With the purpose of providing social security coverage to the maximum workforce of the organized and unorganized sectors, the Central Government enacted the Code on Social Security, 2020 ("Code") on September 29, 2020, consolidating all the essential elements related to social security. When enforced, this Code will repeal and re-enact nine Central labour legislations relating to social security, including the Employees Provident Fund and Miscellaneous Provisions Act, 1952 ("EPF Act"), the Employee State Insurance Act, 1948 ("ESI Act"), the Maternity Benefit Act, 1961, and the Payment of Gratuity Act, 1972.
This article summarizes the key changes introduced by the Code.
Wide Definition of 'Employee'
The Code aims to cover the maximum number of employees and workers. It provides a wide definition of 'employee', which includes employees in supervisory, managerial, and administrative capacities as also contract labour. However, the Code distinguishes between employees based on wage ceiling and/or their scheduled employments for determining their eligibility to various social security benefits. Thus, although the Code seeks to provide social security to a large number of employees, all benefits may not be available to every employee.
Social Security Contribution for Inter-state Migrant Workers
Under the Code, the scope of 'inter-state migrant workers' has been widened to include those workers who move from one State for employment in an establishment in a destination State and may subsequently change their establishment within the said destination State, pursuant to an agreement or other employment arrangement. A wage ceiling of INR 18,000 per month has been prescribed for such workers to qualify as inter-state migrant workers. Further, since inter-state migrant workers have also been included in the definition of 'contract labour', they would qualify as 'employee' under the Code and receive certain benefits as employees. Therefore, going forward, employers may need to provide social security to inter-state migrant workers at par with their other employees.
Registration of Establishments under the Code
The Code comprehensively defines 'establishments' to mean, amongst others, places such as factories, motor transport undertakings, and newspaper establishments, where an industry, trade, business, manufacture, or occupation is carried on. All such establishments covered by the Code will need to obtain a registration. However, establishments that are already registered under any other Central labour law in force will not be required to obtain such registration as their existing registration will be deemed to be a registration for purposes of the Code.
Voluntary Coverage to Establishments having Employees less than the Threshold
Under the Code, establishments that have a smaller number of employees than the prescribed threshold for coverage under the provisions of the Employees' Provident Fund ("EPF") and the Employees' State Insurance Fund ("ESI") have the option to avail of voluntary coverage under the same and subsequently opt out of such voluntary coverage, subject to fulfilment of certain conditions. By providing such flexibility, the Code seeks to facilitate provision of such benefits to employees of smaller establishments while providing a safety net for employers to opt out of such coverage.
Increase in Social Security Contributions
The definition of 'wages' under the Code elaborately lists the included and excluded components. Further, it provides that if the aggregate of the excluded components exceeds 50% (or such other percentage as prescribed by the Central Government) of an employee's total remuneration, the amount that exceeds the one-half (or such percentage as notified) will be deemed to be 'wages'. As such, at least 50% of the total remuneration would need to be considered as 'wages' for purposes of calculating social security contributions. This may result in lesser take-home salary for employees and higher contributions by employers in respect of the employees.
Statutory Recognition to Gig and Platform Workers and Aggregators
The Code is the first legislation to formally recognize the gig economy and extend social security coverage to them. It gives statutory recognition to paid work arrangements outside the traditional employer-employee relationships by introducing the concept of 'gig workers', which includes 'platform workers'. 'Platform workers' include individuals using online platforms of aggregators to access other organizations/individuals to solve specific problems or to provide specific services in exchange for payment. 'Aggregators' are digital intermediaries or marketplaces for a buyer or user of a service to connect with the seller or the service provider. They have been classified under several categories such as ride-sharing services, food and grocery delivery services, logistic services, e-marketplace for wholesale and retail sale of goods and services, travel and hospitality, etc.
Social Security Coverage for Gig Workers
The Code provides for the registration of gig workers, a specific social security fund for them, and the formulation of social security schemes related to life and disability cover, health and maternity benefits, old age protection, education, housing, provident fund, etc. tailored to their needs. It also stipulates coverage of gig workers and their families under the ESI framework. By implementing such measures, the Code seeks to provide social security coverage to a significant number of workers who form part of the ever-growing and dynamic gig economy.
Aggregators to make Social Security Contributions for Gig Workers
The Code requires an aggregator falling within the specified categories to contribute towards the social security fund for gig workers. Such contributions will be at a rate of 1-2% of the aggregator's annual turnover (exclusive of any tax, levy, and cess paid or payable to the Central Government), as notified by the Central Government, but not exceeding 5% of the annual amount paid or payable by him to his gig workers. The Code also provides for the regulation of aggregators who engage gig workers. As such, aggregators who consider gig and platform workers engaged by them as "independent contractors" and do not provide social security benefits on this basis will now be required to provide such benefits to them.
Reduction of Qualifying Period for Receiving Gratuity
While the Code maintains status quo of the qualifying period of five years of continuous service for regular employees to receive gratuity, it reduces the qualifying period for working journalists to three years and entitles fixed-term employees to receive gratuity on a pro-rata basis instead of five years of continuous service. Thus, going forward, employers would also need to pay gratuity to fixed-term employees at the end of their service.
ESIC Empowered to Pay Benefit to Employees and Recover from Principal Employer in Certain Circumstances
Under the ESI Act, if a principal employer fails or neglects to pay contributions to employees and thereby disentitles them to certain benefits, or an appropriate scale of benefits, the ESI Corporation ("ESIC") may pay the aggrieved employees the benefits they are rightly entitled to and recover such amount from the employer. The Code expands the scope of this provision to include the employer's failure or neglect to insure (i) an employee at the time of his appointment, which deprives him of entitled benefits and (ii) employee on/after the date of accident resulting in personal injury, which disentitles him to receive dependent benefit or disablement benefit. In such cases, ESIC is empowered to provide the entitled benefits to the concerned employees and recover from the employer the capitalized value of such benefits, after adjusting any contribution/interest/damages that the employer is liable to pay for non-payment or delayed payment of requisite contributions.
Limitation Period for Initiating Proceedings under ESI and EPF
Under the EPF Act and ESI Act, no limitation period is prescribed for recovery of past dues from employers. Further, no formal direction or guidance has been given by the respective authorities with regard to the period of assessment for past non-compliance. This creates undue hardships for employers against whom the EPF/ESI authorities initiate recovery proceedings for any retrospective period, as per their discretion. The Code provides a limitation period of five years for such proceedings and thereby safeguards the employer's pecuniary interest. As such, employers will be able to estimate the maximum liability for past non-compliance under the Code.
Employment Opportunities through Career Centres
The Code will replace the existing employment exchanges with career centres that provide career services through registration of employers and job-seekers as well as collection and dissemination of employment-specific information, apart from provision of vocational guidance, career counselling, and guidance for starting self-employment. The Code thus seeks to enhance employability and employment opportunities and enhance the skill development system to create more jobs and employment in the country.
Enhanced Penalty and Compounding of Offences
The Code provides for graded and enhanced penalties for various offences, which may be compoundable subject to certain conditions. While the maximum fine for a contravention may extend to INR 1,00,000 for certain offences, and even go up to INR 3,00,000 for subsequent contravention, the penalty of imprisonment may vary from two months for a first offence to three years for second or subsequent contravention after previous conviction.
Overall, the Code provides a much wider social security coverage to a greater number of employees and workers. including gig workers. By bringing uniformity in the definition of 'wages', it seeks to provide meaningful social security cover for beneficiaries and prevent employers from reducing their liability by adopting creative salary structures. Further, by prescribing a limitation period, the Code seeks to curb corruption in enforcement, bring clarity on employer's liability for past dues, and ease their compliance obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.