New labour codes to affect employees' in-hand salary, companies wage bill

The central government is set to notify the rules under new labour codes, which will have an impact on employees' cost to company (CTC) as well as employers' wage bills. Employers will have to modify the employee compensations once the extensive labour reforms come into play to accommodate the new definition of wages. Expected changes for employees include higher post-retirement benefits, while decline in take-home salaries. Employers are likely to see increased outgo towards provident fund (PF) and gratuity contributions.

Under the Code on Wages, 2019, wages will include three components - basic pay, (inflation-linked) dearness allowance and retention payment. While it envisages all remuneration provided to employees, it excludes bonuses, pension and PF contributions, conveyance allowance, HRA or housing benefits, overtime, gratuity, commission, retrenchment compensation, etc.

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The new wage code mandates that basic pay will have to make up 50 per cent of employees' CTC. Allowances to employees, like leave travel, house rent, overtime and conveyance, will have to be limited to the remaining 50 per cent of CTC. If any of these exemptions, in aggregate, exceed 50 per cent of the CTC, the extra amount will be deemed as remuneration and will be added to the wages.

Meanwhile, gratuity will undergo certain changes too as per the new wage code. Under the new definition, gratuity will have to be calculated on the basis of a larger base, including basic pay as well as other allowances of wages such as travel, special allowance, etc. This will add to the gratuity cost of companies.

While the new definition of wages will increase the social security component of compensation packages, it could also mean lesser take-home salary for employees.

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The four broad labour codes on wages, industrial relations, social security and occupational safety, health and working conditions (OSH) have already been notified after the President's approval, subsuming 44 central labour laws. The Code on Wages was passed by Parliament in 2019 while the three other codes got clearance from both the Houses in 2020. The Ministry of Labour and Employment has now finalised the rules under these codes, paving the way for their implementation.

"We have finalised the rules under the four codes which are required to implement the four labour codes. We are ready to notify these rules. The states are doing their work to firm up rules under the four codes," Labour Secretary Apurva Chandra recently told news agency PTI.

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