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:-
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
(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.
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.
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.
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