Wages under Code on Wages, 2019 – How different from that provided in the Payment of Wages Act, 1936

  • Provision to Wages Definition (requiring Basic + DA to be minimum 50% of CTC) is a new introduction in wage definition and this is expected to bring a landscape change as to how industry structures its pay packages.
  • At present many organisations have salary structure where basic salary ranges from 20% to 40% of CTC. After implementation of this new Wage Code, companies will be required to change salary structure to comply with this legislation.
  • If Basic Salary is increased from earlier level to 50% of CTC, it can have impact on employer and employees, some of which are listed below:
  1. May result into higher contribution to Provident Fund/ NPS to ensure enhanced social security benefit.
  2. Increased PF/ NPS contributions will lead to reduction in take-home salary and at the same time, a reduction in tax liability as NPS contribution by employer is exempt without any monetary ceiling.
  3. This will lead to increased cost to company for benefits which are linked to Basic salary, for example employer’s contribution to EPF, EPS, EDLI, ESIC will increase, based on respective regulations upper monetary ceiling.
  4. In case of Gratuity benefit, cost is also likely to increase significantly as benefit is linked to Basic + DA salary with no monetary ceiling on salary for calculation of benefit. So, if Basic salary increases due to change in salary structure, liability is likely to increase significantly and will result into Actuarial Loss under the accounting standard.
  5. Companies where leave encashment is calculated on Basic salary, will observe significant increase in cost.
  6. With this, we can observe that take-home salary may get reduced for employees, but Government has tried to increase retirement benefits of employees to ensure better social security to them.

Floor wage: According to the Code, the central government will fix a floor wage, taking into account living standards of workers. Further, it may set different floor wages for different geographical areas. Before fixing the floor wage, the central government may obtain the advice of the Central Advisory Board and may consult with state governments.  The minimum wages decided by the central or state governments must be higher than the floor wage. In case the existing minimum wages fixed by the central or state governments are higher than the floor wage, they cannot reduce the minimum wages.Fixing the minimum wage: The Code prohibits employers from paying wages less than the minimum wages. Minimum wages will be notified by the central or state governments. This will be based on time, or number of pieces produced. The minimum wages will be revised and reviewed by the central or state governments at an interval of not more than five years. While fixing minimum wages, the central or state governments may take into account factors such as: (i) skill of workers, and (ii) difficulty of work.Overtime: The central or state government may fix the number of hours that constitute a normal working day. In case employees work in excess of a normal working day, they will be entitled to overtime wage, which must be at least twice the normal rate of wages.  Payment of wages: Wages will be paid in (i) coins, (ii) currency notes, (iii) by cheque, (iv) by crediting to the bank account, or (v) through electronic mode. The wage period will be fixed by the employer as either: (i) daily, (ii) weekly, (iii) fortnightly, or (iv) monthly.Determination of bonus: All employees whose wages do not exceed a specific monthly amount, notified by the central or state government, will be entitled to an annual bonus. The bonus will be at least: (i) 8.33% of his wages, or (ii) Rs 100, whichever is higher. In addition, the employer will distribute a part of the gross profits amongst the employees. This will be distributed in proportion to the annual wages of an employee. An employee can receive a maximum bonus of 20% of his annual wages.*Source-The Code on Wages, 2019: https://labour.gov.in/sites/default/files/184_2019_LS_Eng.pdfPress Release from GOI (Lok Sabha): http://pib.nic.in/newsite/PrintRelease.aspx?relid=192386