Article (February-2021)


New Labour Codes - Few Burning Issues

G.M. Saini

Designation : -   Advocate

Organization : -  Labour & Employment Law, New Delhi


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It has taken from decades to about a century to attempt to reform plethora of our archaic labour laws, which has lost its relevance in present day industrial and commercial environment. Multiple rigid statutory compliances, regime of licence-raj, inspector-raj, multiple inspections, absence of bargaining agents, rampant industrial disharmony not only made it difficult to do business, it also kept foreign investors distant away from the country. This situation strongly necessitated consolidation and simplification of plethora of labour laws and to provide atmosphere of ease of doing business. The reforms also required to allow the employer to rationalize its operations, flexibility to deploy right-sized and right-skilled workforce and modern machinery. Keeping all this in view and the recommendations of the second National Commission on Labour, over 40 labour laws have been consolidated into four Codes, namely, The Code on Wages, 2019, The Code on Social Security, 2020, The Industrial Relations Code, 2020 and The Occupational Safety, Health and Working Conditions Code, 2020. In the new Codes, besides many other new provisions, many definitions, including of wages, have been uniformly re-defined, new mechanism of fixing minimum floor wage and resolution of industrial disputes has been provided, lay off has been made easier, compulsory recognition of union has been provided, strikes have been controlled, social security for traditional and non-traditional employees has been provided, fixed term employment has been allowed etc. Though, the existing big bunch of labour laws have been consolidated into just four Codes, but their real simplification is still wanting.

The Code on Wages, 2019

  • Wages : One of the most contentious definitions.

"Section 2(y) - 'wages' means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in employed in respect of his employment or of work done in such employment, and 
includes :-

(i) Basic pay;

(ii) Dearness allowance; and

(iii) Retaining allowance, if any,

But does not include -

(a)    Any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;

(b)    The value of any house-accommodation, or the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;

(c)    Any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;

(d)    Any conveyance allowance or the value of any travelling concession;

(e)    Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

(f)    House rent allowance;

(g)    Remuneration payable under any award or settlement between the parties or order of a court or Tribunal;

(h)    Any overtime allowance;

(i)    Any commission payable to an employee;

(j)    Any gratuity payable on the termination of employment;

(k)    Any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment;

Provided that, for calculation the wage under this clause, if payment made by the employer to the employee under sub-clause (a) to (i) exceeds one-half, or such other per cent, as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent, so notified, shall be deemed as remuneration and shall be accordingly added in wages under the clause;

Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wages.

Explanation - Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent of the total wage payable to him, shall be deemed to form part of the wages of such employee."

Financial impact of wages to the employer and the employees is most critical. The definition of 'Wages' has been standardized across all new Codes, by including some Allowances and by excluding some others. Whether it is 'A' Allowance or 'B' Allowance, ultimately it is money and part of one gross wage. If any creative establishment coins some other names to the Allowances, other than in the definition, a dispute may again arise whether it should fall in included or excluded category. Exclusion from wages of House Rent Allowance, which is a big chunk of money and an integral part of current wage structures, is surprising. The new definition under the new Codes makes it more complex and disputable, but not simple.

Idea of considering 50% of all remuneration as wages is not understandable. The jugglery behind defining wages like this in the Codes, seems to be hidden behind calculation of provident fund contribution. EPFO had issued a circular like this on 6th August, 2014 so that EPF contribution is not reduced by employers. The honourable Supreme Court had also given similar observation in the matter of Surya Roshni in February, 2019, related to EPF contribution only. Section 6 of EPF Act clearly defines EPF contribution to be payable on Basic wages, Dearness Allowance and Retaining Allowance, if any, only; without specifying their ratio to the gross wages. But efforts have been made to include other Allowances also to be as 'wages' for the purpose of calculating EPF contribution at higher rate, which perhaps might not have been the original intent of the EPF Act. Objective of reform should be to simplify and encourage better compliance with no hardship to employers and employees, rather than to encourage enrichment of corpus of EPFO.

Calculating 15% of value of wages paid in kind is quite vague, and if done, wages may go haywire and impact on incidentals like bonus and gratuity etc. Many companies work on CTC basis and it has many components, viz., cost of car, house, food items, subsidized canteen, house furniture, air conditioner, fridge, leave travel concession, news papers and books and many others. Even bonus and gratuity is part of CTC, and it will be paid again on 15% value of it. Establishments doing exercises of restructuring wages in tune with forthcoming new labour Codes are facing difficulties.

To avoid all sorts of contentious confusions, it may be simple, practical and rational, to say, that the total amount of remuneration paid on monthly basis may be considered as one 'wage', without any bifurcation into different Allowances. EPF and ESI contribution may be calculated on gross amount of wage, at appropriately lower rates of contributions, may be graded, so that a balanced amount of EPF and ESI contribution is calculated, without any hardship, confusion or dispute. Any other better definition of wages, but simpler and fair definition will go a longer way in establishing harmonious industrial relations between employers and employees with ultimate benefit to the industry and the nation. Many things are linked and dependent on the definition of wages.

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G.M. Saini