The Code on Wages: Addressing the Key Changes and Their Impact

The Code on Wages, 2019 (“Code”) codifies and amends the extant laws related to wages, bonus and remuneration encashed to labour workforce in organised and unorganised sector of employment. It aims to simplify the implementation, enforcement and harmonise the labour law regime in India.

The Code subsumes the following enactments upon its enforcement viz. (i) The Payment of Wages Act, 1936 (“Wages Act”); (ii) The Minimum Wages Act, 1948 (“MW Act”); (iii) The Payment of Bonus Act, 1965 (“Bonus Act”); and (iv) The Equal Remuneration Act, 1976 (“ER Act”). The extant legislations have been incorporated into separate chapters under the Code. This article provides a comparative analysis of the key changes introduced under the Code with the current labour law framework and its impact on the employment ecosystem of India.

Contrast between the Extant Framework and the Prospective Framework

1. Protection against gender discrimination

Extant Framework: At present, ER Act provides for payment of equal remuneration to men and women workers performing ‘same work or work of similar nature’, by the same employer and prohibits discrimination on the grounds of gender against women in the matters of employment and other related aspects. For the purposes of paying equal remuneration to employees undertaking ‘same work or work of similar nature’, the employer shall take into consideration the set of skills, efforts and responsibilities required to be possessed by men and women employed to do such nature of work.

Prospective Framework: It is quite significant to see that the Code has adopted a gender-neutral approach whereby prohibiting gender discrimination in relation to matters of recruitment and payment of remuneration. Once the Code is brought into effect, the employers shall be required to pay equal rate of remuneration to the employees regardless of their genders, performing ‘same work or work of a similar nature’.  The employer while recruiting employees to carry out, ‘same work or work of similar nature’, shall also now take into account the employees’ work experience in addition to the skill, effort, responsibility in relation to terms and conditions of employment.

2. Reduced hours of work constituting a normal working day

Extant Framework: Till date under the MW Act and rules framed thereunder, a normal working day for an adult, adolescent worker shall comprise of total 9 (nine) hours and similarly, 4&1/2 (four and a half) hours for a child worker, inclusive of rest intervals. The present statute distinctly defines the term ‘adult’, ‘adolescent’ and ‘child’ with respect to number of hours of work to constitute a normal of working day.

Prospective Framework: The draft rules framed under the Code has notably reduced the hours of work to total 8 (eight) hours inclusive of rest intervals to constitute a normal working day. Under the Code, neither the term ‘adult’, ‘adolescent’ and ‘child’ has been defined nor the number of hours of work to comprise a normal working day has been specified for such category of workers.

3. Fixed rate of wages for overtime work

Extant Framework: Currently, the MW Act casts an obligation on the employer to pay wages for overtime work to employee, as per the rates prescribed under the MW Act or by the appropriate government, from time to time. The state specific shops and establishment legislations provide a fixed rate of wages for overtime work i.e., twice the normal rate of wages. Such state-based shops and establishment legislations also provide a limit pertaining to maximum number of overtime hours an employee should not exceed while working for an employer.

Prospective Framework: It is pertinent to note that the Code has uniformed the rate of wages for overtime work i.e., twice the normal rate of wages, in relation to minimum wages payable by an employer to an employee.

4. Consolidated definition of the term ‘Wages’

Extant Framework: Under the current regime, the MW Act, Wages Act, Bonus Act and ER Act provide different definitions for the term ‘wages’, ‘remuneration’ and ‘salary or wage’ incorporated basis the specific operation of the concerned statute.

Prospective Framework: Interestingly, the definition of the term ‘wages’ has been made uniform across all the labour codes. As per the Code, the term ‘wages’ means all remuneration paid in way of salary and allowances and includes ‘basic pay’, ‘dearness allowance’ and ‘retaining allowance’ (if any) and excludes components such as bonus, value of house accommodation or electricity, water or medical attendance, provident fund contribution, conveyance allowance, house rent allowance, overtime allowance etc. It is significant to be note that a proviso has been inserted under the definition of ‘wages’ to construe that the excluded components cannot exceed one half, or such other percent as notified by the Central Government, of all the remuneration payable to the employee. In the event such amount exceeds one half or such percent as prescribed by the Central Government, the same shall be considered as ‘Wages’. Another proviso has been added in the definition to provide that in the event an employee is given any remuneration in kind by the employer, the value of such remuneration in kind which does not exceed 15% (fifteen percent) of the total wages,  shall be deemed to form part of the wages payable to such employee.

5. Expanded coverage in relation to payment of minimum wages

Extant Framework: Presently, under the MW Act, the minimum wage is entitled to employees undertaking work of skilled, unskilled or clerical nature in a scheduled employment for which the respective state government fixes a rate of minimum wages.   

Prospective Framework: It is interesting to observe that under the Code, the payment of minimum wages is not only limited to an employee undertaking work of skilled, unskilled, clerical nature but also includes those employees performing work of supervisory, managerial, administrative and technical nature. However, no clarity and reference has been provided under the Code regarding scheduled employment as opposed to the extant framework under the MW Act.

6. Expanded coverage under payment of wages

Extant Framework: Till date, the applicability of the Wages Act is limited to employees earning wages up to INR 24,000/- (Indian Rupees Twenty-Four Thousand only) per month. Moreover, the Wages Act is only applicable to class of employers be it the factories and limited establishments such as railways, mines, docks etc., as provided under the statute.

Prospective Framework: It is intriguing to note that the Code mandates the payment of wages to all categories of employers be it a factory, establishment etc., except establishments of Government of India and respective state governments. However, the Code does not prescribe any wage limit in relation to the employees unlike the extant Wages Act.

7. Distinction between ‘employee’ and ‘worker’

Extant Framework: Under the present legislations related to wages and bonus, the term ‘employee’ has been defined separately. Further, the term ‘worker’ comes within the ambit of the defined term ‘employee’ as provided under the current framework populated in these legislations.

Prospective Framework: It is pertinent to note that the Code distinguishes between the term ‘employee’ and ‘worker’ where, an ‘employee’ means any person (other than an apprentice employed under the Apprentices Act, 1961) employed in an establishment to perform work of skilled, semi-skilled, or unskilled manual, operational, supervisory, managerial, administrative, technical, or clerical work nature. On the other hand, a ‘worker’ means a person employed in any industry to perform work of manual, unskilled, skilled, technical, operational, clerical or supervisory nature and excludes (i) an apprentice as defined under Apprentice Act, 1961; (ii) a person employed in a managerial or administrative capacity; and (iii) a person employed in a supervisory capacity drawing a monthly wage exceeding INR 15,000/- (Indian Rupees Fifteen Thousand only).

8. Time limit for payment of wages

Extant Framework: Under the present Wages Act, the time limit prescribed for the payment of wages depends upon the different sectors of employment. In the event, where an employer terminates an employee, the wages shall be paid within 2 (two) working days from the date of termination of such employment. The timeline regarding payment of wages by an employer upon voluntary resignation by the employee, varies basis the provisions of the state specific shops and establishments legislation.

Prospective Framework: Notably, the Code has discontinued with the practice of prescribing timeline for wage disbursement basis the sector of employment. Now, timeline in respect of payment of wages has been standardised for all employers regardless of their sector. Based upon the type of engagement, the following payment timelines have been proposed under the Code:

Further, in case where an employee has been removed, dismissed, retrenched or becomes unemployed due to closure of an establishment or has resigned from the services, the wages shall be paid to such employee within 2 (two) working days of such removal, dismissal, retrenchment or resignation. The scenario pertaining to disbursement of wages upon resignation of employment by an employee has now been acknowledged under the Code for which a timeline has been incorporated which shall be pertinent from an employer’s perspective.

9. Disqualification for bonus

Extant Framework: Under the Bonus Act, an employee shall be disqualified for bonus in case where such an employee has been terminated on the grounds of (i) fraud; or (ii) riotous or violent behaviour while on the premises of establishment; or (iii) theft, misappropriation or sabotage of any property of the establishment.

Prospective Framework: It shall be noted that the Code continues to retain the grounds of disqualification for bonus as enumerated under the extant Bonus Act and has further incorporated conviction for sexual harassment as an additional ground for disqualification for bonus entitlement to an employee.

10. Introduction of Inspector cum Facilitator

Extant Framework: The present legislations grant certain powers to officers and inspectors to undertake cognizance in the of matters of any non- compliances on the part of the employers and pass necessary orders, as it may deem fit.

Prospective Framework: It is noteworthy to see that the Code has adopted a neutral approach in respect of streamlining the processes of compliances to be undertaken by employers. The introduction of the concept of Inspector cum Facilitator has been predicted to play a very progressive role to change the dynamics of the labour laws in India. The role of the Inspector cum Facilitator is not limited to carry out search and seizures, inspection of the records, but shall also to act as a facilitator by rendering advice to the employers and workers in relation to compliances of the Code. The Code has also, recognised the significance of the principles of natural justice wherein prior to initiating a prosecution, the Inspector-cum-Facilitator must give an opportunity to the employer to comply with the provisions of the Code through a written direction. The employer is required to comply with the directions within the stipulated time period in order to avoid any prosecution. However, the opportunity to rectify the breach will not be provided to an employer in case such employer is found to be a repeated offender of a violation being committed within a span of 5 (five) years from the date of first offence.  Additionally, the Code also allows inspection electronically and calling of information relating to inspection through web-based platform.

11. Offences and Penalties

Extant Framework: The current framework prescribes the penalties upon non-compliance of the provisions of the concerned legislations. The penalties provided under these statutes are mostly in the nature of fines combined with imprisonment in respect of offences committed by an employer.

Prospective Framework: A major step has been undertaken in the Code to decriminalised majority of the offences by making the penalties monetary in nature. However, it specifies that an employer shall be penalised with imprisonment upon subsequent or repeated violation of an offence under the Code within a span of 5 (five) years from the date of conviction of first offence. Penalties vary depending upon the nature of the offence, with maximum penalty entailing to imprisonment for 3 (three) months and fine up to INR 1,00,000/- (Indian Rupees One Lakh Only). The table below depicts the list of offences and penalties prescribed under the Code.

The Code provides an option to compound offence to first time defaulter employees. The   application of compounding shall be filed before the Gazetted Officer as notified by the appropriate Government, to compound up to 50% (fifty percent) of the maximum fine provided for under the offence. However, the option of compounding is not available for offences repeated within 5 (five) years from the date of first offence.

A&A Analysis

The enactment of the Code is one of most progressive steps taken by the Indian Government in terms of reforming the labour law regime. The Code has been drafted with the intent to render ease to employers’ community by reducing the compliance burden and to promote ease of doing business within India. Considering the digital initiatives introduced by way of web-based inspection scheme formulated by the Indian government, the Code has recognised the steps related to electronic maintenance of registers, records and e-filing of returns by employers. The ‘ease of compliance’ initiatives under the Code is also expected to promote incorporation of more new enterprises catalysing the creation of more employment opportunities in the country.

The Code has universally extended its ambit to cover both the organised and the unorganised sectors of employment, making it possible to shield a sizable segment of the labour workforce against discriminatory practises and guarantee that all workers are paid equitably. The gaps existing between the regulators and stakeholders shall be reduced by the enforcement of the Code, by the virtue of providing better and well-defined dispute resolution mechanism. The conflicts between employers and workers shall now be dealt in a better form by the virtue of appointment of the Inspector-cum Facilitator who shall advice upon such parties to dispute regarding the compliances under the Code. The additional role as a facilitator to be performed by the inspection officers and authorities is a notable reform in terms making India an employer-friendly jurisdiction.

Amongst several benefits, the codification of labour laws shall remove the multiplicity of definitions and authorities, without compromising on the basic concepts of employee welfare and benefits. Such benefit can be observed in the Code wherein definition of the term ‘wages’ has been made uniform across all the labour codes. This uniformity in the definition shall provide clarity to the employers and the employees segment in respect of entitlement towards wages and other allied statutory benefits accorded thereunder.

The Code has tried to stay in line with certain principles of the extant framework of the wage related legislations by inserting each of the said legislations in the form of separate chapters. However, there are few aspects under the Code upon which clarity is required to be addressed by the appropriate government.

For instance, as per Section 3 of the Code, along with other components, experience of an employee shall also be a part of the component for an employer whilst determining the scope of ‘same work or work of similar nature’ regarding equal remuneration payments. However, neither the Code nor the draft rules framed thereunder have stipulated any criteria for the employers while considering experience as a parameter to recruit employees for ‘same work or work of similar nature’. Under Chapter II of the Code related to minimum wages, the term ‘employee’ and ‘worker’ has been used interchangeably at certain places. However, upon analysing the provisions of the said chapter in line with these separate definitions provided for ‘employee’ and ‘worker’, there appears to be a deviation in terms of gathering the actual understanding intended in relation to entitlement of minimum wages to employees vis-à-vis workers. Moreover, the Code has expanded the definition of the term ‘employee’ render minimum wage benefit to employees performing work of administrative, managerial and supervisory nature. However, no threshold has been prescribed in relation to such nature of work so as draw a comparison between regular employees and the category of employees appointed in administrative, managerial and supervisory capacity. Additionally, no clarity has been provided regarding the payment of minimum wages to adolescent workers engaged by the employers in their establishment in comparison to specific provision provided under the MW Act.

The enforcement of the labour codes by the Government of India has been one of the most awaited reforms for the last 4 (four) to 5 (five) years intending to repeal 29 (twenty-nine) current labour laws of India. Upon the Code coming into force along with the other labour codes, we will be witnessing certain modifications under the draft rules framed in consonance to the Code. Moreover, the employers will be able to get some clarity on the operation part of the compliances prescribed under the Code.

Authored by Sheena Ogra, Ashmita Rahi and Prashant Malviya of Ahlawat & Associates.