Unlike the present legislations where the applicability of the law depends on the salary thresholds, a number of employees, and nature of establishments, the provisions of the Code are applicable to all establishments and all employees, except in the case of bonus where the applicability is based on the wage ceiling to be prescribed by the government at a later date and the number threshold of 20 employees on any day during an accounting year. All employees are covered under the Code including those in supervisory, administrative, and managerial roles.

As a consequence, the provisions pertaining to payment of wages, deduction, wages period, overtime, etc. which are currently not applicable to employees earning wages more than INR 24,000 under the Wages Act, would apply to all employees for whom minimum wages are fixed under the Code.

The eligibility and calculation for payment of bonus under the Code would depend on the wage ceiling which will be notified by the appropriate government.

The term ‘wages’ has undergone a substantial change under the Code. The definition of wages has a wide import bringing within its fold any payment made in consideration of services rendered as per the contract of employment. The definition also lists out certain exclusions that will not be considered as wages. However, it is provided that in case the exclusions exceed 50% or such other percentage (as may be notified by the Central Government), of the total remuneration paid to the employee, then the amount that exceeds the 50% or such other percentage (as may be notified) shall form part of ‘wages’.

The implication of this new definition of wages is that it will now determine the manner of calculation of provident fund, ESI, gratuity, maternity benefit, bonus, leave encashment, and retrenchment payments as well eligibility thresholds for such payments.

That said, one needs to understand that the new definition does not dictate which components should form part of a wage structure. It explains which component would qualify as ‘wages’ for the purpose of determining the statutory payments.

Given that the consequential impact of the new definition could be dearer payouts by the employer, organizations will need to examine whether the salary structure needs to be changed so as to mitigate additional financial outflow. Also, clarity from the government on the ambiguities in the definition and on whether there will be a grandfathering of the accumulated gratuity until the date of enforcement of the Codes is essential to determine the extent of outflow from the exchequer of an employer.

Therefore in cases where the components of a salary structure that fall under the inclusion part of the definition of wages is higher than 50%, it is possible that in order to reduce the financial impact, the net take-home may be reduced to balance it with the increase in the retirement benefits such as gratuity.

Another important change is the increase in the period of limitation for filing claims by employees to 3 years from the existing limitation period under the present legislation that varies from 6 months to 2 years. Retention policies (if any) of an organization will need to be revisited basis of this change. Further, the Code provides for class-action claims where the claim is in respect of a group of employees employed in an establishment. Therefore, organizations would need to be mindful of potential collective employee litigation and be aware of the heightened possibility of unionization by the employees.

Lastly, the documentation with respect to the registers maintained under the present legislation will need to be changed, once the Code is notified and implemented and formats are prescribed under the rules.

The labor codes were to be made effective from April 1, 2020, however, it appears that the date of enforcement has been deferred since the rules under the Codes to be framed by Central and State Governments have not yet been finalized. News reports indicate that the date of enforcement could now be in the month of May. This however, would entirely depend on the status of the rules.

This article was originally published in Business World on 7 April 2021 Written by: Pooja Ramchandani, Partner.

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