With the introduction of the new labour codes, the earlier enactments namely, the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976 have been consolidated and replaced by the Code on Wages, 2019 (“Wage Code”). The intention of the legislature is to create a uniform framework governing employee wages, bonus and compensation structures to ensure uniformity of implementation across establishments. You may also refer to our earlier article on the Code on Social Security, 2020 @ https://lexcounsel.in/newsletters/part-1-of-indias-new-labour-codes-code-on-social-security-2020/

Key changes introduced by the Wage Code inter alia include the following:

1. Uniform Wages: A key change is the introduction of a uniform definition of ‘wages’ which means “all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment” and includes (i) basic pay, (ii) dearness allowance, and (iii) retaining allowance. ‘Wages’ does not include (a) statutory bonus, (b) value of any house-accommodation, supply of light, water, medical attendance or other amenities etc, (c) HRA, (d) employer PF/pension contributions, (e) conveyance allowance, (f) overtime allowance, (g) sum paid to defray special expenses, (h) remuneration payable under any award, (i) commission, (j) gratuity, and (k) retrenchment compensation or other retirement benefits.

Interestingly, the Wage Code stipulates that if the aggregate of excluded components except for gratuity and retrenchment compensation exceeds 50% of total remuneration, the excess amount will be deemed to be remuneration and added back to ‘wages’. Recent clarifications by the Ministry of Labour and Employment indicate that, for the purpose of this 50% calculation, only certain statutory components (i.e., employer contributions to provident fund/pension and statutory bonus) will be considered within remuneration, while annual performance based incentives will be excluded.

Introduction of the 50% cap on exclusions is a substantive change that closes a commonly used structuring gap of minimising basic wages in comparison to other allowances to reduce statutory contributions and is now impacting the wage bills of most employers.

2. Minimum Wages: The Wage Code further introduces the concept of a floor wage to be fixed by the Central Government based on living standards and geography. While the State Governments retain the authority to fix specific minimum wages for their jurisdictions, they cannot fix minimum wages below the central floor wage. Further, the Wage Code eliminates the earlier concept of ‘Scheduled Employments’. Previously, minimum wage protections applied selectively based on the industry category, however, the Wage Code now guarantees universal minimum wage coverage to all employments.

3. Timeline For Payment Of Wages: One key change is the requirement for timely payment of wages which applies to all employees, without any salary threshold. Earlier, this applicability was limited to employees earning up to INR 24,000/- per month, but it now extends to all categories, including senior management employees. Employers are required to pay monthly wages by the 7^th day of the following month. In cases of resignation, termination or retrenchment, final dues must be settled within 2 (two) working days.

4. Statutory Bonus: In relation to bonus, the Wage Code has moved away from fixed statutory thresholds. Previously, statutory bonus was payable only to employees earning up to INR 21,000/- per month. Under the new framework, the State Governments have been given the power to notify the wage threshold for bonus eligibility.

6. Inspector-cum-Facilitator: Erstwhile labour laws, which were marked by often arbitrary inspections and rigid dispute resolution processes, have now shifted towards a more transparent and technology-driven framework, along with stricter penalties for non-compliance. A key change is in the role of the inspector. The ‘Labour Inspector’ has now been redefined as an ‘Inspector-cum-Facilitator’, whose function is not only to enforce the law but also to guide employers in achieving compliance. Inspections are now largely conducted through web-based systems and are assigned on a randomized basis, reducing the scope for discretionary or intrusive visits.
7. Penalties: The penalty regime has also been significantly revised. While minor procedural lapses are no longer criminalised at the first instance, monetary penalties have increased. For instance, underpayment of wages can attract a fine of up to INR 50,000/- for a first offence and in case of a repeat offence within 5 (five) years, may lead to imprisonment of up to 3 (three) months and/or a fine of up to INR 1,00,000/-. Other violations may result in a fine of up to INR 20,000/- initially, escalating to imprisonment of up to 1 (one) month and/or a fine of up to INR 40,000/- if repeated within 5 (five) years.

Failure to maintain required records can attract a penalty of up to INR 10,000/-. Additionally, the time limit for employees to file claims has been extended from 6 (six) months (under Minimum Wages Act, 1948) to 3 (three) years, providing a significantly longer window to seek remedies. Further, to reduce the burden on courts, certain offences that do not involve imprisonment can now be settled through compounding. This allows a designated Gazetted Officer to close the matter on payment of a sum equal to 50% of the maximum prescribed fine. However, this option is not available for repeat offences committed within a period of five years. Further, if a person fails to comply with the compounding order, an additional penalty of 20% over and above the maximum fine may be imposed.

Conclusion

The Wage Code is a positive step towards simplifying wage laws by introducing a uniform definition of ‘wages’ which addresses the long-standing complexity arising from multiple and inconsistent definitions under the earlier legislations. Introduction of the 50% cap on exclusions requires organisations to reassess and restructure their salary components to align with the new requirements under the Wage Code. While the new approach is beneficial from a long-term social security and retirement perspective, in the short term it could result in a reduction in the take-home salary, particularly impacting cash flows of the lower-income employees. Further, the flexibility given to State Governments to fix minimum wages and bonus eligibility thresholds may result in different rules across states, creating compliance challenges for organisations operating in multiple locations. Recently, Uttar Pradesh faced many violent protests from workers on fixation of minimum wage slabs lower in comparison by nearly 35% in comparison to Haryana. So, while the Wage Code simplifies the framework and improves compliance, it also brings practical implementation and structuring challenges that employers will need to carefully address.

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