Inside the mad scramble to comply with the new labour codes

People management processes and salary systems may need to be rejigged, for instance. And the change may increase human resource cost, among other costs, in the short run, he argued.

“The financial implication is (already) a big talking point inside the board rooms," Valliappa said. “Corporates are taking stock of the situation. Entrepreneurs won’t speak up as much, but there are several layers of concern and we hope that both the Centre and the state governments frame the final rules, which will operationalize the four labour codes, carefully," he said.

After much debate, India has decided to consolidate 29 existing labour laws into four board codes—on wages, social security, occupational safety and industrial relations. While Parliament has given its assent, rules are yet to be framed. The initial target for the roll out was April 2021. But delays in rule making at the state-level as well as the assembly elections which are scheduled for April could delay the implementation by a few months.

Once implemented, the four codes are expected to introduce sweeping changes that would affect both businesses and workers. Employers would have greater flexibility to use short-term work contracts; industrial strikes will become harder; a new national wage floor would come into force; informal/gig workers have been promised a new social security net.

There is also a key impending change in the definition of “wage", which would affect everyone who earns a salary. The ‘basic wage’ component is set to go up to at least 50% of gross pay, which would have an impact on everything from statutory deductions like provident fund and gratuity to the take-home pay. Since the employer’s contribution to schemes such as EPF is calculated as percentage of the basic pay, this new provision is already a sour point for businesses which anticipate immediate cost escalation.

Union labour secretary Apurva Chandra said that the labour codes “have taken into consideration both employees’ and employer’s welfare".

But businesses aren’t waiting for that ideal balance to materialise on its own. Many are on an overdrive to “adjust" to the new regime. Legal, consulting and staffing firms that are working closely with corporates say that businesses are already working on four to five key segments—compensation and finance, talent operations, compliance and dispute resolutions.

While compensation or employees’ salary will most likely see a restructuring and may cause some friction between employer and employees initially, in talent operations, the definition of contract workers/flexi workers as well as their deployment will need a significant HR exercise.

“We are waiting to see the fine print," said Navneet Ahluwalia, head of human resource at Fujifilm India. “This change will impact us on four levels—compliance and ease of transition, financial impact, employee behaviour and acceptance and flexibility of the government machinery, which needs to be agile and willing to receive feedback as it is a new setup."

Salary and compensation

Corporates argue that employees’ salary will inevitably undergo restructuring at some point in the next few months and many allowances may get merged with the basic pay. The wage code and the draft rules indicate that the basic wage component in the salary structure is set to go up and companies that generally lower basic pay in order to reduce statutory deductions will no longer be able to do it. The draft rules, which serve as a basic framework for the roll out, say that the basic wage—for the calculation of employees’ provident fund, gratuity, leave encashment, etc.—will be taken as 50% of the total emolument of an employee.

As a result, companies are getting ready with flexible salary structures, said Bangalore-based Atul Gupta, partner (employment and corporate practice) at the law firm Trilegal.

“Your pay, and your way… that is going to be my offer to our people," said SK Jain, chief human resource officer at Jindal Stainless. Jain is already neck-deep in preparations to give greater flexibility to the firm’s 14,000 employees to design their own salary packages.

“Basic and HRA (house rent allowance) will be there as fixed items… and we can give a bouquet of other components to an employee to design his or her salary. Technology allows me to offer this flexibility. For example, if someone does not wish to take, let’s say, newspaper and recreational allowances, then, it’s okay. He or she can choose something else like education allowance for their kids. Nothing is final yet, and details are still being finalised," Jain added.

He said that the adoption and implementation of labour reforms is a layered exercise and HR teams in Jindal’s field offices and factory floors are constantly working on it. “It is nuanced work, but will be effected smoothly," he said.

Gupta of Trilegal, who is helping companies design salaries as per the legal position that is expected to be enshrined in the new laws, said that if 50% of the total monthly payment has to be taken as the base for calculating EPF, ESIC and other statutory deductions, it will have a direct bearing on the take-home pay.

Currently, an employee earning up to ₹15,000 per month is mandatorily covered under the government’s PF scheme. Workers earning more than that are not mandatorily required to deduct PF dues on an amount higher than the threshold. Similarly, industrial workers with a salary of ₹21,000 or less come under the ESIC.

“While many employees will go for statutory deductions within the threshold limit (those earning less than ₹15,000 a month), companies will offer flexibility (to mid- and senior-level employees) on whether to pay PF dues on 50% of the actual salary," Gupta said.

“While employers will try to reduce their financial implications, they will also have to make sure that the employees’ take-home pay is not compromised," explained Pooja Prabhakar, managing partner and chief executive of BCP Associates, another law firm that specialises in labour laws.

Financial Implications

Whenever the new codes are put in place, the possibility of a retrospective increase in gratuity and leave encashment is another headache for India Inc. Industries reeling from business loss and an economic downturn are concerned that this will have a significant impact on their finances in the upcoming fiscal.

Why is there a belief that some of these changes would be retrospective? Leave encashment and gratuity is calculated on the basis of the last drawn salary (largely, the basic wage). After the code is implemented, 50% of the monthly salary will become the basis on which such calculations will happen, not 20-40% which is the industry norm currently.

This may not seem like a big cost, but in payroll and employee cost calculations, these are significant components, said a senior executive of a staffing company, who requested anonymity. “What companies are asking us is: How to manage this and how to re-design salaries in order to avoid cost escalation? Industry lobby groups have already asked the government to relook at this provision before finalising the rules," said the executive.

“We expect organizations to review their compensation budgets in the second half of the year once the exact financial impact of the labour codes is known," said Nitin Sethi, partner and chief executive (performance and rewards business) at the consulting and professional service firm Aon India, during the recent launch of a survey on the anticipated salary hike in the upcoming year.

With so much flux and uncertainty, many firms are already pushing for a slow, phase-wise roll out. “The gratuity liability can go up by almost 40-50% for us if the rules are implemented retrospectively. We would like to be given a three-year window to fully implement these changes. If they give you three to five years, then you know that you can manage the cost escalation in a staggered way," said Anupam Kaura, president, human resources and corporate administration at Crisil Ltd.

“We have done some calculations through our actuary on how much the impact is going to be in terms of actual liabilities," he said. “But we don’t have (the) final rules as yet… it’s a little bit of a wild goose chase right now."

Kaura said that his management is ready to deal with the financial implications in the coming year and have already announced their appraisals for 2021-22, but several other firms may hold off as they await greater clarity.

This upheaval in the internal processes and mechanisms of corporate India happens to be underway in the backdrop of an acute jobs crisis—the unemployment rate which has remained persistently high over the past few years hit an unprecedented 25% at the height of the pandemic-induced lockdown. While the situation has started to improve, economists argue that disguised employment is only growing, and decent jobs are still missing.

Given this context, it is important to look beyond just the financial health of companies and ensure that they don’t resort to unethical loopholes, argued Amarjeet Kaur, general secretary of the All India Trade Union Congress. “Why is it bad if a worker demands a good salary?" she asked.

“The government continues to assert that the code will benefit both employees and employers but what everyone is actually waiting to see is whether it will create enough (new) jobs or will it only offer greater flexibility to employers to manipulate working hours and salary (in an already weak job market)," said KR Shyam Sundar, a labour economist and professor at XLRI, Jamshedpur.

People management

The tricky balance—between employer and employee interest—will be nowhere more relevant than in the realm of low-wage contract work. Under the new code, the role of contract workers and fixed-term employment (FTE) will see a drastic change. While contract worker numbers may go down, FTE will become the favoured new category of workers.

“The labour codes say that a company cannot use contract workers in core activities. This is going to have huge implications," said Gupta of Trilegal. “What we know is companies can define what constitutes core activity. More than service firms, the manufacturing sector is working on this subject a lot and we are evaluating options, handholding firms and looking at the rules very closely," he added.

Jain of Jindal Stainless said that companies across multiple verticals will go for FTE. It has two benefits: completion of a fixed tenure and non-engagement of a person thereafter will not be treated as retrenchment; project-based work without permanent engagement will become the new norm. The departure of such short-term employees may also not be treated as attrition. “FTE will see a wide acceptance and so is the four or five-day work week concept. Sectors such as IT and shared services will adopt them big time," said Kamal Karanth, co-founder of specialist staffing firm Xpheno.

The new codes aren’t all about just compliance and transition issues though. There are also unresolved conflict points, which could threaten the whole edifice. One particular provision which has attracted the ire of trade unions is the attempt in the industrial relations code to redefine the meaning of a “negotiating union". It now needs the support of 75% of a firm’s workers. As several trade unions are active in companies, it will be tough for any one group to manage 75% support. This, the unions allege, will take away their collective bargaining power. Under such a scenario, the new law proposes a negotiating council.

“I hear that companies are very happy with this provision as it will take away the rights of some unions in a negotiating table," said Kaur of AITUC. “We hear that the manufacturing sector in particular is trying to create sprinter groups so that negotiations and dispute resolutions get delayed," she alleged. With suspicion and uncertainty building up about a regime that is not even in place yet, the Union government and the states have their task cut out.