Come April 2021, Take-home salaries of employees may reduce as private-sector employees are set to fall as companies need to restructure pay packages of employees as per the new wage rules.
The new act aims to amend and consolidate the laws relating to wages, bonuses, and matters connected therewith. The Code on Wages Bill, 2019 subsumes four labor laws — Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act.
The new compensation rules, which are part of the Code on Wages passed by Parliament last year, become effective from next financial year. As per the new rules, allowances can not be more than 50% of the total compensation. It means basis pay (in government jobs, basic pay plus dearness allowance) will have to be 50% or more of total pay from April.
From April 2021, salary slips, provident fund (PF) and gratuity components, take-home pay, and even balance sheets of India Inc will be impacted, as per the government’s new compensation rules, which are part of the Code on Wages passed by Parliament last year.
As per the new rule, allowances can not be more than 50% of the total compensation. Basic pay will have to be 50% or more of total pay from April. Companies will have to shell out more towards their contribution to the employees’ PF kitty and gratuity payout.
Usually, most of the companies keep the non-allowance part of an employee’s pay packages less than 50%. Due to this pay package of most of the employees are likely to undergo change. Companies will have to increase the basic pay of employees to meet the new requirement. The revision will result in a reduction in take-home pay as the provident fund (PF) contribution of most of the employees will go up. PF is calculated as a percentage of basic salary.
“The labor code indicates that if the ‘wages’ bucket falls below 50% of the remuneration, then some portion of components excluded from the ‘wages’ bucket will be added to it so that this bucket becomes at least 50% of the remuneration for the purpose of calculating different payments such as social security contributions, gratuity, leave encashment, etc,” said Anshul Prakash, partner (employment labor and benefits) at Khaitan & Co.
According to experts, the new rules may result in the restructuring of salaries for employees whose employers are contributing to the provident fund (PF) based on actual salary. Currently, it is voluntary on part of the employer and employee to make PF contributions on actual wages in case the monthly salary of the employee is over ₹15,000. The employer and employee PF contribution can be limited to 12% of ₹15,000. In such cases, PF contribution may not be impacted.
Over 29 labour laws have been merged into four codes and one Code on Wages Bill, 2019.
The Occupational Safety, Health and Working Conditions Code, 2020, consolidates and amends the laws regulating the occupational safety, health, and working conditions of persons employed in an establishment and related matters.
The Industrial Relations Code, 2020, consolidates and amends laws relating to trade unions, conditions of employment in industrial establishments, or undertakings, investigation, and settlement of industrial disputes.