Impact of the Definition of Wage on Salaries and Payroll

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Wages on Salaries & payroll

Overview of the Definition and Its Effect

Wages as defined under Section-2(y) of the Code on Wages, 2019 or Section-2(zq) of the Industrial Relations Code, 2020 or Section-2(88) of the Code on Social Security, 2020 and Section-2(zzj) of the Occupational Safety, Health and Working Conditions Code, 2020 reads uniformly. Thus, for all of the twenty-nine Central labour laws subsumed into four labour codes, ‘wages’ has the same meaning and import from a definitional perspective.

The definition divides the scope of wages into inclusive components and excluded allowances. The proviso under the definition stipulates that the excluded allowances cannot exceed fifty percent of the total remuneration earned through the inclusive components under the definition. The amount exceeding this fifty percent threshold is deemed wages and added to the same.

Inclusive Components

The definition provides as follows:-

“Wages means all remuneration, whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes”

The components made part of this inclusive part are basic pay, dearness allowance and retaining allowance.

Excluded Allowances

The definition goes on to exclude the following from the scope of wages and applies the proviso to the same:-

  1. Any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;

  2. The value of any house-accommodation, or of the supply of light, water, medical attendance, or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;

  3. Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;

  4. Any conveyance allowance or the value of any travelling concession;

  5. Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

  6. House Rent Allowance;
  7. Remuneration payable under any award or settlement between the parties or order of a court or Tribunal;

  8. Any overtime allowance;

  9. Any commission payable to the employee;

Effect of the Proviso

The following table explains the proviso’s effect:-

Components
Proviso ApplicableProviso Not Applicable
Basic10,00016,000
DA80005000
Sum of Inclusive Aspects18,00021,000
Conveyance Allowance40002000
HRA15,00015,000
Sum of Excluded Allowances19,00017,000
Total Wage37,00038,000
50% of Total Wage18,50019,000
Quantum of Excluded Allowance>50% of total wage500Nil
Wage under the Code 18,50021,000
Deemed Wages500Nil

While our previous piece analyzed the Impact of the Definition of ‘Wages’ on Statutory Benefits, this article aims to examine some of the key consequences the same shall have on salaries from a payroll perspective.

The impact of this proviso can be summarized as follows:-

  • The quantum of remuneration falling under clauses (a) to (i) under the excluded allowances cannot exceed 50% of the total remuneration. This means for the purpose of calculating wages excluded allowances from clauses (a) to (i) can form a maximum of 50% of remuneration

  • Any amount exceeding threshold will be deemed wages and added thereto

  • Thus, the intention behind the proviso and a corollary of the above statement is that at least 50% of remuneration should be considered for all the social security benefits

The following section shall examine the impact this definition shall have on salaries and their corresponding effect on payroll.

Impact on Payroll

The consequences of the new definition on payroll can be summarized as follows:

  1. Salary Structure
  2. 1.1. HR and payroll personnel will have to be wary of cases where employees are earning more than 50% of their total remuneration through their excluded allowances. This will lead to the application of the proviso and inclusion of the excess as deemed wages. If this process continues over time, it could lead to wages being inflated and thus statutory contributions for EPF and ESI steadily increasing over time.

    1.2. The Supreme Court decision in the Surya Roshni and Vivekananda cases provided that where an allowance or emolument is paid universally, necessarily, and ordinarily, the same is liable to be included as part of basic wages for the calculation of EPF contributions. The new definition of wages has adopted a via media between complete exclusion of allowances and the Supreme Court decision that for all practical purposes included all allowances.[s21]  The intent behind the same is to ensure that employees receive at least 50% of their wages in the form of fixed components.

    1.3. On a more positive note, the new definition is likely to be beneficial for those in entry-level jobs as earlier their wages for statutory contributions included several emoluments which lead to higher amounts being deducted towards EPF and ESI contributions. Whereas, under the new labour codes the scope of wages vis-à-vis statutory contributions has reduced meaning that the take home salary of those in entry level jobs will be higher. This will benefit employees as they will have an added incentive to enter formal modes of employment and will reduce costs for employers as well due to reduction in the quantum of contribution.

  3. Payroll Management
  4. 2.1. The issue of fluctuating wages is one payroll personnel should pay close attention to. For example, those employed in executive positions or employees earning large sums of money through performance bonuses can be affected as year-end bonuses can lead to an increase in wages if the proviso becomes applicable.  Even in cases where gratuity has to be paid, if an employee draws a large bonus in his last month of employment, this can lead to the quantum of gratuity increasing drastically.

    2.2. This involves making the requisite changes to payroll processes as well as any payroll management software that is being used.

    2.3. Chapter-II of the Code on Wages, 2019 provides for payment of wages for overtime work to employees under Section-14. While the provision is applicable only to those drawing minimum wages, it provides that employees doing overtime work shall earn at an overtime rate at twice the normal rate of wages for every hour or part thereof worked in excess of normal hours. Thus, this is another aspect that needs to be taken into consideration as overtime allowance would fall under the excluded allowances.

If you have any doubts or queries relating to the impact of the Codes on your company’s salary structure or payroll processes, feel free to drop them in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney.
Simpliance makes no representations or warranties in relation to the information on this article.

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Animay Singh
Simpliance COE

Biography

Madhu Damodaran
Simpliance COE

Biography

6 thoughts on “Impact of the Definition of Wage on Salaries and Payroll”

    1. Hi Pradeepan,
      As per the Code it is clear that the 50% threshold is applicable to all remuneration under the definition of wages, thus it cannot be considered on gross pay. You may refer to the proviso Section-2(y) of the Code on Wages, 2019 for further clarity.

      Regards
      Animay

  1. Sir,
    You have not talked about the
    1) Pension part : PF, NPS and Superannuation
    2) Reimbursement part: LTA and Sodexo

    Now our query is
    1) Where they will fall
    2) While calculating 50 % of total wages will the above pension and reimbursement part
    a) will be included
    b) will be excluded

    1. Hi,
      With regards to your first question relating to EPF and NPS, the status under the Code on Wages, 2019 is largely similar to that under the EPF Act, 1952. The Government is yet to notify the thresholds applicable which could be the only area for a potential change. With regards to leave travel allowance you may refer to Section-2(y) of the Code on Wages, 2019 where you will find that clause-(d) under the excluded allowances clearly excludes conveyance allowance and the value of traveling concession from the scope of wages. However, while computing total wages it will be considered. With regards to pension however, the same cannot be said as it falls under clause-(k) which is excluded from the scope of the proviso to the definition.

      Regards
      Animay

  2. Hi,
    The definition is too complicated, if possible please provide calculation of salary as per Code on wages definition like as mentioned below:-

    A – Earnings
    1. Basic + DA
    2. Allowances (HRA / Special / Conveyance / Education etc….)
    Total Gross

    B. Annual Benefit
    1. LTA
    2. Statutory Bonus

    C. Retirement Benefits
    1. PF (Employee)
    2. Gratuity
    3. ESIC (if applicable)

    Total CTC (A + B+ C)

    Deduction part

    1. PF/Pension (Company)
    2. Profession Tax
    3. TDS
    4. Any other deduction

    NET Take home

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