The New Wage Codes: Impact On The Salaried Class

By: Tavaga Research

While the pandemic is wreaking economic and social havoc around the world, the central government has introduced the much-needed labor sector reforms that promise to make the labor markets vibrant by removing its rigidity that many investors and corporates complain about.

Even though these reforms have been discussed and debated for a long time, it has taken unusual courage to implement these, particularly when the economic situation remains precarious.

A change in the labor laws is taking place for the first time since independence, with the workers finally getting assurance in terms of wages, job security, and benefits.

The government with this law has codified 29 central enactments into four labor codes namely the Code on Wages, 2019, the Occupational Safety, Health and Working Conditions Code, 2020, the Code on Social Security, 2020, and the Industrial Relations Code, 2020.

While hearing a case in Madras High Court in 2019, Justice N Anand Venkatesh had observed that the industrial laws in this country have become archaic and unfortunately have not matched the fast-changing environment in the industry.

This indicates the dire need to inject life into the labor laws, more importantly, after the 1990s when the economy underwent a sea change during the PV Narsimha Rao government.

The main objective of any business entity is to be able to make reasonable profits on their investments; workers are equally entitled to reasonable wages and safe working conditions. It is, therefore, an uphill task to frame and codify rules that satisfy the conflicting concerns of both the parties mentioned above.

The new wage codes try to achieve that objective.

What are the key proposals?

The Industrial Relation Code that groups three enactments has correctly embraced the definition of the industry, propounded by the Supreme Court in the late 1970s.

Introducing fixed-term employment that provides benefits on par with permanent workmen would enable the industry to have a more flexible workforce.

The government has also put forward a proposal that brings in more conditions to restrict the right of the workers to strike, alongside an increased threshold relating to layoffs and retrenchment in the industrial establishments having 300 workers from 100 workers or more, currently. 

These steps are likely to provide flexibility to employers for hiring and firing workers without unnecessary permission from the government.

In a report in April, the Standing Committee on Labour while pointing out that some state governments like Rajasthan have already increased the threshold had suggested hiking the threshold to 300 workers.

In favor of the workers, the criteria for recognition of trade unions has been settled, which had been eluding since 1926. Approaching a tribunal to resolve disputes has now become very easy for the workers in the event of failure of a settlement.

Additionally, a worker could be required to work overtime only if that worker consents. The threshold mandatory number of days required for earned leave has been reduced to 180 days from 240 days earlier. Women are entitled to all types of work now and the fixation of minimum wages has received a long-overdue review under the wage code.

A large number of workers in the unorganized sector, as well as the new age gig economy and their families, have been brought under the Social Security Code.

The central government will constitute a separate fund and a welfare scheme for those workers relating to life and disability insurance, health, old age, and crèche.

Employers have to ensure sanitary conditions for their employers and make ESI contributions to the concerned worker on time, failing which, they will be subject to severe consequences.

Impact on the Salaried

The purpose of each of the 29 legislations was varied and hence the wage definition under many of them was also different. The new codes aim to unify, simplify, and consolidate all of these legislations and hence take a common approach.

In the new wage code that will come into effect from the next financial year, the PF (Provident Fund) contribution will witness an increase compared to the current levels, along with some changes in the gratuity calculations. (Please find the EPF Calculator by clicking on this link)

This could well result in a decline in one’s take-home salary.

For instance, assume that an individual has a CTC of Rs 25,000 with the breakup of the pay provided below:

Pay Components	Current Structure	Impact of New-Wage Codes
Special Allowance	8,332	7,839
Basic Salary (30% of CTC)	7,500	7,500
HRA (40% of Basic Salary)	4,000	4,000
Conveyance	1,000	1,000
Travel Concessions	2,000	2,000
Employer contribution to PF	1,800	1,900
Gratuity part of CTC	368	762
Total	25,000	25,000
Take-Home Pay (after considering employee contribution to PF)	21,032	20,439
Wages for Gratuity	7,500	15,832
Gratuity payout for employee with 12-year service	51,923	1,09,604
Increase in gratuity liability	–	57,681

Source: BusinessToday.In; Tavaga Research

The table above provides a clear explanation of the impact of the new wage bill on the salary of the employees. For individuals, with a basic salary of less than 50 percent of the CTC could see their carry home go down, as shown in the example above.

Concerns over the labor codes

The increased threshold for the standing order will negatively impact the rights of the workers in small establishments having workers less than 300.

The Industrial Relations Code also introduces new conditions to carry out legal demonstrations. The time period for arbitration proceedings has been included in the conditions for workers before going on a strike as against only time for conciliation currently.

For instance, the code stipulates that no individual employed in any industrial establishment shall go on a strike without notifying at 60 days prior to the demonstration.

The industrial relation code has expanded to cover all industrial establishments. The Standing Commission on labor had recommended against this and proposed that these requirements be restricted to public utility services like electricity, water, telephone, natural gas, and other essential services.

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