As govt eyes new labour codes, CTCs likely to be tweaked

NEW DELHI: The labour ministry has finalised rules under the four labour codes, or laws, and is likely to notify them to take effect from April. The country’s most wideranging labour reforms in decades will have an impact on both employers’ outgo and employees’ take-home salaries.

Once implemented, the new labour codes will prompt companies to restructure employee compensation packages or “cost to company” (CTC). Firms have will have to restructure salaries because, under the new rules, all allowances, such as leave travel, house rent, overtime and conveyance, have to be capped at 50% of the CTC. The Code on Wages 2019 has revised the definition of ‘wages’ which will now include three components: basic pay, (inflation-linked) dearness allowance and retention payment.

According to the new definition, “wage” will exclude statutory bonus, pension and provident fund (PF) contribution, conveyance allowance, house rent allowance, overtime and gratuity. If any of these exclusions, in aggregate, are in excess of 50% of an employee’s CTC , barring special allowance, the excess amount will be added back to the wage for calculation of social security benefits.

A wider definition of basic pay will likely increase social security contribution because firms compute their social security contribution on the basis of how wages are defined. This could however result in lesser net take-home for employees, analysts say.

Since basic pay could be higher because monetary allowances will be capped at 50% of CTC, companies may have to incur increased costs towards provident fund and gratuity, which are calculated on the basic pay. Employers in the private sector generally either contribute 12% of an employee’s basic salary and dearness allowance to the PF.

During recent consultations between the labour ministry, representatives of firms and employee unions, employers had expressed concern over the possible impact of the new definition of wages on a company’s outgo.

“However, there will be no change in the definition of wages. It will remain as it is,” an official of the labour ministry said.

Parliament has passed four labour codes, or laws, one each on wages, industrial relations, occupational safety health and working conditions and social security, bringing changes to a large number of labour laws, some dating back to the pre-Independence era. The changes have simplified, rationalised and amalgamated 29 labour laws into four codes.

Three codes -- dealing with occupational safety, health and working condition; industrial relations; and social security -were approved by Parliament in September 2020, while the Code on Wages was passed in August 2019. The rules are likely to clarify how gratuity is to be calculated. Gratuity is calculated on the last drawn salary of a worker. It is computed by taking into account 15 days’ of their salary for every year worked in the preceding five years. Employees receive gratuity on completion of five years of continuous service. However, under the new changes, even fixed-term contract workers completing only one year of service will get gratuity. The official cited above said the new rules may allow gratuity to be calculated in two phases to limit outgo of companies. Gratuity earned till the time of the new law comes into effect is likely to be calculated basis the older definition of wages. From the next fiscal onwards, gratuity will be calculated based on the new definition.

“This is being called a grandfather clause and, if introduced, it will limit costs to companies and their financial burden. However, the changes would impact statutory payouts, including bonus and employer’s contribution to PF as they are linked to how wages are defined,” said Sanjay Saran, CEO of human resources consultant GoHire Pvt Ltd.