New Wage Code explained: Will your salary be affected?

Published: December 26, 2020 at 10:24 am

The “Code on Wages”(“Wage Code”) Act, 2019 aims to transform the old and obsolete labour laws into more accountable and transparent ones. The Act seeks to simplify the wage definitions and universally regulate the provision of minimum wages for all workers in India. In this article, we explain in simple terms what the new wage code and its potential impact on your salary. 

About the author: Karthik Swaminathan is a Software Developer by profession. He is interested in Personal Finance, Mutual Funds, Insurance, and likes to read about emerging startups.

To give a preview timeline of this Act, the “Code on Wages” Bill was passed in Lok Sabha on July 30, 2019, and in Rajya Sabha on August 02, 2019. The President gave the assent to the “Code on Wages” Bill on 8th August 2019 thus making it an “Act”. This “Code on Wages” is the first of the four labour code which has now become an Act replacing the below four labour regulations:

i) The Payment of Wages Act, 1936 – To regulate the payment of wages to employees ensuring payments are disbursed on time without any undue deductions.

ii)The Minimum Wages Act, 1948 – To protect workers against low pay and enforce fixing of minimum rates of wages.


iii) The Payment of Bonus Act, 1965 – To provide for payment of bonus to persons employed in certain establishments based on profits or production.

iv) The Equal Remuneration Act, 1976 – To mandate equal remuneration for men and women workers and to prevent gender discrimination in employment matters.

Key Features of the “Code on Wages” Act

The “Code on Wages” Act has 9 chapters with 69 sections covering different aspects of payment of wages, minimum wages, equal remuneration, and payment of bonus. There are several key aspects of this Act which are discussed below:

1. The “Code on Wages” Act has provided separate definitions for “worker” and “employee”  with “employee” meaning a broader category including both organized and unorganized sector.

Who is a worker? The term “worker” means any person except an apprentice employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied and also includes working journalists, sales promotion employee.

Who is not a worker? However, persons subjected to AirForce Act or Army Act or Navy Act, employed in police service or who is employed mainly in a managerial or administrative capacity or who is employed in a supervisory capacity drawing a monthly wage exceeding Rs.15,000/- or such amount notified by the Central Government from time to time are excluded from this definition.

Who is an employee? An ‘Employee’ means any person employed on wages by an establishment other than an apprentice to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied and also includes a person declared to be an employee by the appropriate Government, but does not include any member of the Armed Forces of the Union.

The existing “The Payment of Wages Act,1936” and “The Minimum Wages Act, 1948” applied only to workers working in scheduled employment and for the workers who have wages below a particular threshold value. However, with the “Code on Wages” Act

the payment of wages and minimum wages provision will apply to all establishments and employees under both organized and unorganized sector except for the member of Armed Forces of the Union and an apprentice engaged under the Apprentice Act,1961.

2. The “Code on Wages” Act has unified the definition of “wages” intending to bring a uniform definition of  “wages” across all legislation and to minimize litigation. The “wages” definition in the Act has listed down the components which are included in the wages, components which are excluded from the wages and the conditions applicable on the excluded components.

  • Components included in the wages: Basic Pay, Dearness Allowance, Retaining Allowance if any.
  • Components excluded in the wages
Table showing Components excluded in the wages in the New Wage Code
Table showing Components excluded in the wages in the New-Wage Code

iii. Conditions Applicable: If payments made by the employer to the employee in which the sum of components highlighted in red in the above table exceeds one-half or such other per cent. as may be notified by the Central Government, of all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause. In simpler terms, the “yellow” highlighted components in the above table cannot exceed 50% of total remuneration. This implies, wages cannot be less than 50% of total remuneration.

In other words,  Basic Pay + DA should be a minimum of 50% of the CTC, generally, the majority of the private sector does not have the DA, Retaining allowance implying that the Basic Pay component should be a minimum of 50% of CTC.

3. Minimum Wages: The Central Government shall fix the floor wage considering the minimum living standards of workers across various geographical areas. The minimum wage rates will be fixed by State Government which shall not be less than the floor wage defined by the Central Government, if the minimum wage rate fixed by State Government exceeds the floor wage then the State Government shall not reduce the minimum wage rate fixed by them earlier.

The Central Govt will obtain the advice of the Central Advisory Board and the State Governments before fixing the floor wage. The appropriate Government shall review or revise the minimum wage rate not exceeding 5 years and the employees working more than normal working hours should be paid for every hour worked in excess at the rate not less than twice the normal rate of wages.

4. Payment of Wages: The employer can fix the wage period as daily, weekly, fortnightly, or monthly and no wage period can be more than a month. In case of employee resignation or removal, closure of the establishment the wages are required to be paid within two days. There shall not be any undue deductions in the wages other than the allowed wage deductions specified in the “Code on Wages” Act.

5. Bonus Payment: All employees whose wages do not exceed a specific amount(to be informed by State and Central Government) will be eligible for an annual bonus. The minimum bonus amount prescribed under the “Code on Wages” Act is 8.33% and maximum bonus amount is 20%. The “Code on Wages” Act has also specified the disqualifying conditions under which an employee shall not be eligible for the bonus payment.

6. Advisory Board: The Central Government shall form the Central Advisory Board comprising members representing employees, employers, independent person, five representatives of State Government The State Government shall form the State Advisory Board comprising members representing employees, employers, independent person.

7. Equal Remuneration: The “Code on Wages” Act prohibits discrimination based on gender and enforces that there shall be no discrimination in an establishment on grounds of gender in the matter relating to wages or while recruiting an employee.

8. Inspector Cum Facilitator: The appropriate Government shall appoint Inspector-cum-Facilitator to advise employers and workers related to compliance with the “Code on Wages” Act and inspect the establishments as assigned to them by the Government.

The Act also mentions the list of other guidelines that shall be followed by the inspector-cum-Facilitator to carry out his assigned duties appropriately.

9. Offences and Penalties: The “Code on Wages” Act, has listed down the list of offences which includes Payment of wages less than the prescribed amount under the Code,non-maintenance of the records, contravention of rules under the Code.  The Act also has provided the guidelines that need to be followed to deal with the offences which range from paying fine to imprisonment based on the offence.

Impact of “Code on Wages” Act

As per the “Code on Wages” Act allowances(components in yellow in the table, Point 2) can not be more than 50% of the total compensation, in other words, basic salary has to be at least 50% of the total compensation. The organizations which have more than 50% allowance components in their payroll need to re-structure the payroll to adhere to the new wage code norms.

To adhere to the new code wages these organizations will have to increase the basic pay component, this, in turn, will result in increased contributions to provident fund and gratuity.

For an employee, an increase in basic pay could significantly increase their PF contribution. Though in the short run there is a probability of employees receiving a lesser take-home salary as PF contributions go up but in long run, this increases their social security kitty. Therefore there is no need for readers to fear the new wage code.

The new wage code bill could increase the financial burden of organizations that need to restructure the payroll to increase the basic pay component. The increase in basic pay puts the burden on the employer as employer PF contribution increases significantly and this could be a driver for many organizations to revisit their payroll structure to balance the components. 

References

The “Code on Wages” Act has detailed information and guidelines specifying various constraints related to wages. The below source can be referred by anyone who likes to read in detail about the “Code on Wages” Act. 

  1. Wage Code bill introduced in the Lok Sabha
  2. Circular dated 30th July 2019: Lok Sabha Passes the Code on Wages Bill, 2019
  3. Circular dated 2nd Aug 2019 Rajya Sabha Passes The Code on Wages Bill, 2019
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