New Labour Codes: Salaries Are About To Get Bigger And Smaller... And Other Things
An earlier image of employees at the Infosys Ltd. campus in the Electronics City information technology hub in Bengaluru, India. (Photographer: Karen Dias/Bloomberg)  

New Labour Codes: Salaries Are About To Get Bigger And Smaller... And Other Things

Two contrasting forces could apply to salaries in the new year and this has nothing to do with an economic recovery or the financial fortunes of your employer.

The new labour codes introduce a slew of changes including a new and broader definition of 'wage', which will require employers to revisit their existing compensation strategy. And will change what employees take home.

Experts think that broadly, the revised definition will on paper expand the wage amount and, hence, enhance the social security benefits but reduce the in-hand salary for employees. At the same time, communicating and implementing such changes will prove a challenge for employers.

Here are the key changes which will impact employers and employees...

A Revised Remuneration Structure

A typical salary package in the private sector comprises basic salary, special and house rent allowances. On the other hand, public sector employees also get allowances linked to inflation (dearness allowance) and transport expenses, among others.

Employers compute their social security contribution on the basis of how labour laws define 'wages'—components of an employee’s salary that will be considered while calculating social security benefits.

Employers in the private sector typically either contribute 12% on the employee’s basic salary or basic salary + DA to the provident fund. This is due to two reasons—prevailing industry practice as well as their interpretation of 'wages' in the Employees Provident Fund and Miscellaneous Provisions Act.

Any variation in what comprises 'wages' will thus either increase or decrease the quantum of social security contributions and benefits to an employee. This is where the new labour laws bring in a noticeable change -- by widening the definition of ‘wage’.

The revised definition of wage under all the 4 labour codes —

  1. Wage means anything payable as salary or allowance;
  2. Includes basic salary, dearness allowance, retaining allowance;
  3. Excludes statutory bonus, pension and PF contribution, conveyance allowance, HRA, overtime, gratuity, etc., subject to the condition below.
  4. If exclusions, in aggregate, are more than 50% of an employee’s CTC (cost to company), any part above 50%, except special allowance, will be considered as wage for social security benefit.

For instance, lets say that X is employed at a CTC of Rs 100. Of this, Rs 20 is basic salary while DA and RA total Rs 20. Excluded components like overtime, HRA, etc. in aggregate form 60% of X’s CTC.

As excluded components are more than 50% of the CTC, the excess Rs 10 will be added back to wages for calculating social security contributions. Thus, an employer will have to make provident fund contributions on Rs 50 as compared to Rs 40 under the earlier definition.

This change that will impact both employers and employees in three ways.

  • First, it will enhance the social security for an employee.
  • Second, employer contributions will go up.
  • And lastly, the in-hand salary for an employee will likely reduce.

Richa Mohanty Rao, partner at law firm Cyril Amarchand Mangaldas & Co., said the change would directly impact several statutory payouts such as bonus, minimum wage and employer’s contribution to provident fund as they are linked to definition of wages.

Certain previously excluded components like meal vouchers, gym membership, etc. could get included up to the specified limit if they are reflected as part of the CTC, she said.

As a strategy, employers must evaluate their remuneration structure in order to determine the components of salary on which they will have to make contributions or payments going forward as the implementation date of the code nears
Richa Mohanty Rao, Partner, Cyril Amarchand Mangaldas & Co.

Atul Gupta, partner at law firm Trilegal, explained the impact of this on gratuity payments. Gratuity is currently paid only on basic salary and dearness allowance. Once the codes are implemented, gratuity will have to be calculated on up to 50% of the gross remuneration (if the basic salary + DA for an employee is less than 50% of his total remuneration), thus increasing its quantum, he said.

Employers looking at cost saving will have to rework their remuneration structure to address the additional costs that may arise as a result of this change.

CTCs (cost to company) will likely increase as some firms include employer PF contribution and gratuity payments in the computation. Organisations looking to save costs will need to rethink their remuneration strategy. This may impact other discretionary elements of pay and incentives that employees were receiving.
Atul Gupta, partner, Trilegal

Grievance Redressal Committees

The Industrial Relations Code requires every industrial establishment—businesses engaging in production, supply or distribution of goods or services—which employs more than 20 workers to set up a grievance redressal committee containing an equal number of members representing the employer and employees.

The committee is tasked with resolution of individual complaints of workers in a time-bound manner. Its membership cannot exceed 10 individuals and must have an adequate number of women members in proportion to the female workers employed in an establishment.

Setting up and managing such committees will come as a new challenge for employers requiring changes in the policies dealing with employee code of conduct.

Gupta explained that organisations will have to direct workers to bring all individual termination or dismissal-related grievances to the GRC before they approach the conciliation officer—an external person appointed by the government. Organisations must create a protocol for this process as the code provides them the ability to address such disputes internally, before external mechanism is invoked, he said.

Gig, Platform and Fixed-Term Employees

Companies looking to employ gig, platform or fixed-term employees will face a challenge to tailor their policies to bring them in line with requirements under the new law.

Prashant Singh, vice president at Teamlease Services, said companies will have to customise their policies and offer letters for fixed-term employees as they are now entitled to same benefits as permanent ones.

As overtime rates for the private sector will be prescribed by the state governments, overtime policies and benefits will need a tweak once suitable notifications are issued by states under the labor codes
Prashant Singh, Vice President, Teamlease Services

Rao pointed out that aggregators involved in providing services like ride-sharing, delivery of food and grocery, content and media will be required to contribute a percentage of their turnover to the Gig and Platform Workers’ Social Security Fund set up under the social security code. Employers must have a policy in place for handling this process, she said.

Lohit Bhatia, president for workforce management at Quess Corp, agreed. The draft rules under the OSH code require an employer of a factory, dock, mine or construction to make arrangements for conducting free-of-cost medical examination every year for workers who have completed 45 years of age, he said.

Companies operating in these sectors will have to factor in such elements in their wellness/health policies, he said.

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