Wage Code 2019: Expect cut in take-home salary; gratuity, PF to rise

The new wage definition is an attempt to simplify the various regulations related to wages with the promise of easier implementation. However, India Inc still awaits the details. The Bill is anticipated to get enforced by April 2021

The government has come out with new compensation rules to increase the social security benefits for employees.  According to the new wage definition, in effect, at least 50 per cent of the gross remuneration of employees should form the basis to calculate benefits such as gratuity, retrenchment compensation and provident fund, etc. in situations where the sum of basic salary and other fixed allowances (such as dearness allowance) is less than 50 per cent of the gross remuneration.

The new definition is part of the Wage Code 2019 that was passed by the Parliament last year and also reflects in the more recently passed codes on Social Security.

The new wage definition is an attempt to simplify the various regulations related to wages with the promise of easier implementation. However, India Inc still awaits the details. The Bill is anticipated to get enforced by April 2021. Some of the wage thresholds for laws such as Bonus, Provident Fund, Employees State Insurance, etc. have not been decided yet.

"A lot of laws that had their own definition of Wages have been consolidated under the Labor Codes. There were different definitions under Minimum Wages Act, Provident Fund Act, Bonus Act, etc. All of these laws were meant to extend certain benefits to employees or give them certain rights. This is an attempt to make the definition of wages uniform, as proposed in the Wage Code, 2019 which has been duplicated in the other Codes as well," says Employment lawyer Atul Gupta, Partner at law firm Trilegal.

While it will simplify the nomenclature, it will have significant cost repercussions for firms. Kamal Karanth, co-founder of specialist staffing firm Xpheno says as the base to calculate PF and gratuity increases, employers will have to shell out more as part of their workforce cost. Also, there will be a one-time cost increase for employers to audit their current base of employee pay structure and align with the new system. It may also result in rising compliance cost burden and penalties, if any.  

One area where the firms will certainly see an impact is the increased gratuity cost, says Gupta.  As of now, it is applied to all employees, management and otherwise. Also, it is calculated on 15 days of basic pay and dearness allowance. Now, with the new calculation, gratuity will have to include the other allowances of wages such as travel, special allowance, etc.  

So, in the long run employees might gain with higher retirement benefits, but low-paid employees who may want more cash in hand may have to suffice with lower take home salary.  

But, these are broad generalisation and there are several gray areas that remain unclear. "It is not clear whether this rule will apply to all wages or will be applicable above a certain wage threshold. Also, the other Acts, such as PF Act have their wage threshold, it remains to be seen whether those wage thresholds will apply or not," says Gupta of Trilegal.  

Moreover, labour is a concurrent subject in the constitution and hence, the Act related to wages will have to be amended by the state governments as well. "The Labour department in the State and the Law enforcement bodies in the Central Government have to be restructured to make sure that there's clarity and harmony while enforcement. We expect these to happen over the next three-four months. Only then, we would know the implications for sure," says Aditya Narayan Mishra, director and CEO of CIEL HR Services. He gives the example of minimum wages and overtime rates for employees. These are to be administered by state governments but we are unclear if overtime hours will be applicable for all employees in an enterprise and how they will be tracked, verified and complied with. "Secondly, the rates for minimum wages are yet to be published by the government bodies. Thus, we aren't sure if the wages will rise or remain the same as a result," says Mishra of CIEL.