New Wage Code: To Increase Compensation Cost For Companies Amid Retrospective Provisions

New Delhi: From April, your take-home pay may get impacted while companies may see 3%-10% increase in their wage cost with a retrospective increase in gratuity and leave encashment provision if the new wage code comes into effect.

Companies are now reviewing potential changes in the salary structure by running various models to comply with the wage code and determine compensation costs. Big-ticket components under analysis include a retrospective increase in liabilities for benefit plans, such as gratuity and leave encashment, particularly for organisations where the employee base is long-tenured, the Times of India mentioned in a report.

The retrospective increase in gratuity and leave encashment liabilities and additional provident fund (PF) contributions, for instance, may lead to a review of the salary increment budgets for 2021. Provident Fund contributions will increase if organisations adopt the expanded definition of wages as earlier PF was calculated only on ‘basic pay’ and dearness allowances.

In the new wage code, the government has consolidated 29 central labour laws into four codes, including those related to wages and social security. In the new wage code, gratuity becomes mandatory for fixed-term employees, irrespective of five-year completion norms. It also allows employees to avail encashment of leaves.

Nishith Desai Associates head (HR laws) Vikram Shroff told the publication that the labour codes have introduced some fresh concepts, but the most important change is the expanded definition of ‘wages’. “This definition is consistent across all the four labour codes and will have considerable implications for both employers and workers, with the possibility of adversely affecting take-home pay,” the daily quoted Shroff as saying.

The computation of ‘wages’ under the new codes includes components like basic pay, dearness, retaining and special allowances. Specified items like HRA, conveyance, statutory bonus, overtime allowance and commissions have been excluded for computing wages, which, under the code, should be at least 50% of the total remuneration.

Accordingly, if these specified exclusions cross 50% of the remuneration, the excess amount will be considered to determine ‘wages’ under the codes. For instance, gratuity, which was earlier calculated on the basic salary, will now be computed on ‘wages’, which could result in higher pay for the employee and a larger outgo for the employer.

In the present compensation structure that is prevalent across sectors, basic salary is in the range of 30% to 50% of the gross, while allowances make up the balance. Some companies, said experts, plan to take the basic pay to 50% of the remuneration so that the specified exclusions are capped at 50%.

The daily citing Aon India CEO (performance & rewards) Nitin Sethi mentioned that companies may see a rise of 6-10% in wage bill, in case it now provides basic salary at 20-30% of the total compensation. For those whose basic salary is already at 40% of the gross, the cost implication would be lower, at around 3-4%.

“If the basic pay to gross pay ratio is around 30% and it moves up to 60% after implementation of the ‘Code on Wages’, we would expect the liabilities on account of the above schemes to double,” Aon India practice leader (retirement and benefits solutions) Vishal Grover told ToI

Worth mentioning here is that the labour codes, however, do not contain a provision requiring employers to change their CTC (cost to company) structure. “Whether it is still a good practice to do so needs to be considered by each employer based on the CTC structure, especially if the basic salary plus other included components is less than 50% of the total remuneration,” said Shroff.

He added that although the Budget made references to female workers’ participation, protection of migrant workers and social security coverage for gig workers, it fell short of providing clarity on the new labour codes and how the government proposes to implement them. “Employers need to be ready should any of the labour codes is made effective on April 1 to coincide with the beginning of new the financial year,” said Shroff.

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