Decoding the Code on Wages: Now central and state govts must decide the national floor wage and minimum rates of wages

January 13, 2021 6:15 AM

The Code has been drafted keeping ease of doing business in mind. Small creases can be ironed out easily by the government.

The Code on Wages has subsumed four laws, some of which were from the pre-Independence era.A number of articles have raised concern about the new definition of wages, and especially regarding the necessity to consider 50% of the gross salary (basic plus dearness allowance) while ascertaining wages.

By Abhay Nevagi

Rumours are rife that the Code on Wages, 2019, is likely to result in an exponential increase in the financial liability of employers in a pandemic-stricken economy. Perturbed employers are reaching out to consultants for advice. Sensing an opportunity, reputed CA/consultancy firms have come out with new service portfolios, which include transitioning into labour codes, restructuring of salaries and strategising for hiring.

Do we really need to be so alarmed?

The Code on Wages, 2019, has subsumed four laws, some of which were from the pre-Independence era. These are the Minimum Wages Act, the Payment of Bonus Act, the Equal Remuneration Act and the Payment of Wages Act. The Code was introduced in Parliament to simplify labour laws and amend them largely with the aim of facilitating ease of doing business.

In this context, a point to consider is whether managerial and administrative employees who are drawing salaries way beyond minimum wages would be entitled to benefits available under the Code? The definition of ‘employee’ is provided in Section 2(k) and it covers ‘managerial’ and ‘administrative’ employees, leading us to believe that all benefits under the Code would extend to the said employees.

However, the Code also defines ‘worker’ in Section 2(z), which specifically excludes ’managerial’ and ‘administrative’. Most of the benefits afforded under the Code are to the ‘worker’. This is clear when we analyse the provisions of the Draft Code on Wages (Central) Rules, 2020, which is under public scrutiny. Rule 5 and 6 read with Rule 4(3) and Rule 6(6)(a) of the said Draft Rules makes us conclude that the government is going to fix minimum rate of wages only for ‘workers’ who are categorised as unskilled, skilled, semi-skilled and highly skilled. The Draft Rules also provide a detailed list of jobs which are classified into unskilled, semi-skilled, skilled and highly skilled categories. There is no reference to managerial/administrative category of employees defined in Section 2(k) of the Code in Schedule E. Therefore, it can be safely concluded that provisions regarding fixation of minimum rates of wages are not applicable to this category of employees.

There is also a misapprehension that managerial/administrative employees will now have to be paid ‘overtime’ for additional work, which is paid at double the normal rates of wages. Section 14 of the Code specifically provides for overtime to an employee whose “minimum rate of wages has been fixed under this Code by the hour, by the day, or by such a longer wage period as may be prescribed.”

The scheme of the Code and Rules does not provide for fixation of minimum rate of wages for managerial/administrative category of employees. The nature of work/job roles mentioned in Schedule E refers to manual and menial nature of work. Therefore, overtime is not payable to managerial/administrative employees under the Code.

Another issue pertains to the requirement of payment of wages to employees within two days from the date of ouster of an employee from the company, as prescribed under Section 72 of the Code. Similar provisions existed under the Factories Act, 1948, and the Payment of Wages Act, 1936, which have been repealed. This cannot have a major impact as the employer was, in any case, required to pay wages post termination of services of an employee.

Bonus, generally paid on Diwali to workers, was a mandate of the law under the erstwhile Payment of Bonus Act, now subsumed under the Code on Wages. The Payment of Bonus Act has a wage limit and only employees who earn up to Rs 21,000 are eligible to receive statutory bonus. The Code has a similar provision and the government is tasked with notifying the threshold.

A number of articles have raised concern about the new definition of wages, and especially regarding the necessity to consider 50% of the gross salary (basic plus dearness allowance) while ascertaining wages. There is also a service requirement that is being pitched by various consultancies for restructuring of salary to minimise the impact of definition of wages.

Section 2(y) of the Code defines wages and includes only basic pay plus dearness allowance plus retaining allowance. The definition excludes bonus, conveyance allowance, PF/pension contribution, payment towards special expenses because of the nature of the job, HRA, remuneration payable under settlement between parties or the order of the Tribunal, overtime allowance, commission, etc. Proviso to the Section states that if the total of the components that are excluded is more than 50% of gross remuneration, then such percentage of remuneration that is more than 50% will be added to wages.

However, the true impact of these provisions would only be seen with respect to unskilled, semi-skilled, skilled and highly skilled category of employees for whom the government is going to lay down the minimum rates of wages. Otherwise, for employees who are highly paid, much beyond the minimum rates of wages, this treatment of considering 50% of gross salary would not have any impact.

Even with respect to PF contributions, the Supreme Court, in its judgment dated February 28, 2019, in the Surya Roshni matter has laid down the broad parameters regarding the kind of allowances that could be excluded while considering basic pay for calculating PF contribution. The wrongful benefit that some employers may have obtained by keeping the basic component of the salary very low has already been wiped off by the said judgment. Therefore, the Code on Wages does not require an employer to modify the current salary structure for highly paid managerial and administrative employees. Once the rate of minimum wages is laid down by the government for workers, at that point of time an employer may have to consider modifying the structure of wages of such workers who will get affected.

Contractor labour for outsourcing of work has proved to be another sensitive area. The Code provides for coverage of not only contractor supplying labour, but a contractor for contract of work is also covered. However, Section 2(l) and sub-section (iii) provides for a contractor as an employer. Therefore, financial implications, if any, are placed on the contractor. Certainly, a contractor will expect reimbursement of additional cost, if any. Looking at exploitation of contract labour by a contractor, any marginal increase cannot be subject matter of debate or complaint. The Code has been drafted keeping ease of doing business in mind. Small creases can be ironed out easily by the government.

Now the ball is in the court of the central government and respective state governments to come up with appropriate rules, regulations, notifications and, most importantly, deciding the national floor wage and minimum rates of wages. Till then, we will have to wait and watch.

The author is an advocate

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