The Code on Wages, 2019 (the ‘Code’) was accorded presidential assent on August 08, 2019, and will be enforced once notified by the Central Government. The Code consolidates and replaces four Central labor legislations related to wages, namely, (i) the Minimum Wages Act, 1948 (“MW Act”), (ii) the Payment of Wages Act, 1936 (“Wages Act”), (iii) the Payment of Bonus Act, 1965 (“Bonus Act”), and (iv) the Equal Remuneration Act, 1976 (“ER Act”), (collectively referred to as the “Present Legislations”) into a single, unified code.

The key changes brought about by the Code that will impact an organization includes:

Coverage of employees
Eligibility and calculation of bonus
Components of ‘minimum wage’
Limitation period
Records and Registers

Reassessment of covered employees

Unlike the Present Legislations where the applicability of the law depends on the salary thresholds, number of employees and nature of establishments, the provisions of the Code are applicable to all establishments and all employees, except in case of bonus where the applicability is based on the wage ceiling to be prescribed by the government at a later date and the number threshold of 20 employees on any day during an accounting year. All employees are covered under the Code including those in supervisory, administrative and managerial roles.

As a consequence, the provisions pertaining to payment of wages, deduction, wages period, over time etc. which are currently not applicable to employees earning wages more than INR 24,000 under the Wages Act, would apply to all employees for whom minimum wages is fixed under the Code.

The eligibility and calculation for payment of bonus under the Code would depend on the wage ceiling to be notified by the appropriate government.

Reassessment of salary structures.

The term ‘wages’ has undergone a substantial change under the Code. Under the Code, the term ‘wages’ is defined to mean “all remuneration whether by way of salary, allowances or otherwise, expressed in terms of money or capable of being so expressed which would if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes –

basic pay;
dearness allowance; and
retaining allowance, if any.”

The definition further lists out allowances to be excluded while calculating ‘wages’:

any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
the value of any house accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
any conveyance allowance or the value of any traveling concession;
any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
house rent allowance;
remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
any overtime allowance;
any commission payable to the employee;
any gratuity payable on the termination of employment;
any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment.

(collectively referred to as “Exclusions”).

It provides that in case the Exclusions exceed 50% or such other percentage (as may be notified by the Central Government), of the total remuneration paid to the employee, then the amount that exceeds the 50% or such other percentage (as may be notified) shall form part of ‘wages’ under the Code.

The implication of this new definition of wages is that it will now determine the manner of calculation of provident fund, ESI, gratuity, maternity benefit, bonus, leave encashment, and retrenchment payments as well eligibility thresholds for such payments.

That said, one needs to understand that the new definition does not dictate which components should form part of a wage structure. It explains which component would qualify as ‘wages’ for the purpose of determining the statutory payments.

Given that the consequential impact of the new definition could be dearer payouts by the employer, organizations will need to examine whether the salary structure needs to be changed so as to mitigate additional financial outflow. Also, clarity from the government on the ambiguities in the definition and on whether there will be a grandfathering of the accumulated gratuity until the date of enforcement of the Codes is essential to determine the extent of outflow from the exchequer of an employer.

Therefore in cases where the components of a salary structure that fall under the inclusion part of the definition of wages is higher than 50%, it is possible that in order to reduce the financial impact, the net take-home may be reduced to balance it with the increase in the retirement benefits such as gratuity.

Amendment of document retention policy and risk of employee litigation

Another important change is the increase in the period of limitation for filing claims by employees to 3 years from the existing limitation period under the Present Legislations which varies from 6 months to 2 years. Retention policies (if any) of an organization will need to be revisited basis this change. Further, the Code provides for class-action claims where the claim is in respect of a group of employees employed in an establishment. Therefore, organizations would need to be mindful of potential collective employee litigation and also be aware of the heightened possibility of unionization by the employees.

Maintenance of registers and records.

Lastly, the documentation with respect to the registers maintained under the Present Legislations would need to be changed, once the Code is notified and implemented and formats are prescribed under the rules.

Labor Laws:: Expectations from the new wage code

The Code consolidates and replaces four Central labor legislations related to wages.