Most companies have been devising wage structure of their employees, basis their pay-out culture, employee category and at most, catering to tax implications on the employees. The usual norm has been to devise a Cost-to-Company structure, encompassing basic wages, variable pay-out, employee benefits and retirals. However, the same has not been free from loopholes, as regard compliance with various legislations concerning wages is concerned.
The Code on Wages, 2019 has been notified on 8ᵗʰ August 2019, though the date on which it will come into force is yet to be notified. The Code consolidates the Minimum Wages Act, 1948, the Payment of Wages Act, 1936, the Equal Remuneration Act, 1976 and the Payment of Bonus Act, 1965. One of the most crucial definitions introduced by the Code is that of ‘Wages’, which is common and uniform among other Codes as well, viz., the Code on Social Security, 2020, the Code on Industrial Relations, 2020 and the Code on Occupational Safety, Health and Working Conditions, 2020.
Section 2 (y) of the Code on Wages, 2019 defines ‘wages’. The first part of the definition is an inclusive definition, and it includes all remuneration, whether by way of salary allowances or otherwise, paid to the employee for fulfilling the terms of employment. The second part of the definition in an exclusion clause, wherein the allowances which will be excluded from the definition of wages are listed. It includes, inter alia, any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment; the value of any house-accommodation; any contribution paid by the employer to any pension or provident fund; any conveyance allowance or the value of any travelling concession; any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; house rent allowance; overtime allowance; gratuity payable on the termination of employment and retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to the employee on the termination of employment:
The third part of definition incorporates the concept of conditional inclusion. It essentially envisages a scenario where the total of all the payments constituting part of exclusions, as stated above but excluding gratuity and retrenchment compensation or ex gratia payment, exceeds 50% of the total remuneration payable to the employee. In such cases, it is provided under the Code, that the amount which exceeds such one-half, shall be deemed as remuneration and shall be accordingly be added in ‘wages’ under the clause.
It is also provided that where an employee is given, in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen percent of the total wages payable to him, shall be deemed to form part of the ‘wages’ of such employee.
Hence, in sum and substance, if the total of the excluded amount of allowances, except gratuity and retrenchment compensation or ex-gratia payment, exceed 50% of the total remuneration, the amount which exceeds 50% shall have to be treated as part of ‘wages’.
The new definition, as contained in the Code, is expected to have significant ramifications in the context of various employment benefits to the employee, such as Provident Fund Contribution, Gratuity, Retrenchment Compensation, Maternity Benefit, etc.
In view of the above, the employers are required to re-align the pay-out structure to its employees with the new definition of wages, in a structured and well–informed manner, in order to be in compliance with the Labour Codes.