The Code on Wages has been brought in as a part of the Government’s efforts to untangle India’s complex regulatory framework pertaining to labour. As part of the Code, the Government has introduced a new definition of the term ‘wages’ that is uniform across the four Labour Codes. The uniform definition comprises three parts – an inclusive portion, specified exclusions and conditions that place a limit on the quantum that may be claimed as exclusions. A key change brought in is that the specified exclusions cannot exceed 50% of all remuneration. Thus, in such an event, the quantum of the exclusions that exceeds the above threshold is deemed to be part of remuneration and consequently wages.
While the above measure intends to disincentivize organizations from adopting compensation structures that result in basic, dearness allowance and retaining allowance from being less than 50% of all renumeration, it is problematic because of its universal application. The implications on payroll and the Payment of Wages Act, 1936 have been dealt with in our earlier blog titled ‘Wages’ Under Payment of Wages Act & Code on Wages: A Comparative Analysis.
The Problems Created by a Universal Definition
While the universal definition does not appear to be problematic prima facie, the difficulties created by it become evident on an analysis of the definitions of the term under various Acts. The Minimum Wages Act, 1948 defines wages in a manner that incorporates house-rent allowance under wages whereas the current definition does not. While the Code provides for a separate definition for minimum wage, it uses the term wage which might lead to difficulties while interpreting the same.
Another such example is the use of the above definition under the Payment of Bonus Act, 1965 wherein wages are defined in a manner so as to include only the basic and dearness allowance. Similarly, with respect to the provident fund under the draft Code on Social Security, 2019 the definition of basic wages is replaced by the universal definition wages which creates several practical difficulties. Mainly because the definition of basic wages under the Employees’ Provident Fund Act, 1952 excludes dearness allowance, house-rent allowance, overtime allowance, bonus commissions and other similar allowances.
A question that may arise at this point is whether having multiple definitions under these separate enactments serves any useful purpose?
The answer to the above is a simple yes. The multiple definitions helped the respective enactments achieve their specific objectives without burdening the employer with high costs of compliance. This is why the definition under the Payment of Bonus Act excludes several components that would normally be part of wages. If the same were to be included, then the amount of bonus payable increases significantly. Similarly, under the Employees Provident Fund Act, 1952 elements are excluded from the definition of wages to facilitate the realization of the specific objectives of the Act.
Where does the solution lie?
It is important to note here that the first draft of the Code on Wages tabled in Parliament contained different definitions of wages and bonus. However, the same was removed after disapproval from stakeholders. While a universal definition offers significant benefits from an ease of doing business perspective, the above problem areas need to be addressed.
One possible way of addressing this is by clearly defining the nuances applicable to each topic in the rules for the Act. This would ensure that the general definition remains universal without excluding important aspects that allow the definition to operate differently in the cases of provident fund, bonus and minimum wages respectively. This will ensure a certain degree of uniformity is maintained and will prevent State Governments from introducing alterations that will undermine the universal aspect of this definition.
Thus, from the above it is clear that there exists a trade-off between universality and efficiency. A balance between the two must be drawn in case of the definition of wages under Section-2(y) of the Code on Wages as it is a universal definition applicable to all the Codes.
How do you believe the Government can address these problem areas? What changes would have to be brought in to ensure the above balance is maintained?
Drop your thoughts in the comments below.
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