Wage code discussion
Overview
This meeting focused on discussing the implementation of the new wage code in India, particularly
how to restructure existing CTC (Cost to Company) structures to comply with the 50% wage
requirement. The session, led by Kumar, addressed key changes in labor laws where 29 existing acts
have been consolidated into four codes: Code on Wages, Social Security Code, Occupational Safety
Code, and Industrial Relations Code. The primary focus was on the Code on Wages 2019, which
mandates that at least 50% of an employee's total payment must be classified as "wages" (primarily
basic salary).
Key Concepts or Theories:
• 50% Wage Rule: Non-wage components cannot exceed 50% of total payment
• Wage Definition: Includes basic salary, dearness allowance (DA), and retaining allowance
• Restructuring CTC: Methods to adjust salary structures without changing net pay or total CTC
• Compliance Impact: Changes to PF, ESIC, gratuity, and bonus calculations based on new wage
definition
Important Questions Raised:
• How should variable pay and performance bonuses be treated under the new wage code?
• What is the effective implementation date of the new wage code?
• How should companies handle the increased cost of employer contributions for PF and gratuity?
• What approach should be taken for existing employees versus new joiners?
Key Takeaways and Summary of Learning Objectives
• The new wage code consolidates 29 existing labor laws into four codes, with the Code on
Wages 2019 being the focus of this discussion
• At least 50% of an employee's total payment must be classified as "wages" (primarily basic
salary)
• If non-wage components exceed 50%, the excess amount must be reclassified as wages for
compliance purposes
• Companies need to restructure salary components to ensure compliance while minimizing
impact on net pay
• The restructuring will affect calculations for PF, ESIC, gratuity, and bonus
• Companies should consider implementing changes for new joiners immediately while planning a
transition strategy for existing employees
Topic 1: Understanding the New Wage Code
The new wage code is not entirely new legislation but rather a consolidation and categorization of
existing labor laws in India. Under the leadership of Santosh Gangwar, Minister of Labor, the
government has consolidated 29 existing acts into four codes: Code on Wages, Social Security
Code, Occupational Safety Code, and Industrial Relations Code. The Code on Wages 2019
incorporates four previous acts: Payment of Wages Act 1936, Minimum Wages Act 1948, Payment
of Bonus Act 1965, and Equal Remuneration Act. A significant change is the removal of the schedule
of employment for minimum wages, which previously categorized wages based on industry type.
Instead, the government has introduced floor wages, giving employers more flexibility to define
wages based on working conditions rather than industry categories.
Relevant Q&A
Dipti: What was the schedule of employment?
Kumar: It was how we categorized different establishments. Different industries had different
minimum wage requirements.
Arshad: If the 50% wage requirement is 15,000 but a particular state's minimum wage is 18,000 or
20,000, what happens then?
Kumar: The Code on Wages sets the requirement that 50% should be wages. Minimum wages are
still applicable, but the schedule of employment categorization has been removed.
Topic 2: The 50% Wage Rule Implementation
The core requirement of the new wage code is that at least 50% of an employee's total payment
must be classified as "wages," which primarily consists of basic salary. If non-wage components
(like special allowances, HRA, etc.) exceed 50% of the total payment, the excess amount must be
reclassified as wages for compliance purposes. This reclassification impacts various statutory
calculations including PF, ESIC, gratuity, and bonus, as these are typically calculated based on basic
salary. For companies already maintaining basic salary at 50% or more, no restructuring is needed.
However, companies with lower basic salary percentages will need to restructure their CTC
components. The restructuring should aim to maintain the same CTC and net pay while ensuring
compliance with the 50% wage rule.
Relevant Q&A
Juanita: If gross salary is 50,000, then basic should be 25,000 (50%). Is this structure correct?
Kumar: Yes, that's correct. Basic should be 50% of the total payment.
Ajai Singh: Can we have basic plus DA more than 50%?
Kumar: Yes, you can pay more than 50% as basic. The government has set a minimum requirement,
not a maximum.
Kunal: If CTC is 100 but after performance evaluation we give 110, how does the 50% rule apply?
Kumar: The entire additional amount will go into Part B (non-wage). The 50% rule applies to the
actual payment, not projections.
Topic 3: Impact on Statutory Contributions
The new wage code significantly impacts statutory contributions like PF, ESIC, gratuity, and bonus.
For PF, if a company is already paying the minimum required contribution (1,800 rupees or 12% of
15,000), there may be no change. However, if basic salary increases due to restructuring, both
employer and employee PF contributions will increase. For ESIC, the calculation will now be based
on 50% of wages rather than gross salary, potentially changing the eligibility of employees for ESIC
coverage. Gratuity calculations will also be affected as they are based on basic salary, which will
increase under the new structure. Companies need to decide whether to absorb the additional cost
of increased statutory contributions or adjust other allowances to maintain the same CTC.
Relevant Q&A
Akash: If basic changes, PF will change, then how do we handle this?
Kumar: The additional employer contribution can be adjusted from special allowance. You should
inform employees that their net pay might reduce slightly because more money is going into their
PF.
Ajai Singh: If an employee's current wage is 11,000 in a 90,000 CTC, how do we handle this?
Kumar: When restructuring, you'll need to ensure the basic is 50% of total payment. This will
significantly increase the basic salary, affecting PF and other calculations.
Anuj: If ESIC is currently calculated on gross salary, will it decrease when calculated on 50% of
wages?
Kumar: Yes, ESIC will be calculated on 50% of wages, which may reduce the ESIC contribution and
benefits for some employees.
Topic 4: Implementation Strategy and Transition
Companies need a strategic approach to implement the new wage code. For new joiners, the
recommendation is to immediately structure their CTC according to the new requirements. For
existing employees, companies can consider implementing changes during the annual increment
cycle to minimize the impact on take-home pay. The transition should be carefully managed with
proper communication to employees about why changes are being made and how it affects their
compensation. While the effective date mentioned was November 21, 2023, there is still some
ambiguity, and many companies are waiting for further clarification before full implementation.
Relevant Q&A
Bashistha: What about existing employees versus new joiners?
Kumar: For new joiners, implement the new structure immediately. For existing employees, you may
need to adjust gradually, possibly during increment cycles.
Rahul: What is the effective date of implementation?
Kumar: The effective date mentioned is November 21, 2023, but there is still some ambiguity. Many
companies are waiting for further clarification.
Pooja: Can we create additional pay elements to handle the restructuring?
Kumar: There's no need to create additional elements. You should restructure existing components
to meet the 50% wage requirement.
Topic 5: Special Cases and Exceptions
The discussion covered several special cases including gig workers, contractual employees, interns,
and consultants. Gig workers and fixed-term employees who complete at least one year of service
will be eligible for gratuity on a pro-rata basis. Regular contractual employees who are on a
company's payroll (not third-party) need to complete 5 years for full gratuity eligibility. Interns and
apprentices are generally not covered under employee categories and thus not subject to the wage
code requirements. Consultants who are paid retention charges and have TDS deducted under
section 194J are not considered employees and are not covered under the wage code.
Relevant Q&A
Dipti: For contract workers with basic and special allowance, do we need to give gratuity after 1
year of service?
Kumar: If they are direct contractual employees on your payroll, they will be eligible for pro-rata
gratuity after 1 year.
Arshad: What about interns? Are they covered?
Kumar: Interns, especially those from educational institutions, are not typically covered under
employee categories. They are not eligible for benefits like PF or ESIC.
Juanita: What about consultants who are over 60 years old?
Kumar: Consultants are not employees. If you're deducting TDS under section 194J, they are
business partners, not employees, and the wage code doesn't apply to them.
Actionable Next Steps / Assignments
• Analyze current CTC structures to identify employees whose basic salary is less than 50% of
total payment
• Create a transition plan for implementing the new wage structure, with different approaches for
new joiners and existing employees
• Prepare reports for management showing the financial impact of the restructuring, particularly
on PF, ESIC, and gratuity costs
• For employees who will be newly eligible for ESIC, register them on the ESIC website before
implementing deductions
• Communicate changes to employees, explaining why restructuring is necessary and how it
affects their compensation
• Consider implementing changes during the annual increment cycle to minimize impact on take-
home pay
Supplemental Resources and Readings
• Code on Wages 2019 document with latest updates
• List of 29 existing labor acts that have been consolidated into four codes
• Supreme Court ruling on mandatory basic salary requirements
• ESIC website for employee registration
• PF ECR reports for compliance verification