The Code on Wages - Why this change is inevitable and must be embraced

India enacted four Labour Codes between 2019 and 2020, subsuming 29 existing central labour legislations. The intent behind this exercise was social security to all, ease of doing business, digitization and harmonization of an otherwise fragmented labour law system. The first and most important of these is the Code on Wages, 2019.

Prime Minister Narendra Modi when addressing the Tirupati Labour Conference on 25^th and 26^th August, 2022 said that the new labour Codes offer flexibility of working and will promote employment for women and bring social security to all, including the unorganised sector. This clearly indicated the government’s intent to apply these laws as soon as possible and that this is an inevitable change that we must embrace. This article sets out some of the major changes that the Code seeks to bring and the practical and legal consequences of these changes.

The term “wages” presently has over 12 distinct definitions in the labour statutes, this term having been the focus of over 100 judgments, with mind bogglingly countless hours of Court and lawyer time spent on interpreting and clarifying this term. 

Hence the very object of the Code on Wages is to consolidate laws relating to matters governing wages. In furtherance of this object, it introduces a new definition of “wages” that has been used across all the Four Labour Codes. This is no mean feat. To have achieved parity in the meaning of wages itself is praiseworthy.

The Code on Wages bring about two major changes through revised definitions and a few more through substantive provisions. We shall examine the new definitions and their impact first.  The new critical definitions are as follows:

 a) “Wages” now includes all remuneration paid to an employee but excludes certain fixed components like HRA, PF, Statutory Bonus, etc.

b) “Employee” includes all persons employed in the establishment excluding the employer or the board of directors of the company.

The impact that these two seemingly small changes will likely have on the industry is multifold. Employers will now need to consider this new formula to arrive at wages for all statutory purposes including the timely payment of wages, contributing to the provident fund and ESI, paying overtime, and paying gratuity and retrenchment compensation. This will also require employers to revise their existing structure to reduce the impact caused to the outflow of the company. From actuarial evaluations to budgets for the next year of operations, employers are going to see a vast differential if they don’t undertake this exercise before the roll out of the Codes. The question of gratuity cost being prospective or retroactive is a key issue with the industry asking for grandfathering of this provision. If that does not happen, companies will need to pay under the new formula even if the employee was employed before the Code came into force.

In the long run, a uniform wage definition brings about consistency, clarity and certainty, which the current law does not provide. The plethora of disruptive Judgments in the recent past like the Vidyamandir Judgment on what constitutes “PFable wage”, or the Texmo Judgment excluding conveyance from ESI showcased how the entire industry needed to keep shifting its understanding and taking corrective steps in the absence of clarity as to the meaning of the term.

The new definition is however not without ambiguity and leaves room for interpretation. This is both a flaw and a strength. Too rigid a term may fail to account for variables while too flexible a definition may create excessive ambiguity. The right balance appears to have been strived for and partially achieved. A great feature of this new definition has been the spill over provision which, in a sense, caps all exclusions at 50% while keeping inclusions unlimited.

The seemingly innocuous employee definition also results in a sea change. It brings managers and other senior designations, previously covered only by contract, within its fold and extends them several rights which were only available to workmen earlier, including the right to receive overtime wage and the ability to go to court for violation of provisions governing payment. From an industry perspective, this will mean extending the application of policies to all employees, especially those in relation to working hours, date of wage payment and overtime, impacting the very way in which the industry functions. Managers and company leadership play a pivotal role in the organisation and are hired and paid to put in far more number of hours than the typical 8 hour days. They are also tasked with management and key decision making, a role that is not restricted to the working hours of the company. How these functions and their roles will align with the new legal requirement, only time will tell.

The Code on Wages also extends many of the provisions of the Code to all employees, without any cap on the maximum salary earned. This is a big shift and companies will need to change their thought process in respect of many provisions to comply with this change. It means that overtime is also extended to all employees, something that companies do not follow today.

Another change is the need to settle accounts within 2 working days of the exit of the employee, regardless of whether the exit is by way of resignation or termination. This will necessitate system changes, process and policy changes and payroll changes. If employees are working from home, this will also pose challenges in terms of asset recovery and cases of job abandonment.

Deductions from wages for all employees have now been capped at 50%. Companies will have to be cautious especially in recovery of salary advances and recovering the cost of assets or damaged property. 

The most alarming change that this Code brings is criminal prosecution for Code violations. Section 52 of the Code allows a Union, an Employee, or the inspector cum facilitator to approach a Criminal Court against a violation of the Code, including the failure to pay wages, and delayed or short payment of wages. This provision will decrease the time employers spend running their business versus defending actions brought by disgruntled employees.

Additionally, the rules to the Code purport to make changes to forms, registers and filings, which will mean an overhaul of the compliance templates of the company. They also require the principal employer to pay the contractor before the 7^th of the wage month, so as to ensure he can pay wages on time. This will certainly mean a change in contractual terms for many in order to comply.

Overall, the Code on Wages is set to require a lot of the industry in terms of change, but these are for the best. A recent industry survey conducted by BCP Associates shows that the overall intent of the Codes is not suspect, and the industry clearly understand that the change is needed, and it will bring in transformation of a legal regime that has been languishing for decades.

Overall, we believe that the Code on Wages is a step in the right direction. How it plays out in courts and amongst employers is something we will need to wait and watch but being prepared for these changes is of paramount importance for every organisation.

Pooja Prabhakar is Managing Partner and Aditya Kamath is a Partner at BCP Associates