New labour codes redefine wages, boost gratuity and benefits

Labour code overhaul: Wages redefined, gratuity and benefits to soar for millions of employees

NEW DELHI: The Centre on Friday implemented four new labour codes, marking the biggest overhaul of workers' laws in decades. The government has said the move aims to simplify rules and improve worker protection. A key change under the new codes is the definition of ‘wages', which now includes basic pay, dearness allowance, and retaining allowance, with at least 50% of total remuneration counted as wages.

Previously, employers often structured salary packages so that basic pay plus DA formed a small portion of total compensation, with large parts allocated to allowances that did not count towards benefits such as gratuity or provident fund. Under the new labour codes, every component of the cost-to-company (CTC) will now be treated as remuneration unless specifically exempted, with the maximum exemption capped at 50% of total compensation.

“‘Wages' now include basic pay, dearness allowance, and retaining allowance; 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits,” an official statement said.

The change is expected to impact the calculation of various social security contributions, including Provident Fund (PF), Employees' State Insurance Corporation (ESIC), Workmen's Compensation, and maternity benefits.

“The definition of ‘wage' under the labour codes is likely to impact the base for calculation of various other social security contributions like Provident Fund, ESIC, Workmen's Compensation, Maternity Benefit etc. It will depend upon how individual employers have structured their salaries into different components,” said Madhu Damodaran, regional managing partner, AM Legals, a law firm.

The impact on gratuity will be significant. Since gratuity is calculated based on the last drawn wages and years of service, a higher proportion of basic pay and DA in the wage base will result in a larger lump-sum payout at exit.

“With this notification, all the statutory benefits and contributions will apply on deemed wages, which is at least 50% of a person's salary. This would lead to a huge increase in gratuity payout because up until now the gratuity was calculated on basic salary, which could be less than 50%. But now it will have to be calculated on at least 50% of the wage,” explained Damodaran.

“While this is great for employees, it will also increase the cost for employers,” Damodaran added.

The reforms also extend gratuity eligibility to fixed-term employees after one year of continuous service, rather than the previous five-year requirement.

“For employees on roll, the previous eligibility of five continuous years continues to be applicable,” as per Puneet Gupta, partner, People Advisory Services-Tax, EY India.

“The government basically wants to dissuade the practice of hiring people for a period of say 3 years to avoid paying gratuity. Now fixed-term employees, who are hired for a fixed number of years, will also become eligible for gratuity right after a year. Currently, only permanent employees are eligible for gratuity as per the payment of Gratuity Act. They would also be eligible for all benefits on the same lines as permanent employees,” said Preeti Chandrashekhar, an independent employees benefit consultant and actuary.

Similarly, the changes may affect PF and other social security contributions, though as per Employees' Provident Fund Organisation (EPFO) rules, the ₹15,000 cap for statutory EPF contributions limits the immediate impact, unless employees opt for higher contributions.

"The notified codes will enable many lower-income employees to have greater retirement savings due to higher deemed wages for EPF contributions and gratuity benefits," said Kulin Patel, chief executive, partner and actuary at K. A. Pandit Consultants & Actuaries, India.

"From an employer standpoint, better visibility of labour laws and easier compliances should also encourage the international business community to set up in India," Patel added.

Source: LiveMint
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