The Code on Wages, 2019 ("Code"), which was enacted on August 8, 2019, will become effective from the date to be notified by the Central Government. The Government aims to implement the Code, along with the other three labour codes, by year end or early next year. The draft rules under the Code ("Rules") were published on July 7, 2020 to seek public feedback.
The Code will consolidate four Central labour enactments on wages, viz. the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 ("Bonus Act"), and the Equal Remuneration Act, 1976. As its title suggests, it incorporates all the essential elements related to wages and, to an extent, even regulates the wages of highly remunerated, managerial, and supervisory employees.
This article analyzes the key salutary changes and challenges under the Code that will impact the private sector.
Defining Workers and Employees
The Code defines both 'workers' and 'employees', with the former being a subset of the latter, and excludes from the ambit of 'workers' such persons who undertake managerial work or are engaged in supervisory work for wages exceeding INR 15,000 per month or an amount notified by the Central Government from time to time. In doing so, it provides legislative coverage to all employees while extending greater protection to workers.
Minimum Wage Coverage to Greater Number of Workers
The existing law regulates the Minimum Wage ("MW") of only those employees who work in scheduled employments. The Code seeks to regulate the MW of certain employees in all employments. The Central Government will set the Floor Wage ("FW") under the Code, which may vary for different geographical areas. The MW payable to employees fixed by the State Governments cannot be below the FW notified for that area by the Central Government, and no employer can pay wages less than the notified MW for the area, establishment, or work, or discriminate amongst employees doing the 'same work or work of a similar nature' on gender basis. The MW under the Code will be determined according to the employee's skill, the arduous nature of the work performed by her/him, the geographical location of the place of work (i.e., whether metropolitan area, non-metropolitan area, or rural area), and other prescribed factors. From a conjoint reading of the Code, the Rules, and Schedule E to the Rules, it appears that MW under the Code will be fixed for workers engaged in specified occupations and not for all employees.
Increased Employee Costs
The comprehensive definition of 'wages' under the Code elaborately lists the 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 the total remuneration of an employee, the amount that exceeds the one-half (or such percentage as notified) will be deemed to be 'wages'. Hence, going forward, the various employment benefits, such as gratuity, retrenchment compensation, maternity benefit etc., may need to be calculated on at least 50% of an employee's total monthly remuneration and thereby increase an employer's cost per employee.
Curtails Employer's Right to Deductions from Wages of Managerial and Supervisory Employees
The Code requires employers to pay full wages to their employees without any deductions, except those authorized under the Code and in such manner, to such extent, and subject to such conditions as prescribed. Since the new definition of "employee" includes even the managerial and supervisory employees, employers henceforth may not be able to enforce clawback provisions negotiated with such employees, or make adjustments from the final payouts to such employees at the time of their exit from employment.
Status Quo on Overtime Wages to Managerial and Supervisory Employees
The Code requires an employer to pay overtime wages to employees working in excess of the prescribed daily hours. However, this obligation is in respect of the employees whose MW is fixed under the Code. That said, assuming that the MW of workers will be fixed under the Code, the managerial and supervisory employees who do not qualify as workers may not be entitled to overtime wages under the Code. Unless exempt, such employees may nevertheless be entitled to overtime wages under the State-specific Shops and Establishments Act applicable to them.
Varied Bonus Applicability for Different States
Under the Bonus Act, an employee is eligible to receive statutory bonus if she/he is covered under the prescribed wage ceiling of INR 21,000. The Code does not prescribe a wage ceiling for such coverage. Instead, it empowers the State Governments to fix such ceiling. Therefore, each State may have a different wage ceiling, rendering similarly paid employees eligible for statutory bonus in some States but ineligible in other States. This lack of uniformity could make compliance cumbersome for employers that have pan-India operations.
Additional Duties of Employers in respect of Contract Employees
The Rules require employers to pay the amounts payable to contractors in advance so that the employees engaged through such contractors receive timely payment of their wages in accordance with the Code. Further, if a contractor fails to pay minimum bonus to his employees and the employer receives written information about the same, on confirmation of such failure, the employer will become responsible for such payment.
Duty to Supply Information and Provide Compliance Advice
Under the existing laws, Labour Inspectors have a duty to enforce statutory compliance by prosecuting and penalizing non-compliant employers. The Code modifies the duties of Labour Inspectors to make them Inspector-cum-Facilitators. For offences not relating to underpayment of amount due to an employee, the Inspector-cum-Facilitators have to provide compliance information and advice to such defaulting employers and an opportunity to comply with the Code, instead of prosecuting them for the non-compliance. However, such opportunity is not available for repeat contravention by an employer within a period of five years.
Web-based Inspection Schemes
The Code seeks to eliminate arbitrariness and malpractices in inspections by introducing a web-based inspection scheme. Further, it confers jurisdiction on the Inspector-cum-Facilitators based on randomized selection of inspections rather than specific geographical limits and requires them to electronically call for inspection related information from employers. Thus, the Code capitalizes on technological advancements to do away with physical visits by select Inspectors and enables conduct of inspections remotely.
Enhanced Limitation Period for Claims by Employees
The Code enhances the limitation period for filing of claims by employees to three years as against the period of six months to two years prescribed in the current legislations. Further, it empowers the authority hearing and determining claims of employees arising under the Code to entertain such claims even after such limitation period if sufficient cause for delay is shown by the concerned employee. This will protect employees by giving them more time to settle their claims and may subject employers to accountability for a longer period of time.
Enhanced Penalty and Compounding of Offences
The Code provides for a graded penalty and enhanced monetary fines for different types of contravention. The repeat contravention by an employer within a period of five years after the first conviction is punishable with imprisonment, or enhanced fine, or both. Further, the offences not punishable with imprisonment are compoundable by employers paying of a sum of 50% of the maximum fine provided for the offence under the Code. While higher fine may act as an effective deterrent and check non-compliance by employers, making certain offences compoundable will balance their interest.
Overriding Effect of the Code
The Code will have an overriding effect, notwithstanding any other law in force, award, agreement, settlement, or contract of service to the contrary.
In addition, the Code facilitates implementation by removing extraneous provisions, providing uniform definitions, reducing overlapping enforcement authorities, reporting and filing requirements, and thereby reducing the compliance requirements and the costs associated therewith for employers. That apart, its aims to promote transparency and accountability in the enforcement of labour laws, which is an ambitious but urgent measure.
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.