India Inc chalks out impact of lower take home post Labour Code

The Centre on Friday notified four new labour codes consolidating 29 laws, expanding basic social security and minimum wage guarantees across the labour landscape. Over the weekend, employers worked on the development that ripples across 400 million formal and informal workers, HR executives and consulting firms assisting them with compensation structures said.

“We had meetings over the weekend and will need more clarity on where the variable component falls -- would it be under the 50% of the wages that will see increased statutory benefits or the one without," a top executive at one of India's large diversified conglomerates said on the condition of anonymity.

The new labour codes, which define wages more broadly, may trigger higher social security contributions by both employers and employees, said audit and consulting firm Deloitte. “This could mean a slight reduction for employees in their take-home pay if the overall CTC remains unchanged, as statutory deductions may increase under the new labour codes," said Divya Baweja, partner at Deloitte India who leads global employer services practice. Deloitte works with corporates on compensation and reward structures.

In an emailed response, Baweja stated that the new codes define "wages" to include all forms of remuneration, with only specific exclusions. Further, these exclusions (other than specified payments like gratuity etc.) cannot exceed 50% of total remuneration. “Consequently, a minimum of 50% of an employee’s remuneration would amount to ‘wages’ for computing statutory benefits".

The new framework, effective immediately, consolidates the country’s employment statutes into four codes: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions (OSHWC) Code, 2020.

A key feature across all four codes is a new definition of ‘wages’, which will include basic pay, dearness allowance and retaining allowance. Employers must ensure that at least 50% of total remuneration qualifies as wages.

The code on wages will definitely have a short-term impact for both employee and the employer, said Nakshatra Bhatt, associate partner, talent solutions for India at Aon. "For the employee, taxable salary will increase and contribution in superannuation will go up, thereby reducing take-home pay. For the employer, there will be a potential impact on their profit and loss as the liabilities on leaves and gratuity might increase," Bhatt said.

However, Bhatt estimates that in the longer run, it will “definitely make rewards design a bit more streamlined and comprehensible".

The HR head of a hospitality chain said his company will also look into the provisions of state-specific Shops and Establishment Act that outlines working conditions. “Each state has its own working hours allowed and the Labour code now regulates an 8-12 hour work depending on the number of working days in a week. We will have to find out what are the overtime payment for employees," said the senior executive, who did not want to be named.

Another HR executives said the company is chalking out the impact of costs because of healthcare benefits and gratuity being allowed to fixed-term employees after one year instead of five. The new code states that employers must provide free annual health check-up to all workers above 40.