Labour codes to impact gratuity, ensure strict compliance
A lot is now being heard about the new labour codes. What they are, why do we need them, whom will they impact and in what way: there are far too many queries in our minds. Let us try to decode the new labour codes in this article.
The four new labour codes— Code on Social Security, 2020, Occupational Safety, Health and Working Conditions Code, 2020, Industrial Relations Code, 2020, and Code on Wages, 2019 — subsume the existing 29 central labour and industrial laws and aim to avoid multiplicity of laws. The government wants to facilitate ease of compliance and achieve equity for all. The new codes will ensure better use of technology for various compliances and effective enforcement.
Do the new labour codes apply only to blue collar employees or would they also apply to white collar employees? The answer is that the labour codes would apply to all employees irrespective of the role/level/nature of duties/salary (with minimal exceptions) of the organisation.
One attempt of the government to bring in simplicity is the new common definition of wages across all four codes. Under existing laws, there are different definition of wages for provident fund, gratuity etc. However, now under the new codes, there is a common definition of wages. This new definition of wages covers all salary components expressed in terms of money or capable of being so expressed. There are specific exclusions from the definition of wages such as statutory bonus, house rent allowance, conveyance allowance, commission etc. However, these exclusions are limited to 50 per cent of the total remuneration (except gratuity and retrenchment compensation). With this change in the definition of wages and its common applicability, there will be an impact on the employees’ benefits and employers’ costs.
The new definition of wages will specifically impact gratuity cost. For all the current and future employees, gratuity will now be payable under the new definition of wages. Another change is regarding the period considered for eligibility to gratuity. For fixed term employees, the earlier criteria of minimum five years of service has been now reduced to one year. This means that now fixed term employees will be eligible for gratuity just after one year of serving an organisation. This, however, is not applicable to permanent employees who are not employed for a fixed period. Permanent employees will continue to be eligible for gratuity after five years of service.
Any ‘‘worker’’ under the labour codes can now demand leave encashment at the end of each calendar year. Such leave encashment is to be calculated on ‘‘wages’’ as defined under the Labour Codes.
Changes have also been prescribed in the labour codes with respect to hiring of employees through third parties/contractors.
Any worker who is hired in or in connection with the work of the establishment by or through a contractor is a ‘‘contract labour’’. But a worker would not be termed as a ‘‘contract labour’’ if his/her employment with the contractor is governed by mutually accepted standards of the conditions of employment; and he/she gets periodical increment in the pay, social security coverage and other welfare benefits. For such workers who do not fall within the definition of ‘‘contract labour’’, the contractor will be responsible for all compliances under the Labour Codes as their employer.
An establishment will now have to pay an amount payable to the contractor before the date of payment of wages so that the contractor can pay the wages by the due date and must pay a minimum bonus to the employees if the contractor fails to pay. This is to ensure timely payments to the employees.
Compliances will also be widely impacted under the labour codes. Wages will have to be paid within two working days even in the case of voluntary resignation by the employee. There are prescriptive formats for the wage register, employee register and wage slip specified in the rules. Aadhaar will be mandatory for social security contributions and benefits. A safety committee must be formed by the employer and it will have to contain representatives of employer and workers; women can work night shifts night (before 6 am and after 7 pm) only after express consent and subject to safety conditions. These are just a few of the changes in the codes. Strict consequences are outlined in the codes for non-compliance of any of the compliances required.
All the four labour codes have been passed by both Houses of the Parliament and have also received Presidential assent and all that needs to be notified is the date from which the codes will come into force.
The need of this hour is a thorough analysis by each organisation of their employees’ compensation structures, HR and payroll policies and third-party contracts so that they can identify align these with various requirements under the new labour codes.
Dinesh Agarwal is partner and Puneet Gupta is director at EY. Additional inputs by Reema Jalan, a senior tax professional with EY India.