CTCS likely to be tweaked as govt eyes labour codes

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 wide-ranging labour reforms in decades will have an impact on both employers’ outgo and employees’ takehome 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 (HRA), 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 provident fund.

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, on condition of anonymity.

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 central labour laws into four codes.