What is the Code on Wages

What is the Code on Wages, and why was it introduced in India?

The Code on Wages, 2019 is a landmark labor law reform that consolidates and simplifies four existing laws:

• Payment of Wages Act, 1936
• Minimum Wages Act, 1948
• Payment of Bonus Act, 1965
• Equal Remuneration Act, 1976

Objectives:

1. Uniformity: Establish national standards for wages across all sectors.
2. Simplification: Replace complex, outdated laws with a single code.
3. Workers’ Rights: Ensure timely payment of wages and eliminate wage discrimination.
4. Ease of Business: Reduce compliance burdens for employers through standardized rules.

Why It Matters:

• Covers 500+ million workers in organized and unorganized sectors.
• Mandates minimum wages based on geography, skill level, and occupation.
• Example: A factory worker in Maharashtra must earn at least ₹12,500/month, while a tech professional in Bengaluru has higher minimum wage thresholds.

We recommend businesses review their payroll structures to align with the code’s provisions.

What are the key provisions under the Code on Wages?

The code introduces five transformative provisions:

Key Changes:

• Universal Minimum Wage: Applies to all industries, replacing sector-specific thresholds.
• Simplified Definitions: Clear criteria for “wages” (includes basic pay, allowances, excludes bonuses).

Example: A retail company must now pay overtime at ₹500/hour (if standard wage is ₹250/hour) for work beyond 48 hours/week.

How does the Code on Wages impact employee compensation structures?

The Code on Wages significantly impacts employee compensation structures in India. As an Employer of Record (EOR), we've observed several key changes that businesses need to consider:

1. Redefinition of 'Wages':
   • The code introduces a new definition of 'wages' that includes basic pay and allowances.
   • It excludes certain components like HRA, conveyance allowance, and statutory bonuses.
   • Impact: Companies need to restructure salary packages to ensure at least 50% of remuneration falls under 'wages'.
2. Minimum Wage Calculations:
   • The code mandates a floor wage set by the central government.
   • States can't set minimum wages below this floor.
   • Example: If the floor wage is set at ₹178 per day, states must set their minimum wages at or above this level.
3. Overtime Pay:
   • Overtime work must be compensated at twice the normal wage rate.
   • This applies universally, unlike previous laws which had sector-specific rules.
   • Impact: Companies need to review and potentially adjust their overtime policies and budgets.
4. Bonus Calculations:
   • The code standardizes bonus calculations across industries.
   • Employees earning up to ₹21,000 per month are eligible for bonuses.
   • Bonus amount: Minimum 8.33% to maximum 20% of wages or ₹7,000, whichever is higher.
5. Gender-Neutral Remuneration:
   • The code prohibits gender discrimination in matters relating to wages.
   • Companies must ensure equal pay for equal work, regardless of gender.
6. Salary Deductions:
   • The code limits deductions to 50% of an employee's total wage.
   • This protects employees from excessive deductions that might impact their take-home pay.

We recommend that businesses conduct a thorough review of their compensation structures to ensure compliance with these new provisions. This may involve:

• Restructuring salary components to meet the new 'wages' definition.
• Adjusting overtime policies and budgets.
• Reviewing and potentially revising bonus structures.
• Conducting pay equity audits to ensure gender-neutral remuneration.

By proactively addressing these changes, companies can ensure compliance while maintaining competitive compensation packages.

What steps must employers take to comply with the Code on Wages?

To comply with the Code on Wages, employers need to take several crucial steps. Based on our experience helping businesses navigate this transition, we recommend the following actions:

1. Review and Revise Salary Structures:
   • Analyze current compensation packages to ensure they align with the new definition of 'wages'.
   • Adjust the ratio of basic pay and allowances to meet the 50% 'wages' requirement.
   • Example: If an employee's total remuneration is ₹100,000, at least ₹50,000 should fall under the 'wages' category.
2. Update Minimum Wage Compliance:
   • Stay informed about the national floor wage and state-specific minimum wages.
   • Ensure all employees, including contract and part-time workers, are paid at or above these thresholds.
   • Implement systems to automatically flag any wages falling below the minimum.
3. Revise Overtime Policies:
   • Update overtime calculation methods to reflect the double-rate requirement.
   • Communicate changes to employees and managers.
   • Implement robust time-tracking systems to accurately record overtime hours.
4. Adjust Bonus Structures:
   • Review and update bonus policies to align with the new calculations under the Code.
   • Ensure all eligible employees (earning up to ₹21,000 per month) are included in bonus distributions.
5. Implement Equal Pay Practices:
   • Conduct pay equity audits to identify and address any gender-based wage disparities.
   • Establish clear, gender-neutral criteria for pay decisions and promotions.
6. Update Payroll Systems:
   • Modify payroll software to reflect new wage definitions and calculation methods.
   • Ensure systems can generate compliant wage slips and reports.
7. Train HR and Payroll Teams:
   • Provide comprehensive training on the new code's provisions and implications.
   • Ensure teams understand how to calculate wages, overtime, and bonuses under the new rules.
8. Establish Compliance Monitoring:
   • Implement regular audits to ensure ongoing compliance with the Code.
   • Set up systems to track and address any compliance issues promptly.
9. Update Employment Contracts and Policies:
   • Revise employment agreements to reflect the new wage structure and overtime rules.
   • Update company policies related to compensation, bonuses, and overtime.
10. Maintain Proper Records:
    • Establish systems to maintain all required records as specified in the Code.
    • Ensure records are easily accessible for potential inspections.

We strongly advise businesses to seek expert guidance when implementing these changes. The transition to the new Code on Wages can be complex, and professional assistance can help ensure full compliance while optimizing your compensation strategies.

What penalties apply for non-compliance with the Code on Wages?

The Code on Wages introduces a revised penalty structure for non-compliance. Based on the search results, here are the key penalties:

1. Underpayment of Wages:
   • First offense: Fine up to ₹50,000
   • Repeat offense within 5 years: Imprisonment up to 3 months and/or fine up to ₹100,000
2. Violation of Other Provisions:
   • First offense: Fine up to ₹20,000
   • Repeat offense: Imprisonment up to 1 month and/or fine up to ₹40,000
3. Improper Record Keeping:
   • Fine up to ₹10,000
4. General Non-Compliance:
   • Maximum penalty: Imprisonment for 3 months and/or fine up to ₹100,000

We note that the Code generally reduces initial penalties compared to previous laws, focusing more on fines rather than imprisonment for first-time offenses. This approach aims to ease compliance burdens for employers while still maintaining worker protections.

How does the Code on Wages differ from previous labor laws?

The Code on Wages represents a significant shift from previous labor laws in India:

1. Consolidation: It replaces four separate laws (Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, and Equal Remuneration Act) with a single code.
2. Universal Coverage: Unlike previous laws that covered only certain sectors, the Code applies to all industries and workers.
3. National Floor Wage: Introduces a concept of a floor wage set by the central government, below which states cannot set their minimum wages.
4. Simplified Wage Definition: Provides a clearer definition of 'wages', impacting how compensation structures are designed.
5. Reduced Criminalization: Focuses more on monetary penalties for first-time offenses, reducing the risk of imprisonment for employers.
6. Gender Equality: Strengthens provisions for equal pay regardless of gender.
7. Bonus Calculations: Standardizes bonus calculations across industries and increases the wage threshold for bonus eligibility.

These changes aim to simplify compliance, reduce the regulatory burden on businesses, and provide more comprehensive protection for workers across all sectors.

How does the Code on Wages affect different industries and sectors?

The Code on Wages has a wide-ranging impact across various industries and sectors in India. As an Employer of Record (EOR), we've observed the following sector-specific effects:

1. Manufacturing Sector:
   • Standardized overtime rules: Now all overtime must be paid at double the regular rate, impacting cost structures.
   • Example: A textile factory previously paying 1.5x for overtime now needs to budget for 2x payments.
2. IT and ITES Industry:
   • Inclusion of allowances in 'wages': Many IT companies need to restructure compensation packages.
   • Impact: Companies may need to increase PF contributions as the wage base increases.
3. Retail and E-commerce:
   • Universal minimum wage: Ensures even part-time and gig workers are covered.
   • Challenge: Companies with large workforces across different states need to manage varying minimum wage rates.
4. Agriculture and Unorganized Sector:
   • Formal wage structure: Introduces formal wage calculations for previously unregulated sectors.
   • Benefit: Provides better protection for vulnerable workers.
5. Hospitality Industry:
   • Tip inclusion: Tips may now be considered part of wages, affecting tax calculations.
   • Action needed: Hotels and restaurants need to review their tipping policies.
6. Construction Industry:
   • Timely wage payments: Stricter rules on payment schedules benefit daily wage workers.
   • Compliance focus: Companies need robust systems to track and pay wages on time.
7. Start-ups and SMEs:
   • Simplified compliance: Reduced paperwork and clearer rules ease the regulatory burden.
   • Challenge: May need to adjust budgets to meet new minimum wage and overtime requirements.
8. Multinational Corporations:
   • Standardized practices: Easier to implement uniform policies across Indian operations.
   • Action needed: Review global policies to ensure alignment with Indian wage code.

We recommend that businesses in all sectors conduct a thorough review of their wage structures and policies to ensure compliance with the new code. This may involve:

• Restructuring salary components
• Updating payroll systems
• Training HR teams on new requirements
• Revising employment contracts

By proactively addressing these changes, companies can ensure compliance while maintaining competitive compensation packages across different industries.