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Employees salary structure likely to be tweaked once new labour codes are put in to effect

The labour ministry has finalised rules under the four labour codes, or laws, and is likely to notify them to take effect from April. The country’s most wide-ranging labour reforms in decades will have an impact on both employers’ outgo and employees’ take-home salaries.

Once implemented, the codes will prompt companies to restructure employee compensation packages or “cost to company” (CTC). Firms have will have to restructure salaries because, under the new rules, all allowances, such as leave travel, house rent, overtime and conveyance, have to be capped at 50% of the CTC. The Code on Wages 2019 has revised the definition of ‘wages’ which will now include three components: basic pay, (inflation-linked) dearness allowance and retention payment.

According to the new definition, “wage” will exclude statutory bonus, pension and PF contribution, conveyance allowance, HRA, overtime and gratuity. If any of these exclusions, in aggregate, are in excess of 50% of an employee’s CTC , barring special allowance, the excess amount will be added back to the wage for calculation of social security benefits.

A wider definition of basic pay will likely increase social security contribution because firms compute their social security contribution on the basis of how wages are defined. This could however result in lesser net take-home for employees, analysts say. Since basic pay could be higher because monetary allowances will be capped at 50% of CTC, companies may have to incur increased costs towards provident fund and gratuity, Employers in the private sector generally either contribute 12% of an employee’s basic salary and dearness allowance to the provident fund.

During consultations between the labour ministry, various stakeholders expressed concern over the possible impact of the new definition of wages on a company’s outgo. “However, there will be no change in the definition of wages,” a labour ministry official said.The rules are likely to clarify how gratuity is to be calculated. Gratuity is calculated on the last drawn salary of a worker. It is computed by taking into account 15 days’ of their salary for every year worked in the preceding five years. Employees receive gratuity on completion of five years of continuous service. However, under the new changes, even fixed-term contract workers completing a year of service will get gratuity,The official cited above said the new rules may allow gratuity to be calculated in two phases to limit outgo of companies. Gratuity earned till the time of the new law comes into effect is likely to be calculated on the basis of the older definition of wages. From the next fiscal onwards, gratuity will be calculated based on the new definition. If introduced, it will limit costs to firms and their financial burden.