Uniform definition of ‘Wages’ under 4 new Labour Codes and its Impact: Parizad Sirwalla, Partner KPMG
Labour laws in India are traditionally governed by multiple Central government and state government legislations. With a view to harmonise and consolidate such multiple labour legislations, 29 existing Central laws have been amalgamated into four labour codes. These codes regulate (i) Wages (ii) Social Security (iii) Occupational Safety, Health and Working Conditions and (iv) Industrial Relations.
These labour codes have been passed by both houses of the Parliament and have received Presidential assent. However, they will come into force on the date to be notified by the Central government. The final set of schemes, rules and regulations under said labour codes are yet to be notified.
The changes in these codes are expected to give a major boost to labour reforms and impact organisations in every sector. It is the objective of the government that the new codes would reduce complexities, improve ease of compliance, usher in more transparency and accountability and help both employers and employees. The new codes are expected to enhance compliances significantly especially due to enabling electronic maintenance of records and increased penal liabilities.
New Definition of “Wages”
One of the most pertinent amendments introduced in the 4 new Labour Codes is the standardisation of the definition of ‘wages’. Currently, multiple definitions have been specified in the different legislation for the purpose of calculation of the same terms – wages / basic wages, etc. which has led to practical challenges in the administration of salary structures as well as computation and payments of social security benefits, contributions and deductions to be made.
Further, 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 now has three parts to it – an inclusion part, specified exclusions and conditions which limit the quantum of exclusions. The new definition is an inclusive definition and is extremely wide in its coverage. Practically, it could include almost all components of the compensation mix of an organisation.
There is an exhaustive list of components that are specifically excluded under the definition. The specified exclusions, however, shall not exceed 50 per cent of all remuneration, and in the event of exceeding, such excess amount shall be deemed as remuneration and will be considered as “wages”. In case an employee is given remuneration in kind the value of such remuneration up to 15 per cent of total wages payable to him shall also be deemed to form part of wages of such employee.
It is important to note, some of the wage thresholds for the coverage of employees under existing social security benefit schemes such as Bonus, Provident Fund (PF), Employee State Insurance (ESI) have not yet been notified by the appropriate government in the new Codes. This could have a significant bearing in ascertaining the impact of new definition of wages on employers and employees at large.
Impact on employers and employees
This change in definition of ‘wages’ will have an impact both on employers and employees. This could potentially lead to an increase in the liability of payment of contribution towards PF, ESI and various other benefits. 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.
Due to the wide encompassing definition of wages, the liability of gratuity/leave encashment, etc. is also potentially likely to see an upward trend. While the higher contributions would be beneficial from a social security perspective, however, the impact of the same on the employer’s wage bill will need to be assessed. It is interesting to note that on account of employee contribution being mandatory in few schemes like PF etc. there may also be a significant impact on the net take-home income for the employees.
While the intent is simplification and standardisation as well, there are various aspects even under new definition of wages (e.g. definition of remuneration in kind, inclusion of variable pay, valuation rules for remuneration in kind, etc.) which need to be clarified and addressed before the implementation of the new codes.