Article (April-2021)


Designing new wage structure under The New Labour Codes

G.M. Saini

Designation : -   Advocate

Organization : -  Labour & Employment Law, New Delhi


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The new labour codes to become enforceable very soon have tried to consolidate the numbers of existing Acts into just four codes and has also tried to standardize some common and critical terms, which erstwhile are being defined differently under different Acts. One such very important and critical term uniformly defined under all the four codes is the definition of the term 'wages'. All establishments shall have to restructure their existing wage structures in conjunction with the new definition of wages as defined in The Code on Wages, 2019. Wage structure has to be designed in such a manner that it does not adversely impact the employees or the employers, and at the same time should be compliant of new statutory definition of the term 'wages'. Wage structures are designed by different establishments in different ways, inter alia, like :-

i.    By keeping basic components in the wage structure without numerically highlighting the statutory benefits like ESI, EPF, bonus, gratuity etc.

ii.    By offering a consolidated package with freedom to bifurcate the gross amount into various components, either decided by the employer or as per convenience of the employee. It is called cost to company (CTC) pattern.

iii.    By paying some part of remuneration as wages and some amounts as reimbursements.

iv.    By paying some part of the remuneration as wages in monitory form and some part of wages in kind-form.

v.    By paying some part of the remuneration as wages in monitory form and some part of wages in the form of stocks of the Company.

vi.    By paying all remuneration as one consolidated amount.

Employers tend to bifurcate the remuneration of employees in such components which attract least possible or reasonable incidental statutory benefits like EPF, bonus, gratuity etc. Employees are also comfortable with such bifurcations as they legitimately reduce their tax liability and their take-home wages are plumper. This freedom deserves to be allowed to continue in the mutual interest of employers and the employees as well as for industrial harmony.

The term wages as defined in the new Codes is alright, but the two provisos and the explanation at the end of the clause have almost jeopardized the simplicity, clarity and purpose of the definition. These provisos and the explanation seem to be unnecessary and inspired by some bias. The provision of law should be simple, clear and easily implementable.

In February 2019, Hon'ble Supreme Court in the matter of Surya Roshni and others had interpreted or reiterated the finding held earlier in the matter of Bridge and Roof, that all amounts paid to all employees universally, necessarily and ordinarily, shall be considered as basic wage for the purpose of computing EPF. Though, such interpretation is not available in the Act. However, this would be subject to maximum wage limit as provided in the Act from time to time.

The difficulty being faced by the employers is how to satisfy the compliance of law on new definition of wages in new code, how to satisfy their employees whose take-home wage will reduce because of additional contributions towards ESI and EPF, and how to satisfy themselves because by implementing the new definition of wages provided in the new codes is going to increase their financial pay-out. The spiral effect will not stop here. On the one hand it may hamper employment and growth of industry, and on the other hand it may actuate inflation. Both consequences are contra to the desire of ease of doing business.

When trying to implement the new definition of wages, dealing with all the components from (a) to (i) in the clause of definition of wages is impractical, being unknown and incalculable. Excluding the House Rent Allowance, the second biggest component in any wage structure, from the definition of wages is highly surprising. Though, exclusion of other components from the definition of wages is justified. But bringing a part of them back through back door as deemed wages, if their aggregation exceeds 50% of all the remuneration, i.e., Basic, Dearness Allowance and Retaining Allowance, lacks logic, justification and practicality. It becomes impossible to implement literally when employees' remuneration is agreed on CTC pattern; or when Allowances are linked with Basic on per cent system. Let us try some sample examples of wage structure as below, which clearly shows that by implementing the definition of wages under the new labour codes, the Basic wage will increase tremendously which will further enhance the liability on incidentals like bonus, gratuity, leave encashment etc. :-

Perusing through the Table-B above, the amounts of bonus, EPF contribution as shown in the Table will also automatically change, because they are linked to Basic pay; and the deemed Basic pay has substantially increased by implementing the proviso of the clause on wages. The wage structuring process will become further difficult in case the components of wages are linked on per cent basis to the Basic pay. This kneejerk kind of action and reaction will not stop, and a final wage structure is difficult to achieve.

An immediate review of the definition of wages is inevitable and unavoidable.

There may be a very simple way to extricate out of this troubled situation, just fix one appropriately reduced per cent age for EPF contribution on entire remuneration shown in the wage sheet as gross monthly rate of wages, subject to maximum ceiling. Lower wage employees will contribute on lower gross wage and higher wage employees will contribute on higher wage, in proportion to their gross wages. Similar formulae may be devised for ESI, bonus and gratuity etc. Shun the add back formula from exclusions into wages. Please be simple, be clear and be compliable.

G.M. Saini - Advocate, Labour & Employment Laws, New Delhi