‘Wages’ Under Payment of Wages Act & Code on Wages: A Comparative Analysis

 

Animay Singh
Simpliance COE

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Wages

Introduction

The Code on Wages, 2019 has been passed by the Parliament and with the draft Central rules awaiting Parliament’s approval, India’s biggest overhaul of labour laws is imminent. The Code on Wages, 2019 subsumes four labour legislations, namely:-

1.  The Payment of Wages Act, 1936

2.  The Minimum Wages Act, 1948

3.  The Payment of Bonus Act, 1965

4.  The Equal Remuneration Act, 1976

Several changes were brought in through the Code to facilitate deregulation and promote ease of doing business. Moreover, the Code aims to streamline the process of labour law compliance across India by providing a uniform legislative basis for the same. A key change brought in by the Code is the new definition of the term ‘wages’ under Section-2(y) of the Code. It marks a departure from earlier definitions of wages under the aforementioned Acts. Thus, it is necessary to analyze this definition and juxtapose it with that under the Payment of Wages Act, 1936 to understand its import.

Comparative Analysis of the Definitions

While the body of the definitions are similar and inclusive in nature, the sub-clauses are completely different in their construction as well as their overall import. The inclusive aspect of the definition under the Code on Wages comprises of the following components:-

 (i)  Basic Pay

(ii)  Dearness Allowance

(iii)  Retaining Allowance, if applicable

However unlike the definition under the Payment of Wages Act, 1936 the definition under the Code goes on to provide a list of items that are not included in this new concept of wage such as:-

(a) Bonus payable under any law which does not form part of remuneration under terms of employment

(b) Value of any house accommodation or supply of an amenity (such as light, water, medical attendance)

(c)   Contribution paid by the employer towards pensions or provident fund

(d)  Conveyance allowance/ Travelling concession

(e) Sums paid towards special expenses incurred by an individual due to the nature of his employment

(f)   House rent allowance

(g) Remuneration payable under any award/settlement between the parties or order of a court/tribunal

(h)  Overtime allowance

(i)   Commission payable to the employee

(j)   Gratuity payable on termination of employment

(k) Any retrenchment compensation or retirement benefit or ex gratia payment made to an employee on termination of employment

Under the Payment of Wages Act, 1936 the subject-matter under clauses (g), (h), (i) and (k) were included in the computation of wages.

The first proviso under the Code on Wages, 2019 stipulates that if payments under clauses (a) to (i) as mentioned above exceed one-half or such other percentage as notified by Central Government, of the total remuneration under this definition, then the amount which exceeds such stipulated threshold shall be deemed to be remunerated and shall be added under wages.

The second proviso relates to equal remuneration and provides that for the purpose of equality in wages for all genders, the emoluments specified under clauses-(d), (f), (g) and (h) as mentioned above shall be included in the computation of wage.

Finally, the explanation under the definition in the Code on Wages prescribes that where an employee is given remuneration in kind by his employer the value of the same which does not exceed 15% of the total wages payable to him shall be deemed to form part of the wages of such employee.

Issues

The above framework presents us with several problems, the first and major one being the principally flawed inclusion of elements such as provident fund contributions, gratuity payments and bonus into the salary through the first proviso. This goes against the fundamental objective behind such payments and would lead to an unnecessary increase in the employer’s cost. Additionally, it would complicate payroll processes as these components are generally fixed with little to no fluctuation as they are not components of wages. However, with the changes in definition, the same might occur leading to a great deal of confusion.

The probable intention behind the introduction of such a scheme is to ensure that employers include the majority of an individual’s salary in the first three components namely basic, dearness allowance and retaining allowance to avoid the inclusion of other elements into the salary component at a later time. While this is a step taken with good intentions, it will lead to complications as the Government is effectively regulating incentives, thereby making it difficult for employers to formulate their own wage structures.

This will be problematic especially in the case of employees who draw significant portions of their salary through variable and deliverable linked performance-based components. For example, in the case of sales representatives who draw differing amounts based on the nature of their travel, performance targets etc.

Further, the implementation of such a definition for the purpose of minimum wages will also create several issues. Currently, minimum wages include house rent allowance and exclude conveyance allowance, whereas the current definition excludes both. This is especially confusing in light of the introduction of fixation of minimum wages in accordance with the Supreme Court judgement in the Reptakos Brett case.

Conclusion

While the intentions behind the introduction of a uniform definition of wages are largely positive, their effect remains to be seen. This is because the definitions under the different statutes served their respective purposes in relation to the object of the relevant statute. For example, under the Payment of Bonus Act, wages are considered to be only the sum of basic and dearness allowance. This is to ensure that the amount of bonus remains practically feasible for the employer to provide in proportion to the employee’s wages.

Juxtapose the above with the definition of wages provided under the Code on Wages, 2019 and it is clear that the current definition will create issues largely because of the first proviso. This is because the proviso will incorporate several aspects that are principally outside the scope of remuneration under the same and lead to an increase in what are considered wages.

Do you believe the definition of wages under the Code on Wages, 2019 requires amendment? Will it create issues from an HR and payroll perspective?

Drop your thoughts 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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15 thoughts on “‘Wages’ Under Payment of Wages Act & Code on Wages: A Comparative Analysis”

    1. Hi,
      The Code has already been passed by Parliament but is yet to be brought into force by way of notification. Currently the draft Central rules for the Code on Wages have been circulated for public opinion and recommendations, it is only after the same receives Parliament’s approval can we provide any clear picture of when the Code will come into force. Any predictions on compliance changes at this point would be speculation, we would have to examine the final rules as passed by Parliament and it read with the Code to provide a clear picture. Rest assured sir we will definitely write a blog on it!
      Thank you for comment, we hope to see you interacting on our blog more often!

      Regards
      Animay

  1. its our kind request you to provide the circular or latest notification regarding the payments rates for outsource data entry operators.ie issued by Labour department

  2. Welcome on Code but, Realistic view from employers employees view to be considered.
    Role of State Govt & its circular/Notification is important.

  3. If we go by new definition of Wage then Employee who draws 21001 Gross will not be eligible for Statutory Bonus which was previously 21001 Basic

  4. Sir,

    can you please share the new structure for an employee drawing CTC of Rs. 12 Lakhs but has Basic of RS. 5 Lakhs and rest are in HRA , other allowance, Vehicle reimbursement ,Attire allowance. employer contribution for remaining Rs. 7 Lakhs

    1. Hi,
      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. Based on the above, the calculation would look as follows:-

      Total Wages: 12 Lakh
      50% of Total Wages: 6 Lakh
      Excluded Allowances (In the form of HRA and other allowances): 7 lakh
      Difference between excluded allowances and 50% threshold: 7 lakh-6 lakh= 1 lakh

      Thus wages as per the definition under the Code on Wages, 2019 would be 6 lakhs (5 lakhs from basic+ 1 lakh due to application of the proviso)

      Regards
      Animay

  5. Definition of wages is very confusing. It should be explained in the language understood by all with proper example.

  6. hi: 1. in the CTC concept, being followed by most of the Companies, employer contribution of PF, gratuity etc are finding a mention and from that perspective, i feel that there is clarity. Since the minimum wages has incorporated the cost of housing also, having another component called as HRA does not help, except to reduce PF contributions. 2. u have mentioned in your note about the variable pay. The proposed law talks about commissions and I would like to know from you whether you are equating this to the variable pay which is based on KRAs? In my opinion, variable pay is not reflected in this definition which concentrates only on the guaranteed payment or sales incentives etc which I equate to Commission. I agree that the sales incentives will create issues. 3. does this definition exclude certain people ? say, based on CTC levels ?

    1. Hi,
      In response to your first example I would say I am in agreement with your view. With regards to whether variable pay/performance bonus based on KRAs will fall under the commission aspect of the excluded allowances under the definition I must say that we lack clarity on the matter currently. This is partly due to the lack of jurisprudence on the wage definition under the Code. It stems from a fundamental change in the outlook of the Codes, while earlier definitions of wages were enactment based, the current one is universal. Therefore, it is unlikely that courts would adopt earlier jurisprudence to interpret the current definition of wages. Your interpretation could well be one that is adopted, however we must wait for further clarity on the same before reaching any conclusions. To your third question I must simply say no, the wage definition itself does not exclude any individuals based on their CTC.

      Regards
      Animay

  7. The definition of wages to my opinion is a scientific definition and common in all codes. It has three parts – Part-1 – All remuneration payable to any employee expressed in terms of money and includes Basic Pay, DA and Retaining Allowance.
    Part-2- the exclusion list from (a) to (k) .
    Part-3 – the 1st proviso wherein total exclusion under (a) to (i) should not be more than 50% of the total wages calculated under the definition of wages.

    There are confusion among the HR people whether it should be 50% of monthly gross or 50% of CTC.

    To my opinion both are not proper interpretation. It should be total cash component payable to any employee on monthly, bimonthly, quarterly, 6 monthly or yearly basis except non payable items – the value of house accommodation, electricity, water supply etc. to be considered and payable item gratuity should be considered. That is why employer’s PF contribution has to be considered for calculation as payable to employee but employer’s ESIC contribution will not be considered as not payable to employee .

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