The main driving force behind the Code was an aim of the Government to transform the old and obsolete labour laws into more accountable and transparent ones

Many changes, that were supposed to happen in times to come, were actually accelerated due to the unprecedented surge of COVID-19 cases. Remote working for example, was supposed to be the norm from 2025 according to many reports, but it is already in vogue in 2020 and is here to stay for long. Similarly, the changes in the Code on Wages, 2019 was sanctioned in 2019 but it wasn’t expected of the government to implement the sanctioned law during such a time where the continuous cash-flow is extremely important for the economy to stay stabilised.

What does the new ‘Code on wages, 2019’ states

The Code on Wages, 2019 seeks to consolidate and simplify four pieces of legislation — Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976 — into a single code.

The definition of wages has been simplified in the new Code and is expected to reduce litigation and will entail at lesser cost of compliance for an employer. An establishment will also be benefited as the number of registers, returns, forms etc., not only can be electronically filed and maintained, but it is envisaged that through rules, not more than one template will be prescribed. On the other hand, the code ensures minimum wages along with timely payment of wages to all the employees and workers. 

The new definition of wage has three parts to it — an inclusion part, specified exclusions and conditions which limit the quantum of exclusions. Further, it provides that if the aggregate of the excluded components exceeds 50 per cent (or such other percentage as prescribed by the Central Government) of the total remuneration of an employee, the amount that exceeds the one-half (or such percentage as notified) will be deemed to be 'wages'. Hence, going forward, the various employment benefits, such as gratuity, retrenchment compensation, maternity benefit etc., may need to be calculated on at least 50 per cent of an employee's total monthly remuneration, directly impacting employees’ monthly take-home, effective from 1st April, 2021.

Government’s rationale behind this step

While addressing the audience to explain of the changes in Code on Wages, Prime Minister Narendra Modi stated that earlier it was only 30 per cent of the working population which got access to bare minimum wages. Whereas, with the implementation of new amendments in the wages law, employees across industries will have access to equal minimum wages. Actually, the main driving force behind the Code was an aim of the Government to transform the old and obsolete labour laws into more accountable and transparent ones. Among the four Acts being subsumed in The Code on Wages Bill, The Payment of Wages Act, 1936 belongs to pre-independence era and The Minimum Wages Act 1948 is also 72 years old.

“Such equality in the pay-out structure was long awaited by many. All this time people were complaining of zero social security and that no assurity of a secured life post retirement. Hence, it’s good that we are now bound to save more for a better future,” states Madan Sabnavis, Madan has an account chief Economist at CARE Ratings.

Many unorganized sector workers like agricultural workers, painters, persons working in restaurants and dhabas, chowkidars etc. who were out of the ambit of minimum wages will get legislative protection of minimum wages. It has been ensured in the bill that employees getting monthly salary shall get the salary by 7th of following month and those working on weekly basis shall get the salary on last day of the week and daily wagers should get it on weekly basis. Government wants Swiggy, Ola Ubers of the world to avail them proper social security. Also, if any contractual worker is hired for a fixed term of 1 year are more for a finite period, then they will also be availing gratuity to people who have completed five years at work.

Also, with India striving to become the factory of the world, ensuring ease of doing business for investors in the country while protecting the interest of the employees has been another major reason for driving such economic transformation within the country. Adil Zaidi, Partner and Leader-Economic Development and Infrastructure Advisory at Ernst & Young LLP believes that from the ease of doing business perspective, under the new Code, the total of 119 sections of the repealed legislations have been reduced to 69 sections - considering the consolidation of the definition section, inspectors, penalties, competent authority, an appellate authority, and rule-making powers etc. 

Countering the government’s thoughts, Amitabh Dubey, Political analyst, consultant, policy coordinator at ProfCong believes that, “its callous of government to enforce such laws during this time when people are in dire need of constant cash-inflows from their respective jobs. Already, with drastic and sudden hit of Covid menace, lakhs and crores of people have been moving jobless. Hence, passing such a rule where employees’ take-home salaries will be largely affected wasn’t required.” The computation of the wages have been transformed immensely that the amount of retirals also will change and therefore is bound to impact the net take home. It’s also going to increase the quantum of the gratuity also because earlier in the gratuity act very limited items were included as wages which now no more is a thing.

Impact of the bill across industries

Well, talking about the impact, apparently the passed law has only been implemented in helping the government. Experts claim that though in long run it is going to help employees lead a more secured life, increasing the retirement corpus; but at present it is only helpful to the government as the PF amount which we are forced to invest in (now the amount shall be increased with implementation of new wage Code) shall be used by government during such economic deficit.

According to Zaidi, the new Wages Code is likely to impact the private sector companies the most. At present, most private companies prefer setting the non-allowance part of the total compensation less than 50 per cent and the allowance portion greater. This will, however, change with the new wage rules in motion. It is highly likely that these new rules will affect the salaries of private sector employees as they usually get higher allowances.

“Now, looking at the medical and pharma sector, it hasn’t hardly impacted because actually pharma has had the time of life during Covid. In our sector I don't see any challenge, though the government has unified lot of course the labour laws in a one kind of thing like GST, where all taxes have been specified under one umbrella. Similarly, the wages too has streamlined the wages for employees across organised and unorganised sector,” states Anil Mohanty, Head –People and Culture, Medikabazaar.

On the other hand, experts from the IT sector claim that it’s too early to comment on the impact it will have in their respective sector as companies who have already strategically drafted their payout shall not get affected by this law and those who fall under the category of streamlining the process, that are the actually sufferers.

Going Forward

So, now the definition of wages is for everyone and shall be impacting it all organisation irrespective of any sector, as the definition of wages based on which you are paying PF, gratuity, and bonus has changed. 

The inclusion of unorganised sector under the ambit of the Code on Wages and implementing a national level floor wage for minimum wages is expected to hugely benefit a labour-intensive country like India. Promotion of technological advancements to do away with physical visits by select Inspectors and enabling conduct of inspections remotely is further expected to ease compliance and promote setting up of more enterprises catalysing the creation of more employment opportunities. 

Today, Labour law is a concurrent subject. Earlier there were over hundred state government laws and over forty Central Government laws on labour. Currently these 4 labour codes have subsumed the 29 existing central government labour laws. Conflicts might be prevail amidst both central and state government, but they will work together to hopefully see that the provisions are harmonious.