A lot of ruckus is created in the past few days, due to which the salaried employee class is worried and a major cause of concern among it is the composition of their take-home salary in their total pay. Most probably the salaried employees will be receiving a higher employer contribution to their employee provident fund (EPF) along with higher gratuity payments from the next financial year, i.e. once the new law on wages gets implemented from 1st April, 2021. This is due the standardised application of the new definition of “wages” under the Code on Wages, 2019 (hereinafter the “Wages Code”) based on which EPF and gratuity are calculated. However, this may lead to a substantial reduction in the in hand salary of the employees. In this article, the author therefore attempts to analyse the impact of the new labour and employment laws on the corpus of EPF and other social-security components in employees’ total pay along with its impact upon their take-home salary.
I. INTRODUCTION: THE NEW LABOUR CODES
In past there were as many as 165 labour and employment laws in India, including 44 federal laws and therefore, it was no less than a nightmare for employers to comply with laws both at Central and State level. In this context, the government of India, in pursuance of its aim of promoting ease of doing business, consolidated the major Central labour and employment laws relating to wages, social security, industrial relations and occupational safety etcetera. The Wages Code and the Code on Social Security, 2020 (hereinafter the “Security Code”) both are part of the four labour codes arising out from merging 29 out of 44 Central labour laws. The Wages Code was passed by the Parliament in August 2019, whereas, the other three labour codes were passed in September 2020. It’s anticipated that these new laws will be implemented from April 1, 2021.
EPF, gratuity, leave encashment and other social security benefits (hereinafter collectively referred as “retiral benefits”) are governed by the provisions of the Security Code, but their calculation depends on the new definition of “wages” under the Wages Code. The Wages Code provides a new and standardised definition of “wages” to bring in parity the new laws as opposed to the varied definitions under the extant laws. The new definition now has three parts to it, i.e. an inclusion part, specified exclusions and conditions which limit the quantum of exclusions. This has been explained below.
II. ‘WAGES’ UNDER SECTION 2(Y) OF THE CODE ON WAGES, 2019
According to S.2(y) of the Wages Code, the wages include all remuneration paid to a person expressed in terms of money or capable of being so expressed, in respect of his employment or of work done in such employment, including the basic pay, dearness allowance and retaining allowance (if any). Moreover, S.2(y) further provides that when an employee is paid remuneration in kind, the value of such remuneration up to 15% of total wages payable to him shall also be deemed to form part of wages of such employee. This is hereinafter termed as the “first component of employee’s total pay” or “basic pay”.
S.2(y) of the Wages Code, further provides that wages however, doesn’t include any bonus or commission, remuneration paid under award or settlement between the parties or order of court, contributions towards provident or any other pension fund, house rent allowance, overtime allowance, or any other allowance for house-accommodation, supply of light, water, conveyance, travelling, medical attendance or other amenity. This is hereinafter termed as the “second component of employee’s total pay” or “allowances”.
III. MEAT OF THIS ARTICLE
An employee has been mandated under S.16(1)(a) of the Security Code, to deduct a minimum of twelve per cent from his basic pay towards the EPF contributions. Similarly, to match this, S.16(1)(a) further mandates the employer to deposit another twelve per cent (calculated upon the basic pay) from the second component of the employee’s total pay. Thus, one thing is clear, i.e. the contribution to EPF depends upon the amount of first component of employee’s total pay.
Therefore, many employers with the objective of limiting the EPF contributions restructure these two components of wages in such a way that the first component remains low, while the second component i.e. the allowances gets substantially higher. This is where the Wages Code comes into play and in this very context, S.2(y) of the Wages Code provides that the basic pay, for the purpose of calculation of EPF contributions, have to be at least fifty per cent of employee’s total pay. In order to comply with this rule, the employees are mandated to increase the first component of the employee’s total pay to at leastfifty per cent of the total remuneration, thereby, leading to a rise in the contributions towards retiral benefits.
The Wages Code further provides that if the first component of the employee’s total pay falls below the fifty per cent mark then some portion of the second component of the employee’s total pay will be added to it, so that basic pay becomes at least fifty per cent of the total remuneration for the purpose of calculating contributions to retiral benefits.
Therefore, under the new labour law regime an attempt has been made by the legislature to regard at least fifty per cent of the employee’s total pay as his “wages”. This is aimed to preclude the employers from adopting such compensation structures which may reduce contributions towards the social security schemes so as to secure the employees in long run.
However, this limit of fifty per cent isn’t absolute and the Central Government has the power to prescribe any other limit as it may deem fit. Whatever be the case, the present amendment in definition of “wages” will impact both the employers and employees. It would increase the financial burden upon the employer, due to an increase in the liability of payment of contribution towards EPF and gratuity etc. This will equally impact the liquidity of the employees whose net take home income will definitely witness steep reductions. Nevertheless, the said amendment would be beneficial to the employees inasmuch as their social security is concerned. The said amendment may also further the coverage of the social security benefits to those employees in the organisation who may be currently excluded.
IV. THE TWIST: SECTION 164(2)(B) OF THE CODE ON SOCIAL SECURITY, 2020
Most interestingly, however, the Employees’ Provident Funds Scheme, 1952 (hereinafter the “1952 Scheme”), in Paragraph 26A read with Paragraph 29, explicitly provides that where the basic pay of an employee is more than Rs.15,000, an employer is required to contribute twelve per cent of at least Rs.15,000 as EPF contribution. And, as per S.164(2)(b) of the Security Code, the 1952 Scheme will remain in force for a period of one year from the date of commencement of the Security Code.
This means that Wages Code will not materially affect those, whose salary is more than Rs.15,000/month, for at least one year, i.e. till the 1952 Scheme remains in force. Therefore, only those employees whose basic pay is Rs.15,000 or less would get affected by the Wages Code from the beginning of next financial year in April, 2021. However, if the new Codes changes the trend of the scheme laid down in the 1952 Scheme, then, even those whose basic pay was more than Rs.15,000 will be affected.
But, it’s pertinent to mention that the ones who would be subjected to the hardship caused by the amendment in the definition of “wages” under the Wages Code would also reap some extensive benefits in the long run. They would benefit by way of tax deductions and savings as the EPF, out of all the employee benefit schemes, enjoys the maximum tax concessions under the Income Tax Act, 1961. Employee’s contribution is allowed as a deduction under S.36(1)(va) of the Income Tax Act. Similarly, employer’s contribution is also treated as tax deductible under S.36(1)(iv) of the Income Tax Act. Even, the amount withdrawn from the recognized provident fund is exempted from being taxed in Rule 8 of Part A to the fourth schedule of the Income Tax Act.
V. CONCLUSION
As employers are ready to rejig the salary structure under Cost to Company (CTC) model, by increasing the retiral costs into the salary package, the take home pay of the employees would get impacted. While this amendment may reduce basic pay in the short run, it will surely compensate the employees with higher corpus in the retiral funds in the long run as they would receive larger tax-free funds at the time of retirement.
