This Is Why Your Salary Will Reduce Due To New Labor Laws: Definition Of Wages Will Change?

Take home salaries will reduce but social security pay increases

Likely effective come April the labour ministry has finalised the tenets of 4 labour codes. Likely to bring about wide ranging labour reforms across the country, it is expected to affect both employers’ incomes and employees’ take-home salaries. 

What Are The Codes?

The 4 labour codes cover wages, industrial relations, occupational safety-focused health and working conditions, and social security. The reforms will tackle a huge number of labour laws with some going back to pre-independence times.

The reforms have condensed 29 central labour laws into 4 codes.

Salary Packages To See Changes

The labour codes will push companies to restructure salary packages since all allowances will now have to be capped at 50% of total cost to company (CTC). These allowances will include leaves, house rent, overtime and conveyance. 

The Code on Wages 2019 has tweaked the definition of wages which now comprises 3 components- basic pay, dearness allowance and retention pay. 

A New Way To Define Wages

As per the revised definition the term “wage” will stand independent of statutory bonus, pension and provident fund, conveyance allowance, HRA, overtime and gratuity. 

If these exclusions amount to above 50% of total CTC, the excess will be added back to the wage, the exception being special allowance. 

Now that the ambit of basic pay has been widened, employees can look forward to increased social security contribution. The flip side is that this could lead to lesser net take-home salaries. 

Companies will likely have to incur greater costs towards PF and gratuity. Private sector companies typically set aside 12% of basic salary and dearness allowance to PF. 

Gratuity Calculation To See Revisions

Also expected is more clarity on gratuity calculation. The current norm is that gratuity is computed on the basis of an employee’s last drawn salary. This amount is evaluated by considering 15 days of salary, per year, in the last 5 years of service. After completion of 5 years workers receive their gratuity.

Thanks to the reforms, even fixed-term contract workers who may not work at a firm for 5 whole years can receive gratuity. 

A labour ministry official said that under the new reforms, gratuity may be calculated in 2 phases to limit companies’ expenses. 

Gratuity earned until April of this year when reforms will hit the floor will likely be computed based on the older interpretation of wages. The new method of gratuity calculation will have to be followed from the next fiscal year. 

Sanjay Saran of GoHire Pvt Ltd. opined that the new laws are being dubbed the Grandfather Clause which is sympathetic to a firm’s financial burdens. At the same time statutory payouts would be affected since they are closely related to the definition of wages. 


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