovered in the subsequent pay periods as prescribed by law.

Compliance

The Code incentivizes organizations by reducing compliance burden and transaction costs.  Terms like “Wages”,  “Worker”, “Employees”,  “Employers”,  “Establishments”,  “Appropriate Government”, etc have been given a uniform and common definition.

Some important Definitions

•  Wages:  All remuneration by way of salaries, allowances or otherwise that is payable to a person by the employer in respect of his/her employment, subject to all terms of employment being fulfilled.
•  Establishment:  A place where any industry, business, trade, manufacture or occupation is carried on and includes Government Establishments.
•  Workers:  Any person (except an Apprentice) employed in any industry to do any manual, skilled, unskilled, operational, technical, clerical, or supervisory work for hire or reward.  The term also includes working journalists and sales promotion employees.
•  Employee:   Any person employed on wages by any establishment to perform any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical pr clerical work for hire pr reward.
•  Employer: A person who employs others directly or through any other person, or on his behalf or on behalf of any person, one or more employees in his establishment, and where the establishment is carried on by any department of the Central or the State Government or Local Authorities, the head of department, the chief executive of the local authority.
•  Appropriate Government:  Refers to an establishment carried on by or under the authority of the Central Government, and includes railway, mines, oil fields, major ports, air transport, telecommunications centre, banking and insurance company, or a corporation or other authority established by a Central Act or CPSU’s/Autonomous bodies established by the Central Government.

The Code incentivizes businesses by reducing compliance burden and transaction costs.

• By bringing uniformity in the common definition of frequently used terms, it has reduced complexity in compliance.
• The number of authorities in the tripartite boards has been reduced, and this will be implemented only through 1 Rule instead of 8 different rules that exist at present.
• The options for filing and maintenance of registers, returns, and forms electronically and prescribing one template for the registers, returns, and forms instead of multiple ones at present make compliance hassle-free.

The Code brings cultural changes in the Inspection system to reduce corruption & arbitrariness and infuse transparency.

• The Inspector-cum-Facilitator is not only entrusted with the job of inspecting and imposing fines, but is also tasked to provide information and advice to the employers.
• The introduction of web-based inspection schemes enables calling for information under the Code electronically for inspection and conferment of jurisdiction of inspector-cum-facilitator based on randomized selection of inspection.
• The Code mandates Inspector-cum Facilitator to provide prior opportunity to the employer to rectify and comply with the provisions of the Code by way of a written direction before initiating prosecution. On compliance, the Code stops initiation of prosecution proceedings against the employer. This provision is meant to assist employers who have committed an offence under the Code for the first time and is not applicable to repeat offences.

Bonus Determination

• Employers are mandated to pay Bonus to every employee who draws wages up to a limit set by the appropriate government and has worked for at least 30 days in the accounting year, i.e., the year commencing on the 1st day of April.
• The annual minimum Bonus will be at least 8.33% and maximum up to 20% of the wage earned by the employee.
• The Wage Code has not prescribed any threshold for the applicability of statutory bonus provisions, and appropriate governments are empowered to prescribe such thresholds. For an organization with multiple branches in more than one state, this may create compliance issues as each state may prescribe different thresholds. However, employers are to maintain the status quo and continue with the statutory bonus coverage as is existing till a new threshold is announced.
• Termination of service on the ground of sexual harassment is now identified as an additional ground for disqualification from the statutory bonus.

Cognizance of Offences

• The Appropriate Court shall take cognizance of any offence punishable under this code only on a complaint made by..
• • • Authority/Official of the appropriate government or
    • By any employee or
    • A registered Trade Union or
    • An Inspector-cum-Facilitator
• No court inferior to that of a Metropolitan Magistrate or Judicial Magistrate of the First Class shall try the offences under the Code.

Penalties – Power to impose Penalties

• The appropriate Government will appoint officers not below the rank of Under Secretary, who will impose penalties for the offences.
• The Officer is authorised to hold an enquiry and to summon and enforce the attendance of any person acquainted with the case to give evidence or to produce any documents.
• If on such enquiry, the Officer is satisfied that the person has committed an offence, then he may impose such penalty as he deems fit.

Standardized Penalty Provision

The Code has standardized penalty provisions, introduced the concept of “graded penalty,” and has enhanced penalty provisions, especially the fine amount manifold. This is done to act as a strong deterrent and is expected to improve compliance and the effective application of the provisions.

Maintenance of Records, Returns and Notices

• The Code mandates that every employer of an establishment shall maintain a register of persons employed, muster roll, wages, and other provisions as prescribed in the Code.
• Every employer shall display in a prominent place on the Notice Board an abstract of the Code on Wages, category-wise wage rates, wage period, day or date, and time of payment of wages, and name and address of the Inspector-cum-Felicitator.
• Every employer is mandated to issue wage slips to all employees.

Conclusion

The Code on Wages is a well-intentioned piece of legislation that has been widely accepted by the industry.  The Code aims to balance the interests of the employers and employees.  India’s economic growth and development are inextricably tied to the productivity and well-being of its workforce.

As the nation continues its economic march upwards, the importance of progressive labour laws that safeguard the workers’ rights while fostering a conducive business environment cannot be overstated.   The Code on wages is a decent attempt to replace the obsolete provisions of the earlier laws.  The Code will help in removing the multiplicity of definitions and authorities.  Compliance is maintenance of records and registers, filing of returns, and display of notices will be substantially reduced through this legislation.  The cost of compliance is expected to reduce, and it is hoped that it will eliminate any litigation based on a complex definition of wage, worker, employee etc.

The provisions of the Code inspire confidence in the business community and for all workers, as it will help in bringing all workers under the ambit of the law.  There will be a lot of challenges in the coming days as the respective state government has to address the issues and bring their own laws in consonance with the Code of Wages.  Implementation may pose challenges, but the fact remains that the Code on Wages is a piece of legislation in the right direction and in accordance with the changing times.

We at Getify are fully geared to assist all our clients in implementing the new Code on Wages. As a highly tried and trusted Payroll Processing & HR Management service provider, we can streamline your entire payroll process to be in alignment with the new rules and regulations.