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There is lot of buzz in the industry on effective date for implementation of new labor laws and their impact on existing Payroll policies, procedures and systems. Central government introduced new labor laws with a aim to consolidate, rationalize, and simplify the provisions of various existing labor laws.

Below legislations subsumed into The Code on Wages, 2019-

  1. The Payment of Wages Act, 1936
  2. The Minimum wages Act, 1948
  3. The Payment of Bonus Act, 1965
  4. The Equal Remuneration Act, 1976

How Salary Structure, Take Home Salary & Retirement Benefits gets effected?

According section 2(y) of The Code on Wages, 2019-

"WAGES" means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed.

Wages Includes - basic pay, dearness allowance & retaining allowance.

Code on Wages, 2019 - Impact Analysis on Salary Structure, Take Home salary and Retirement Benefits

Exclusions from Wages

(a) statutory bonus

(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;

(c) Employer Contributions pension or provident fund,

(d) any conveyance allowance or the value of any travelling concession;

(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

(f) HRA;

(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;

(h) any overtime allowance;

(i) any commission payable to the employee;

(j) any gratuity payable on the termination of employment;

(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment:

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause:

Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g) and (h) shall be taken for computation of wage.

Explanation.--Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee;

 

Analysis

  • Specified allowances should not exceed 50% of total remuneration.
  • Basic+ DA + Retaining allowances should be 50% or more of total remuneration.
  • However, Gratuity & Ex gratia payments at the time of employment termination are excluded from 50% cap (#point no.1)
  • Salary payments in kind shall not exceed 15% of total remuneration & over and above 15% should be included in wages (i.e., Basic + DA + Retaining allowances)

Impact

With the new definition of "wage" -

  • Salary Structure needs to be changed ( limiting other allowances to 50%).
  • Tax liability of employees would increase due to limiting all other allowances to 50% of total wages, which will lead to lower take home salary.
  • Take home salary of employee will be reduced. (Due to Increase in Employer share of PF would reduce fixed salary of employee).
  • Gratuity payable & EL encashment payables will be higher
  • Employees will get benefited on account of social security payments ( Employer PF contribution, Gratuity & EL encashment).
  • With the increase (i.e., 50% or more) in basic wages component, Cost to employer will be increased on account Employer PF share, Gratuity Payment & EL encashment.
 

Concluding Comments

Government initiative to reform labor laws is a welcome move. The code on wages, 2019 simplifies laws relating to wages and provisions drafted in favor of employees considering in employees welfare through social security schemes. Employees take home salary may reduce due to increase in employer share of social security payments consequently cost to employers will increase.

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