The Government has consolidated 29 existing labour laws into 4 codes, including those related to Wages and Social Security. The Code on Social Security (‘Social Security Code’) subsumes nine regulations relating to social security, retirement, and employee benefits. Section 2 (y) of the Code on Wages, 2019 defines wages.
Definition of Wages under all the 4 codes, viz., Code on Wages, Industrial Relations Code, Code on Social Security and Occupational Safety, Health and Working Conditions Code, is standardized. The definition has been divided into 3 parts i.e.,
Specified exclusions &
Conditions that limit the quantum of exclusions
It is pertinent to note that, the specified exclusions shall not exceed 50% of all remuneration, in case if the said exclusions exceed 50% of all remuneration, then such excess has to be considered as wages.
Highlights of Social Security Code
The main highlights of the Social Security code are listed below:
Social security is extended to all employees and workers either in the organized or unorganized or any other sectors.
Enrolment under EPF and ESI Scheme voluntarily even if the number of employees in that establishment is less than the threshold.
Provision for payment of cess by the employer in case of building and other construction work, payable based on his self-assessment.
Registration of every unorganized worker, gig worker or platform worker based on self-declaration electronically or otherwise.
Employer’s contribution, or employee’s contribution, or both, payable under Chapter III or Chapter IV, may be deferred or reduced, for a period up to three months at a time, in the event of a pandemic, endemic or national disaster.
Establishment and maintenance of separate accounts under social security fund, for the welfare of unorganized workers, gig workers and platform workers.
Definition of contract labour to exclude permanent employees deputed at Principal Employer location.
Fixed Term employees shall be eligible for gratuity compensation on a pro-rata basis and not based on continuous service of five years.
Impact on Take-home Salary
Although the Social Security Code aims to increase the retiral benefits of the employees, the above-mentioned highlights could impact the take-home salary of the employees. The pay structures of most companies will change due to the exclusion part being usually less, sometimes substantially lower than 50% of the total salary. If the basic salary ratio is around 30% of total remuneration and it moves up to 50% all salary components linked to basic pay such as Provident Fund (PF), Employees State Insurance (ESI) and gratuity will be affected.
PF contributions of both employer and employees will go up as the new definition of wages includes all kinds of allowance and take-home salary may decrease as PF contributions go up. The PF contribution would increase, as PF contributions would have to be made on the new definition of wages and not on gross (excluding some components) as was the case earlier.
The Social Security Code extends the coverage of ESI provisions to all establishments employing 10 or more employees and can be voluntarily applied by an employer of a plantation. It also empowers the Central Government to notify the applicability of ESI provisions to establishments that carry on the hazardous or life-threatening occupation irrespective of the number of workers employed therein.
The take-home salary might also be affected based on the salary bracket the employee falls under. The impact is expected to be higher for those employees coming under lower salary brackets than the mid and high salary brackets, since the ones with higher pay may already have a basic salary close to 50% of the total remunerations.
The impact on tax liability due to salary restructuring shall be assessed individually. It is a common industry practice that the higher salaried employees will pay more tax as the tax planning option would be limited to 50% of CTC. In the event the basic pay increases, under such circumstances, the tax deduction can be claimed under the House Rent Allowance.
The Way Forward
The Labour codes however do not contain a provision requiring employers to change their CTC, but companies will have to rearrange the salary structure of their employees, or the companies can choose to limit PF contribution at 12% of the wages up to the ceiling limit as notified by the central government. However, the take-home salary of an employee may or may not increase, as the same would depend on the current salary structure of the company and its re-alignment with the definition of ‘wages’ under the Codes, which would be the very basis of statutory pay-outs. Whatever the impact may be, organizations should be proactive and assess the potential impact with the assistance of legal experts so that they can be well prepared by the time the new labour codes come into effect.
-Manisha Vidyadhar, Advocate and Senior Associate