New Wage Code: Impact On Your Compensation

Economy has shrunk and unemployment is on a rise. Inflation is extremely high and forecast for next year also not very certain. During this time your take-home pay (private sector) is set to get impacted from April as per new wage rules. The new norms, which kick in next financial year, cap allowances at 50% of the total compensation.

The term “wages” as defined under the codes today, envisages that “all remuneration” provided to the employee is to be considered, and is subject to certain specified exclusions, such as statutory bonus, conveyance allowance, travel concessions, housing benefit, or house rent allowance, contributions to PF and pensions, overtime, commission, etc. The aggregate of these exclusions is limited to 50% of remuneration, and hence the wages as ultimately calculated would be at least 50% of total remuneration. That means basic pay (basic pay plus dearness allowance) will have to be at least 50%, resulting in a proportional increase in employees’ contribution to the provident fund and higher tax (if your basic was lower). On the flip, employees’ social security and post-retirement gratuity will become bigger. Corporates will see a rise in costs as their contribution to PF and gratuity pay-outs will go up.

Clearly, the intent of the codes is to ensure that contributions to PF, gratuity payouts, etc. are made on at least 50% of the total remuneration. The definition also provides for certain termination related payouts such as gratuity etc. and these are not subject to the 50% limit.

The four labour codes subsume 29 legislations. The purpose of each of these regulations was varied and hence the definition of wages under many of these regulations was also different. The codes are aimed at unification, simplification, and consolidation of these regulations, and hence have a common approach, which includes having a uniform definition of wages across all these regulations.

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