The Code on Wages, 2019 has introduced a universal definition of wages that has been incorporated across the three other labour Codes as well. This definition is a marked departure from the multiple varied definitions of the term across different enactments. While the attempt to universalize the definition of such a key term is commendable, much remains to be seen with regards to its effects on wage structuring, payroll, and statutory benefits.
The new definition of ‘wages’ contains basic pay, dearness allowance and retaining allowance as inclusive aspects of remuneration. Whereas bonus, house-rent allowance, overtime allowance, conveyance allowance, gratuity, and commissions amongst others, form a part of excluded allowances. The operative condition in the definition being, that if any of the excluded allowances barring gratuity and retrenchment/retirement benefits exceed 50% of all the remuneration, then the amount which exceeds that threshold shall be deemed as remuneration and added to wages under this definition.
In this article, we shall analyze the effects of this new definition on various statutory benefits under Indian labour laws such as the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; the Employees’ State Insurance Act, 1948; the Payment of Gratuity Act, 1972 and the Payment of Bonus Act, 1965. The import of this new definition will be compared to the pre-existing definition operative in the above enactments. Following this, their effects shall be juxtaposed to determine the utility of having a universal definition of wages in the context of statutory benefits.
The Employees’ Provident Fund
Section-16 of the Code on Wages, 2020 provides the employer’s and employee’s contributions, stating that the former shall be ten percent of the wages payable to each of the employees and the latter shall be equal to the contribution payable by the employer in respect of him. Whereas, under the EPF Act, 1952 the term basic wages is defined with no definition for the term wages. Basic Wages is defined as all emoluments earned by an employee on duty or on leave/holiday with wages in accordance with the terms of the contract of employment. It does not include the cash value of food concessions, dearness allowance, house-rent allowance, overtime allowance and any presents made by the employer.
However, when reference is made to Section-6 of the EPF Act, 1952 dearness allowance and retaining allowance are included in computation of the employees’ contribution along with the basic wages. Compare this framework with that under the Code on Social Security, 2020 and we find that they are exactly the same. Therefore, with regards to computation of EPF contributions, the new uniform definition of wages does not have much impact.
Employees’ State Insurance
Under Section-29 of the Code on Social Security, 2020 contributions payable by the employer and employee shall be prescribed by the Central Government and shall be in relation to wage periods to be prescribed in the regulations as units in respect of which contributions must be paid. This is a scheme similar to that under the ESI Act, 1948, however, the definition of wages thereunder slightly differs from that under the labour Codes.
The definition of wages under Section-2(22) under the ESI Act, 1952 states that it means all remuneration paid or payable in cash to an employee if the terms of the contract of employment were fulfilled. It includes payment to an employee in respect of any period of authorized leave, lock-out, legal strike or layoff and other additional remuneration if any, paid at intervals not exceeding two months. However, it excludes contributions to any pension/provident fund, travelling allowances and gratuity payable on discharge.
This is a marked difference from the definition of wages under the Codes as it does not include the additional payments that are mentioned in the definition under the ESI Act [s21]. A likely consequence of this definition is that it will bring down the ESI contributions. This is because additional remuneration being paid on a regular basis will be excluded, whereas currently the same does not occur. For example, medical allowances and other payments made on a monthly basis get included right now, however under the labour Code definition of wages, these will not be included.
Thus, all the confusion around what constitutes ‘wages’ in the context of additional remuneration will be removed by the universal definition. The proviso under the definition that stipulates addition of any portion of the excluded allowances in excess of 50% of the total remuneration will create a lot of questions.
Under the Payment of Gratuity Act, 1972 ‘wages’ is defined as all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid to him in cash. It includes dearness allowance but does not include any bonus, commission, house-rent allowance, overtime wages and any other allowance.
When juxtaposed with the definition of wages under the Codes we can clearly see that the exclusions are similar between both the definitions. However, the definition under the current Act includes all emoluments under the terms and conditions of employment, something the current definition aims to avoid by making three components namely, basic, dearness allowance and retaining allowance constitute at least 50% of an individual’s wages.
Under the Payment of Bonus Act, 1965, ‘salary or wage’ is defined as all remuneration (except that in respect of overtime work) capable of being expressed in terms of money, which would be payable to an employee in respect to his employment. It includes a dearness allowance (that is all cash payments, by whatever name called, paid to an employee on account of a rise in cost of living [s22] ). It does not include any other allowance, travelling concession, bonus, contributions to EPF and ESI, retrenchment compensation, ex gratia payments or any commission payable to the employee. Earlier, it was common for employers to add all emoluments to wages and thus increase it to bring it above the Rs. 21,000 threshold. However, as per the current scheme under the labour Codes, the same is not possible due to the proviso to the definition of wages.
The definition of ‘wages’ under Section-2(h) of the Minimum Wages Act, 1948 is explained as all remuneration, capable of being expressed in terms of money payable to a person employed in respect of his employment and includes house-rent allowance. It does not include contributions towards pension/provident funds or social insurance, travelling allowance, gratuity payable on discharge and amenities excluded by general or special order of the appropriate Government.
This again is a marked difference from the current definition of wages under the Codes, which excludes house-rent allowance from the scope of remuneration with regards to wages. Once again, this is subject to the 50% threshold brought in by the proviso, however, it does mean that the manner of calculation of minimum wages is going to change.
From the above it is clear that the uniform definition of wages under the labour Codes encompasses central aspects of definitions across most of the above enactments. With the major differences being under the ESI Act and the Minimum Wages Act. However, it is essential to understand the impact the proviso to the definition is going to have.
With regards to employees drawing fixed salaries, it would be essential for employers to ensure that fifty per cent or more of their remuneration consists of basic, dearness allowance and retaining allowance or a combination thereof. This is the best way to ensure cost of compliance remains low while ensuring wages do not fluctuate as the proviso is not brought into play.
The question that arises as a consequence of the above conclusion is, therefore, what can employers do in cases of employees who earn primarily on a commission or incentive basis. With regards to this it is difficult to provide a clear answer. However, based on an interpretation of the proviso, it is safe to say that it would be better for companies to provide as much of the remuneration with respect to these employees in the form of basic, dearness allowance and retaining allowances. This ensures that cost of compliance remains low and that wages do not periodically increase due to the operation of the proviso. However, this might not be practically feasible in all cases and would involve wholesale changes to wage structures in an organization.
What do you think will be the effect of this definition of wages on wage structures? How is your organization planning to adapt to this change? Do you think there is a need for clarity on the same? What do you believe will be the effect of this change?
Drop your thoughts in the comments below.
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11 thoughts on “Impact of the Definition of ‘Wages’ on Statutory Benefits”
1. What about HRA for epf consideration under SS code, if it exceeds 50%?
2. How medical allowance would be excluded from wages for ESI under the SS code?
As per the current definition of wages under the four Labour Codes, basic, dearness allowance and retaining allowance must form at least 50% of wages. In your example you have mentioned HRA exceeding 50% of all remuneration, if the same occurs the quantum of the HRA that exceeds the 50% threshold shall be added to wages. This is because the proviso declares such an amount ‘deemed wages’. Therefore for the purpose of EPF consideration, wages will be the three inclusive components plus the amount of the excluded allowances that exceed the 50% threshold.
If I pay Bonus on a monthly basis and My HRA is already 50% of My Basic + DA, does Bonus will get considered as a part of wages and do I need to calculate PF on that, because PF wages definition says that Bonus is the excluded component to calculate the PF even though it is monthly payable. Please advise
With regards to your query the appropriate answer would be that the quantum of the excluded allowances (in your case the HRA+ Monthly Bonus) that exceeds 50% of your Basic+DA will be added to wages as deemed wages as per the proviso to the definition of wages.
Hi Animay, I need a clarification & confirmation …so according to the definition of wages in the new codes … the ideal salary structure would be Basic + DA to be 50% of Gross Pay and the rest 50% as HRA or any other allowance you want to put it as, by nomenclature …Am I right ….So for eg if monthly gross pay of an employee is 1lac, I put 50K as Basic+DA and 25k as HRA another 25 K as Special Allowance … Now if the wage ceiling in both PF and ESI is made 21k by Govt ( which is likely to make it uniform across PF, ESI, Bonus) then as per definition of employee in the Code on SS 2020, he doesn’t fall under the definition of the employee as his Basic+ DA is more than 21K then should the employer pay employer’s contribution to his PF & ESI, will he not come out of coverage …
The above case you have provided is reliant on several assumptions, it is may be so that the threshold is changed and quite possible that the coverage be extended. I would recommend waiting for the threshold to be notified before arriving at such conclusions. You are absolutely right about the ideal salary structure and that is what the Government’s intention is behind making this move.
I need a clarification on whether wages (ie basic+DA+retaining allow) has to be min. 50% of annual CTC or Gross Salary? Also, is medical allowance need to be considered as retaining allowance thus part of wages or it is considered in excluded allowance?
Hi Animay, I need a small clarification (if you can help).
In accordance with the new Wages code, let’s say the salary structure of an employee looks like below:
Basic (50%) = 25000/-
Rest of the Allowances = 25000/-
Gross Salary= 50,000/-
Now, in one particular months the employee receives performance based incentive/bonus in his salary amounting to 70000/- , taking the total remuneration of that month (Gross + Incentive) to 1,20,000/-
Now this amount is 70,000 rupees in excess of the 50% threshold allowed for ‘allowances’ under the new wages code.
My question is, how will this excess amount of 70,000 impact the various calculations related to the salary structure in that month?
The definition of ‘wages’ does not include incentives. Your understanding is correct.
Further, as per Section 2 (k) of the Code on Wages, 2019 – “If payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the 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.”
Coming to your factual matrix, the total remuneration is 1,20,000 including incentives. Therefore, for calculation of wages, we will take one half of the wages (60,000) and anything in excess will be taken as ‘wages’ for all purpose of calculation.
Hence, the amount to be taken is 60,000
what could be the ideal salary structure in terms of less statutory compliance for a restaurant.
The Government of the respective State prescribes Minimum Wages for various scheduled employments. In addition, the Government also prescribes minimum wages for the Hotel Industry. It is advised to refer the latest Minimum Wages issued by the respective State Government for the Hotel Industry.