Union Finance Minister Nirmala Sitharaman said that the Central government will be implementing the New-Wage Code Bill 2021 from April 1, 2021. This will have an impact on employees' cost to the company (CTC) as well as employers' wage bills. The Code of Wages was passed in December 2019.
With the introduction of this bill, employers will be required to modify the employee compensations to accommodate the new definition of wages. Expected changes for employees will include higher post-retirement benefits, while a decline in take-home salaries. Employers are likely to see increased outgo towards provident fund (PF) and gratuity contributions.
Though the Code of Wages was passed in December 2019, the government had held back its implementation since it wanted to implement it together with other three codes - on Industrial Relations, Social Security and Occupational Health Safety & Working Conditions.
Understanding the New-Wage Code
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 and such other things.
The new wage code mandates that basic pay will have to make up 50% of employees' CTC. Allowances to employees, like leave travel, house rent, overtime and conveyance, will have to be limited to the remaining 50% of CTC. If any of these exemptions, in aggregate, exceed 50% of the CTC, the extra amount will be deemed as remuneration and will be added to the wages.
As per the new wage code, gratuity will also undergo certain changes. 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.
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.
How it will impact you?
The New-Wage Code Bill 2021, will have a direct impact on the central government employees' salary, provident fund and gratuity.
As per the Wage Code Bill 2021, an employee's monthly basic salary can't be less than 50% of the net CTC.
Private-sector employees’ salary will also be impacted. Most of those working in private companies are likely to see a cut in their take-home salary from April.
The wage code will lead to an increase in gratuity payments and employers' contribution to their retirement corpus.
Many private companies prefer to keep the allowances component higher and the basic salary lower. This will not be allowed under the new rules.
The labour codes would not only provide social security to organised sector employees but also to informal sector workers like gig and platform workers (not on the rolls of an organisation).
