NEW DELHI: The Center on Friday introduced four new labor codes, marking the biggest overhaul of labor laws in a decade. The government said the move aims to simplify rules and improve worker protection. A key change under the new laws is the definition of “wages”, which now includes basic pay, cash assistance and retention allowance, with at least 50% of total remuneration being counted as wages.
Earlier, employers often structured pay packages in such a way that basic pay plus DA formed a small part of the total compensation, with large parts allocated to non-benefit contributions such as gratuity or pension fund. Under the new labor codes, any cost to company component (CTC) will now be treated as remuneration unless specifically exempted, with the maximum exemption limited to 50% of total compensation.
“‘Wages’ now includes basic pay, cash assistance and retention allowance; 50% of the total remuneration (or such percentage as may be notified) will be added back to the calculation of wages to ensure consistency in the calculation of gratuity, pension and social security benefits,” an official statement said.
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The change is expected to affect the calculation of various social security contributions, including Provident Fund (PF), Employees’ State Insurance (ESIC), Workmen’s Compensation and Maternity Benefit.
“The definition of ‘wages’ under the labor laws is likely to affect the basis of calculation of various other social security contributions like Provident Fund, ESIC, Workmen’s Compensation, Maternity Benefit etc. It will depend on how individual employers have structured their salaries into various components,” said Madhu Damodaran, Regional Managing Partner, AM Legals.
The impact on tips will be significant. Since gratuity is calculated on the basis of last drawn wages and years of service, a higher proportion of basic pay and DA in the wage base will result in a higher lump sum on exit.
“With this notification, all statutory benefits and allowances will be on deemed wages that are at least 50% of a person’s salary. This would lead to a huge increase in the payment of gratuity, as till now gratuity was calculated from the basic salary which could be less than 50%. But now it will have to be calculated from at least 50% of the salary,” explained Damodaran.
While this is great for employees, it will also increase costs for employers who can pass on the costs. So, in some cases, it could have an adverse impact on take-home pay, Damodaran added.
The reforms also extend gratuity eligibility to fixed-term employees after one year of continuous service instead of the previous five-year requirement.
“For employees in employment, prior eligibility continues to apply for five consecutive years,” says Puneet Gupta, partner, People Advisory Services-Tax, EY India.
“Basically, the government wants to discourage the practice of hiring people for, say, 3 years to avoid paying gratuity. Now fixed-term employees who are hired for a fixed number of years will be entitled to gratuity right after a year. At present, only permanent employees are entitled to gratuity according to the payment of gratuity,” would also state permanent employees as independent employees on the same benefit. and an actuary.
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Similarly, the changes may affect PF and other social security contributions, though as per the rules of the Employees’ Pension Fund Organization (EPFO) ₹The 15,000 limit on statutory EPF contributions limits the immediate impact unless employees opt for higher contributions.
“The announced codes will enable many lower income earners to have more retirement savings due to higher deemed wages for EPF contributions and gratuity,” said Kulin Patel, managing director, partner and actuary at KA Pandit Consultants & Actuaries, India.
“From an employer’s perspective, greater visibility of labor law and easier compliance should also encourage the international business community to locate in India,” Patel added.
