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This article makes an attempt to analyze the Code on Wages (Code) and the impact of the same on take home salary-

The Code on Wages has been introduced aiming to streamline and simplify the existing labour laws. It was passed by parliament in 2019. The Code will subsume the four labour laws – Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. After its enactment, all these four Acts would be repealed.

The code which is expected to be kick in from 1st April 2021 (not implemented yet) introduced significant changes and one of those is the expansion in the definition of the ‘Wages’. Wages means “all remuneration” payable to an employee and includes basic Pay, dearness allowance and retaining allowance but does not include bonus, contribution to PF and pension, HRA, conveyance allowance, overtime, gratuity etc. Further, the allowance component cannot be more than 50% of the total remuneration.

Accordingly, if these specified exclusions crossed 50% of the total remuneration, then the excess shall be deemed as remuneration and shall be added to wages. In other words, basic salary has to be at least 50% of the total pay.

For instance, gratuity which was earlier calculated on basic salary will now be calculated on ‘wages’. In a similar manner, employee and employer contribution to PF will go up and thereby reducing the home take salary amount. However, this will entail higher gratuity payment and PF money to employees when they retire.

Currently, most employers have a wage structure in which the basic salary ranges from 25% to 40% of the CTC of the employee, and this forms the basis for both provident fund and gratuity contributions. With the wages under the codes moving to at least 50% of the CTC, there is going to be an impact from both PF and gratuity perspectives. Therefore, come April you could see a rejig of your salary structure.

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March 2021