India’s New Code on Wages

India’s New Code on Wages Clarifies a Chaotic Situation

By Vijita Verma

With the ongoing trade war between China and the United States, a number of U.S. companies are gradually shifting their business operations to set up branch offices and working centers in India. Manufacturing hubs and units of U.S. companies that were based in China are also shifting to India. The U.S. government has imposed restrictions on transfer of U.S.-origin physical goods, software and technical knowledge to Huawei and 114 global affiliates. The sanctions have largely affected U.S. and European companies that had large contracts with Huawei for projects involving infrastructure and data warehousing. These are now shifting to Indian companies.

The Wage Code discussed below will largely affect U.S. companies that currently have operations in India, and those who intend to start or develop new operations there. It does away with multiple filing requirements and affects their cash flows by relaxing/ restructuring social security contributions by employers.

The 2019 Code on Wages is an act of Parliament that consolidates the provisions of four major Indian labor laws concerning wage and bonus payments and makes universal provisions for minimum wages and timely payment of wages for all workers in India.

India had 44 labor statutes enacted by the central government. At least 17 are over 50 years old. A few even date to the pre-independence (1947) era. The National Commission on Labor, an Indian statutory body created to recommend changes in the labor laws, recommended in 1999 that the existing labor laws should be classified into broader groups for easier compliance.

Under the administration of Prime Minister Narendra Modi, the Central Ministry of Labor and Employment — one of the oldest and most important ministries of government — began considering a plan in 2015 to consolidate the 44 labor laws into four codes in order to improve ease of doing business in India. The Wage Code is the first of the proposed codes. The other three are the Occupational Safety, Health and Working Conditions Code; the Code on Industrial Relations; and the Code on Social Security.

THE 2019 CODE ON WAGES

The Wage Code is the first to be enacted and approved by the Parliament. It came into effect in August 2019 after receiving the consent of the President of India and repeals several previous labor laws. Some of the key changes brought by this Wage Code are:

• Abolition of wage ceiling and economic sector distinctions. Previously the law only applied to employees who draw salary below a particular statutory stipulated limit. The Wage Code mandates uniform applicability of the provisions of timely payment of wages to all employees, irrespective of the wage ceiling. It applies to the organized sector as well as to certain unorganized workers, such as agricultural workers. State governments may add more employment sectors to this list and mandate minimum wages for those jobs as well. The Wage Code mandates that minimum wages be paid for all types of employment — irrespective of whether they are in the organized or the unorganized sector.

• Wage redefined. The different definitions of “wage” across the 44 labor laws previously in effect led to a great deal of litigation in addition to difficulty in implementation. The Wage Code has brought a single definition to be used across all labor law, thus bringing clarity and consistency. The definition includes (1) basic pay, (2) dearness (greater expense or some other factor that increases value) allowance, and (3) retaining allowance. It excludes components such as conveyance allowance, house rent allowance, overtime allowance, gratuity payments, and so forth.

Further, the Wage Code introduces a special methodology for computation of wages; and in certain circumstances, various components of wages that were ordinarily understood to be excluded from the definition will instead be considered as part of it. These changes have increased the work of the Compensation and Benefits team of employers and has a significant impact on employers. They must now be very careful in devising employees’ salary structure.

Manufacturing hubs and units of U.S. companies that were based in China are shifting to India.

• Concept of floor wage. The Wage Code introduces a new concept of “floor wages,” wherein the rates will be fixed by the central government, taking into account the minimum living standards of a worker. The minimum wage rates fixed by the state government cannot be less than floor wage. However, if the existing minimum wages fixed by the appropriate government is higher than the floor wage, they cannot reduce the new minimum wages. Further, minimum wage rates will be reviewed and revised by the appropriate government in intervals not exceeding five years. This change has been welcomed by employees. It aims to bring consistency across geographies as well as different state governments and employers all over India.

• Additional obligations on employers. The Wage Code has empowered employers and imposed additional obligations. Employers have an obligation to pay a mandatory bonus in the event the employee is drawing a minimum amount of wages and has worked for a period of 30 days in an accounting year, irrespective of whether the employer has any allocable surplus during the previous accounting year. In the event the employer has allocable surplus, the employees will be entitled to receive a bonus up to a maximum of 20 percent of their annual wage. Under the old labor laws, a bonus was paid or not paid at the discretion of the employers, who could use the excuse of not having sufficient surplus.

The Wage Code empowers employers to choose the “mode” and period of payment of wages by introducing “electronic mode” as against the existing old methods of payment by coins, bank transfer or check. Employers can also fix the wage period at their discretion, anywhere from daily to monthly. Further, to ensure fair working conditions, the Wage Code provides that dismissal from service due to conviction for sexual harassment would be considered grounds for disqualification for receipt of a bonus.

The Wage Code has amalgamated the different overtime rates and prescribes that such a rate will not be less than twice the normal rate of wages. It goes a step further and prohibits gender discrimination in matters related to wages and recruitment of employees for the same work or work of similar nature (work for which the skill, effort, experience and responsibility required are the same). This has been highly appreciated by female employees across India, where female employees earn roughly 45 percent less than male employees in the same occupation.

• Compliance reliefs for employers. One of the greatest examples of compliance relief brought by this Wage Code is that it consolidates the requirement of multiple registers under previous laws and provides for a single register containing details with regard to persons employed, muster roll, wages, and so forth. This will lead to easing out periodical compliance checks. The form of the register is yet to be prescribed.

Further, the “inspector” under the previous regime has been replaced with an “Inspector-cum-Facilitator,” who has the additional duties of guiding and advising employers and employees on effective implementation. Inspections are now possible through a web-based inspection scheme and electronic summoning of information. This will ease compliance burdens for employers, and be in sync with current trends towards digitalization.

• Penalties and offences. The Wage Code contemplates three kinds of contravention: payment of an amount that is less than what is due the employee, improper maintenance of records, and any other contravention of the Code. The penalty for non-compliance has been substantially enhanced, which may foster a compliance culture by acting as a deterrent. It further allows the employers to rectify noncompliance within a certain time to avoid prosecution. Combining of offences is provided by the Wage Code at any time before or after initiation of the prosecution. Offences can be combined for a sum of 50 percent of the maximum fine prescribed. However, once combined, another combination will not be permitted within a period of five years of the commission of a similar offence.

The Wage Code has amalgamated the different overtime rates and prescribes that such a rate will not be less than twice the normal wage rates.

Finally, the Wage Code clearly prescribes the burden of proof in claims of non-payment or deficient payment of wages or bonus to be on the employer. It provides that any contract or agreement whereby an employee relinquishes the right to any amount or right to bonus due him shall be null and void insofar as it purports to remove or reduce the liability to pay such amount under the Code.

Lastly, the provisions of the Code shall have effect notwithstanding any inconsistency contained in any other law in force, or in the terms of any award, agreement, settlement or contract of service.

The Code has been welcomed by employees across India by addressing issues of gender-based disparity, and ensuring fair and timely payment of wages and settlement post termination or resignation. It is seen as a definite positive step towards labor reform, one that has been long awaited. Only the test of time will determine its true merit.

What is clear is that the Wage Code increases the cost of non-compliance. Gone are the days when employers could evade payment of overtime due to laws that hardly provided a deterrent, so paltry were the fines. At the same time, the Code makes it easier to do business, and in some cases provides an opportunity to rectify a breach and avoid prosecution.

Vijita Verma is a Corporate Counsel with Infosys Limited. She currently works with the Europe Legal Contracts Team and is based in Germany. Previously she handled commercial contracts for the Asia Pacific and Middle East Regions. vijita_verma@infosys.com