Depending on the employment letters and salary breakup of existing employees, even the take-home salary of employees may be affected.
The Indian Government has been working on a complete overhauling of the archaic labour regulations to bring them in sync with the 21st-century business landscape and promoting investments. The new set of regulations consolidates 44 labour laws under 4 categories of Codes namely, Wage Code; Social Security Code; Occupational Safety, Health & Working Conditions Code; and the Industrial Relations Code.
What is the status of the 4 Labour Codes? When will they be applicable?
The Parliament has already passed all the four Codes and it has also received the President’s assent. The government is aiming to implement all the four Codes in one go from the next Financial Year 2021-22 (date not notified yet) and complete the final stretch of labour sector reforms. The 4 codes are:
- The Code on Wages, 2019, applying to all the employees in organized as well as unorganized sector, aims to regulate wage and bonus payments in all employments and aims at providing equal remuneration to employees performing work of a similar nature in every industry, trade, business, or manufacture.
- The Code on Occupational Safety, Health and Working Conditions, 2020 seeks to regulate the health and safety conditions of workers in establishments with 10 or more workers, and in all mines and docks.
- The Code on Social Security, 2020 consolidates nine laws related to social security and maternity benefits.
- The Code on Industrial Relations, 2020 seeks to consolidate three labour laws namely, The Industrial Disputes Act, 1947: The Trade Unions Act, 1926 and The Industrial Employment (Standing Orders) Act, 1946. The Code aims to improve the business environment in the country largely by reducing the labour compliance burden of industries.
The Ministry has also framed the draft Rules under each of these Codes and has invited suggestions/comments from the public on the same. Since labour laws are placed under the concurrent list of the constitution of India, the States can choose to frame their own rules to govern the labour in their respective States.
The new labour codes bring in significant changes and it is pertinent that businesses/organizations understand the key changes introduced under the new Codes, restructure and re-align, wherever required, to adapt to the new labour code regime.
How do the labour laws impact you?
Labour and employment regulations have far-reaching implications for every business organization. Firstly, these are crucial for a congenial and harmonious relationship between employers and employees. You cannot have high productivity and innovation in an environment saddled with rifts and disputes. Secondly, the labour and employee costs constitute between 10 per cent to 50 per cent of the total costs for most business organizations and the new laws will have an impact on the cost structure. Finally, the new regulations will require review and revision of all employment contracts, compensation structure, registrations, and compliances. Suitable changes will need to be made in the governance structure and IT systems. This will require a “project management” approach and a transition roadmap.
Some of the key impacts that the labour laws have on the business community are as follows:
- Consistency in the definition of wages: Under the current labour laws, there are nearly 12 definitions assigned to the term “wages” alone! This was resulting in a lot of litigation and confusion for the companies. The term ‘wages’ has been uniformly defined under the 4 codes and therefore, it is expected to reduce much confusion about what is specifically included in wages.
- Businesses need to clearly understand ‘Inclusions’ and ‘Exclusions’ in Wages: The definition of wages is probably the single most important aspect that the industry needs to consider. The Code on Wages contains specific inclusions as well as exclusions in the definition of wages. Further, under the Code of Wages, it has been specified that the total of the specified exclusions, if the same exceeds 50 per cent (or such other per cent as specified by the Central Government) of the remuneration, then the amount exceeding such 50 per cent would be deemed to be remuneration and would be added in wages as per the definition. All companies need to consider the definition of wages, look at their employment letters, analyse each of the components of their employees’ CTC, and may need to revisit the components in case of non-compliance with the definition of wages under the new proposed labour laws.
- Impact of the new codes on social security and take-home salary: Due to the change in the definition of wages and the fact that the various social security such as Provident Fund, Gratuity, ESIC, etc. have now been pegged as a percentage of the ‘wages’ and not just the basic or basic plus dearness allowance, there is expected to be a change in the total payouts on account of social security and retirement benefits. Depending on the employment letters and salary breakup of existing employees, even the take-home salary of employees may be affected. Even TDS calculations based on the revisions in the take-home need to be carefully considered as the obligation to deduct TDS in case of salary is on the employer.
- Much wider coverage: Unlike the current labour laws, where coverage is different for each of the laws depending on the type of work done by the employee or coverage is restricted to workers or employees drawing certain remuneration, the 4 labour codes seem to apply to all employees and certainly have much wider coverage than each of the current laws looked at individually. The new labour codes also look at new-age working models and seem to give protection and legal remedies to 21st-century workers as well. The labour codes cover contract labour, fixed-term employment, gig workers, platform workers, and many more concepts. Thus, the laws appear to be forward-looking and are more inclusive.
- Faster F&F Settlements: Section-17(2) of the Code on Wages requires wages payable to an employee to be paid within two days of removal, dismissal, resignation, or retrenchment. This will require exit formalities and HR processes to be completed expeditiously and for dues to be settled within the prescribed period. Companies must take note of this and make the necessary changes to their internal processes.
by, Siddharth Surana, Advisor – Strategy and Business Transformation, RSM India