Article: New Labour Codes: Changes, challenges, and impact for employees and employers

Other employee benefits

New Labour Codes: Changes, challenges, and impact for employees and employers

With the revised provisions under the new labour codes to cause enormous impact on both the organisations and their workforce, industry leaders tell People Matters how these will improve the ease of business and what measures are they taking to align practices to the changed laws.
New Labour Codes: Changes, challenges, and impact for employees and employers

India has been trying to reform its labour laws for the past 18–20 years, to bring them in line with the present workplace ecosystems and allow for more uniformity across both the organised or unorganised sectors.

In a historical move, it is finally all set to replace 29 existing labour laws with the four new labour codes, dealing with ‘wages’, 'social security’, 'industrial relations’, and ‘occupational safety’, with an objective to rationalise, consolidate and simplify complex labour legislations.

Industry experts say with the new labour codes, significant changes in organised and unorganised sectors are expected to overhaul workplaces by improving working conditions and revamping existing processes to achieve company outputs more sustainably.

People Matters spoke to industry leaders on the revised provisions under the new labour codes that will have a major impact on the industry and its workforce, how they think these will improve the ease of business and what measures are the organisations taking to align practices to the new laws.

A welcome move

Complex and multiple labour legislations don’t seem to be conducive for the agile and dynamic global economy, thus impacting the ease of business and the wellbeing of employees.  

“Social security, social equity, health, ease of doing business are the most prominent factors driving the need for a reformation of labour laws. Overall, the labour codes will bring in sweeping reforms and enable industries to be more self-reliant and compliance become a way of life,” says Harish TR,  SVP - Head of Human Resources, Maveric Systems.

“We have initiated a comprehensive study of our salary components and structure considering the prospective amendments along with a comprehensive review of HR policies from an employee life cycle perspective, review of standard contracts – CLRA and of employment terms and contracts,” he adds.

The implementation of the labour codes has been in the works for nearly half a decade. Finally approved in 2020, stakeholders have had enough time to gauge the changes to come into effect and their implications.

Lohit Bhatia, President, Workforce Management, Quess Corp, however, notes that since labour is in the concurrent list of the Indian Constitution, all states need to ratify the rules before these can be implemented nationally.

"Currently, about 30 states have initiated the needful by publishing the drafts for stakeholder feedback. The labour codes will ensure the creation of “One India & One law”, reducing the number of laws with often conflicting definition of terms and provisions,  to only codes  four thereby ensuring tremendous ease in doing business," he says.

Definition of ‘Wages’

For organisations, the most important impact would be on wages and components.

Organisations are currently assessing the potential impact of the labour codes, particularly the proposed definition of wages on their compensation policies, benefits and overall compensation structure.

The Code on Wages 2019 as well as the Code on Social Security 2020 (SS Code) introduce a standardised definition of ‘wage’, which was previously an ambiguous concept. Wages now include all types of remuneration including Basic Pay, Dearness Allowance (DA) and Retaining Allowance (RA), applicable to all prospective social security schemes.

“With a comprehensive list of inclusions and specified exclusions with conditions therewith, the code stipulates a 50% cap on allowances like House Rent Allowance, Provident Fund, travelling concessions, and Overtime Allowances, etc., vis-a-vis total remuneration, which will be counted as a part of the remuneration beyond the 50% limit.

"With its wide coverage, including the unorganised sector workers, a uniform definition of wages will help harmonise and simplify the calculation of wages from a social security standpoint, mandating that the overall salary structure of employees be revamped to ensure that basic pay, together with the DA and the RA, makes up 50% of the total wages of the employee,” says MK Padma Kumar, chief operating officer, international development consulting firm IPE Global.

With the new rules providing that the minimum basic wage should be 50% or more of the total CTC, thus contributions to social security should be at least on 50% of such CTC of every individual, Bhatia says this has mostly been a practice at entry level, but needs to be formalised across formal and informal sectors alike right up to top management and leadership. Organisations that currently have a minimum 50% salary as basic wages will be appropriately closer to the final law, while others will have to suitably make these changes to the salary components.

"Employers would also be required to clearly demarcate who are workers among their employees based on their roles and responsibilities as the codes bring in clarity as to workers and their entitlements," he adds.

Equal remuneration across genders: The Code of Wages, like the Equal Remuneration Act now subsumed under it, clearly prohibits discrimination in remuneration on grounds of gender on work done of similar nature and recruitment of employees for work of similar nature.

“IPE Global welcomes this provision and lauds the replacement of the terms ‘men’ and ‘women’, under the old Act, with the term ‘gender’. The Code will help facilitate the inclusion of transgender employees in mainstream work and bridge the gender pay gap across all sectors. A clear definition of the term ‘discrimination’ and recognition of ‘work of equal value’ will help further strengthen the objectives of equity that the Code seek to attain,” says Kumar.

Minimum floor wage: Beyond the older Minimum Wages Act which laid down the procedure for establishing minimum wages, the Code on Wages has also introduced the concept of ‘floor wage’, also applicable to the unorganised workforce.

“This will be determined by the Central government based on the minimum living standards and level of skills of workers across geographical regions based on which state governments shall identify a minimum wage rate, to be revised every 5 years or earlier. Provisions for overtime wages twice the normal wages on an hourly or part-of-hour basis as well as coverage of Employees’ State Insurance (ESI) has also been added to minimise exploitative practices across areas of work. The Code also includes provision for timely payment of wages and is a significant step in reducing regional disparity on this parameter,” says Kumar. 

Changes in EPF & gratuity: Now applicable to both organised and unorganised sectors, the Employee Provident Fund (EPF) and gratuity contributions are set to rise under the Wage Code and the SS Code.  Waiving the pre-existing cap of 5 years of service, the codes permit a 1-year service for employees to collect gratuities.

“The Wage Code also mandates a rise in employer and employee contributions to EPF on the revised basic pay provisions. Thus, while in-hand salary may see a decrease, post-retirement fund is expected to see a rise,” says Kumar.

Aon pulse surveys suggest that 35% organisations are considering to increase their basic pay post-implementation of the Codes and 21% are exploring changes in the compensation structures to be in line with the Codes.

“The main concern facing organisations is that in a year which is seeing one of the highest price and wage inflation in recent years (9.9% as per recent on salary increase surveys), organisations could face additional costs in the form of higher gratuity, leave encashment, provident fund and social security benefits costs if the labour codes are implemented in the current financial year,” says Vishal Grover, Head Wealth Solutions, Aon India.

Aon research suggests that as of March 31, 2021, the top 50 companies of the Nifty 50 Index reported Gross Balance Sheet liabilities against the gratuity scheme to the tune of Rs 80,000 crores. These are backed by assets that cover approximately 80% of the liabilities.

“Once the new definition of Wages is adopted, Gratuity liabilities are expected to increase significantly, particularly for organisations where the basic pay to gross pay ratio has been quite low historically. This would increase the accrual expenses and would require additional cash contributions to maintain funding ratios. Aon’s pulse surveys also suggest that 29% are exploring capping the gratuity benefits at the statutory limit of Rs 20 lakh, which could adversely impact long-tenured and senior staff who have earned large gratuity benefits,” Grover adds.

Quicker full and final settlement: Companies will now have to clear all employee dues, including salaries, leave encashments, reimbursements, etc., within two days of the last working day of the employee from the current 45-60 days after employee exit.

“Often an area of concern, this push will streamline and expedite post-exit clearances, make payroll processes employee -friendly and more robust,” says Kumar.

Maternity benefits: In its pursuit of gender equality at the workplace, the SS Code continues to ensure 26 weeks of paid maternity leave along with creche facilities funded by the employer. Kumar says compliance with this far-seeing provision is certainly expected to enhance workplace participation of women, especially in light of pandemic’s brunt.

Fixed term employment

The Wage Code and the SS Code accord legal recognition to fixed term employees who were earlier excluded from the scope of labour regulations.

Under the new code, employers are mandated to provide employment benefits to fixed term employees at par with those for the permanent workforce, including compensations and gratuity benefits, after 1 year of service.

“This legal protection to contractual workers will go a long way in bridging the existing pay gap between a full-time and fixed employee, strengthen the concept of equal pay for equal work, and reduce reliance on third-party agencies for hiring fixed term employees,” says Kumar.

“Gig and platform workers will be covered in the social security ambit and India, for all practical purposes, will become the first major economy to recognise and support social security for gig and platform workers. Currently an estimated 20- 25 million gig workers in this segment could easily become 100 million by the end of the decade. Providing gig workers social security benefits would benefit the number of workers protected and their families would be provided benefits as well if needed,” adds Bhatia. 

National license

For staffing firms, the biggest benefit will be aligning to the national labour licence regime from the current work order licensing that requires each contractor to obtain a new licence in each district every year to now getting one license for the entire country and all customers for up to five years.

“This alone can create formalisation of employment and faster deployment for seasonal and non-seasonal employees currently deployed in an informal manner. This will cut red tape in employment generation and foster faster hiring across industries," says Bhatia.

‘Code’ blocks

Industry experts, however, say the government needs to plan the implementation in a phased manner.

“A phased implementation will ensure adequate time is provided to implement the same, irrespective of the size and scale of the organisation. There is also a need for educating the workforce/managers/ management in a timely manner. Labour code can’t be retrospective but only prospective,” says Harish.

While there may be conflicting views on the labour code implementation across India, Harish says the key to success is to ensure that a firm start date is provided. This will enable organisations to work per defined project milestones.

“This is probably the first instance where both employees and employers with investors are keenly waiting for the implementation of the labour code,” says Bhatia.

“Given that this needs consensus pan-India, we request the Government of India to have in depth consultations and push for earliest implementations either code by code or integrated. We need to show international investors that India is ripe for the industrial and manufacturing revolution,” he adds.

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Topics: Other employee benefits, Employee Relations, Compensation & Benefits

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