New Wage Code 2021 and Its Impact
Updated: Jul 25
Indian businesses have been long haunted by numerous complex Labour Laws since decades. To simplify the Laws and improve compliance, the government introduced the Wage Code Bill in 2019. Although the bill was passed in December 2019, the government had held back its implementation since it wanted to implement it together with other three codes - on Industrial Relations, Social Security and Occupational Health Safety & Working Conditions. These four codes together will replace 40+ existing Labour Laws but the implementation challenge is three-fold.
First, since Labour Laws are a part of concurrent list, both Central and State Governments have to work on them and finalize the laws. With different governments working at different paces and having various reservations, uniform implementation is a big challenge. This is why the initial implementation date of these codes has been extended from 1st April 2021. Also, companies operating in multiple states will face different laws in different states which will increase operational hassles.
Second, there are multiple company-specific variations which are not clarified by the draft laws. These will lead to multiple interpretations by various stakeholders. It will be only over time that clarifications will be issued by the relevant authorities and judgements passed by the courts. Further, as per the proposed definition of wages, for employees earning overtime, incentives or any variable pay, the wages may change every month.
Third, if some of the proposed provisions are implemented, there will either be increase in Cost-to-company for allowing same Take Home to employees or employees will have a reduced Take Home. Why? Because government has proposed a strict definition of wages and has put a threshold to minimum amounts of social security deductions (PF, ESIC, Statutory Bonus etc.). This will not be easily accepted by the industries.
Cost-to-company (CTC) is the total cost for an employee’s benefits that the employer bears. It has multiple components and it is essential to know the components to know how the new wage code will impact businesses and employees. It includes the following components.
CTC = Employer Contributions + Gross Salary
Employer Contributions = Employer PF + Employer ESIC + Statutory Bonus
Gross Salary = Basic Salary + Dearness Allowance + House Rent Allowance + Other Allowance
Take Home = Gross Salary – Employee Deductions
Employee Deductions = Employee PF + Employee ESIC + Professional Tax
Statutory Bonus is calculated every month and paid annually to the employees
PF is currently calculated on Basic Salary + Dearness Allowance and is mandatory up to Rs 15,000 Basic Salary + Dearness Allowance per month
ESIC is currently calculated on Gross Salary and is mandatory up to Rs 21,000 Gross Salary per month
Professional Tax is to be deducted on Gross Salary and is mandatory for all
TDS, Gratuity and LWF are applicable on case-to-case basis and are not shown above
Major Changes in the New Wage Code
The new wage code is going to replace 4 major current laws. These are: The Payment of Wages Act (1936), The Minimum Wages Act (1948), The Payment of Bonus Act (1965) and The Equal Remuneration Act (1976). The major changes in the new wage code are:
Provisions of the wage code are now applicable to unorganized sector and gig workers as well
More districts to be covered under ESIC, likely to cover the entire country
Wage definition to be standardized under all provisions to avoid any confusion
Basic Salary has to be at least equal to Minimum Wages
Minimum Wages may be decided by the State governments basis floor rates provided by the central government for the country
Allowances should not exceed 50% of the total remuneration. This will increase social security burden on employers and employees
If payments exceeds 50%, the amount which exceeds such 50%, shall be added in the wages
Gratuity and leave encashment expenses may increase
Gratuity is applicable for employees who work 3 years or more and is applicable to contract workers working for a short span as well
Compulsory insurance or funding for gratuity
Bonus to be paid to all employees and not only to employees with wages less than Rs. 21,000
Web based inspection schedule instead of surprise inspections
Increased penalties for non-compliance
Impact of the Wage Code
Impact on Gratuity contributions – applicable for past service periods impacting the P&L
Higher Gratuity and Leave encashment as allowances are capped at 50% impacting the P&L
Mandatory requirement to cover employees under ESI and Statutory Bonus, reducing their Take-home or impacting the P&L
Higher contribution to Provident Fund and hence, reducing Take-home or impacting the P&L
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