The Code on Wages, 2019

Posted In:

Background

Pursuant to the recommendations of Second National Commission on Labour and with a view to rationalize the central labour enactment relating to wages, the Ministry of Labour and Employment (the “Ministry”) introduced the Code on Wages, 2017 in the Lok Sabha on August 10, 2017. However, the said code lapsed upon dissolution of the Sixteenth Lok Sabha.

On July 23, 2019, the Ministry re–introduced the Code on Wages, 2019 (“Code”) in the Lok Sabha. Both Houses of the Parliament have now passed the Code. The Code consolidates, subsumes & transforms four central labour laws relating to wages, namely: (a) the Equal Remuneration Act, 1976; (b) the Minimum Wages Act, 1948 (“MWA”); (c) the Payment of Wages Act, 1936 (“PWA”); and (d) the Payment of Bonus Act, 1965 (“PBA”) (collectively, “Current Laws”).

Below are the key highlights of the Code and the changes that are going to be introduced to the applicable legal framework: –

1. Increase in Scope & Applicability

» Presently, PWA is applicable to a factory and other identified industrial establishments, whereas MWA is applicable to scheduled employments only. This will change with the Code.

» The Code, once notified, will extend the benefits & make the requirements prescribed with respect to payment of wages and minimum wages to all types of establishments irrespective of their nature of business or activities.

» Broadly speaking, benefits under the Code extend to all employees – which includes people performing skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work. Therefore, the scope & applicability of the benefits that were earlier available under PWA and MWA has been expanded considerably under the Code.

2. Wage Computation [Clause 2(y)]

» The Code proposes a common definition of the term “wages” as opposed to the separate definitions of “wages” provided under each of PWA, MWA and PBA. This will enable employers to take a consistent and uniform approach and avoid multiple interpretations.

» The Code introduces a special methodology for computation of “wages” and in certain circumstances, various components of wages that are ordinarily understood to be excluded from the definition of “wages” will be considered as forming part thereof.

» For instance, components like employer’s contribution towards pension or provident fund, house rent allowance, overtime allowance, conveyance allowance, commission payable to employee etc. are not conventionally considered as “wages”. However, the Code provides that in the event payments made to employees under these identified components exceed 50% of all remuneration payable as “wages” under the Code, such excess amount shall be deemed as remuneration and will be considered as “wages”.

» This is a unique provision and is seemingly aimed at compensation structures where wages are less than 50% of the total remuneration of the employee. This provision could result in situations where the “wage” of an employee has to be recalculated. For e.g., if the aggregate of commission / sales incentive, house rent allowance and overtime exceeds 50% of the monthly salary for that particular month, there could be a possibility of re-computation of “wages”.

»  In these situations where the “wage” could fluctuate, computation of bonus under the Code or payment of “wages” for overtime work, would also fluctuate and get impacted.

» Additionally, this could potentially have a knock-on impact if the proposed labour code on social security relies on the given definition of “wages” under this Code; in which case any pay-outs / contributions (like gratuity, provident fund, retrenchment compensation) that are linked to “wages” would also fluctuate / vary.

3. Floor Wages & Minimum Wages [Clauses 6(6) & 9] – The Code introduces a new concept of “floor wages”, which rates will be fixed by the Central Government taking into account the minimum living standards of a worker. Once the Code is enacted, the minimum rates of wages fixed by the State Government cannot be less than floor wages as determined by the Central Government.

4. Overtime [Clause 14] – The Code has amalgamated the applicable overtime rate across board and prescribes that such rate will not be less than twice the normal rate of wages.

5. Time limit for payment of wages [Clause 17]

» Under the present PWA, the employer can pay wages to their employees within 10 days after expiry of the wage–period, in case the establishment has more than 1000 employees. This will now change.

» The Code makes it mandatory for the employer to pay within 7 days from expiry of the wage period, irrespective of the size of the establishment.

» The Code also mandates payment of wages, within a period of 2 working days, from the date of the employee’s removal, dismissal, retrenchment or resignation from employment. While the current PWA has a similar provision for payment of wages within 2 days from the date of termination of his employment, payment of wages on account of voluntary resignation by employees has been brought within the same time limits. This would imply that companies would have to expeditiously process F&F settlements for their exiting employees.

6. Prohibition of discrimination [Clause 3] – The Code expressly prohibits any discrimination on the basis of gender.

7. Register [Clause 50] – The Code consolidates the requirement of multiple registers under PWA, MWA and PBA and seems to provide for a single register containing details with regard to persons employed, muster roll, wages, etc. This may lead to easing out periodical compliances for employers under Current Laws. However, the form of this register is yet to be prescribed.

8. Inspection [Clause 51]

» The Code provides for a single authority viz. Inspector–cum–Facilitator who is responsible for inspection of establishments assigned to him / her with respect to all compliances under the Code. The Inspector–cum–Facilitator may also advise the employers and workers relating to compliances under the Code.

» The Code provides for the inspection to be carried out on the basis of an inspection scheme, as laid down by the appropriate Government, which may also provide for generation of a web-based inspection and calling of information electronically.

9. Claims & opportunity to cure [Clauses 45(6), 54(3) & 59] – Claims under the Code will be adjudicated and determined by an authority appointed by the appropriate Government. An application for adjudication of claim arising under this Code can be filed before the relevant authority within a period of three years from the date on which the claim arises, as against the existing time period varying from few months to a year under the Current Laws. This will provide a longer opportunity to employees to initiate action for their claims.

10. Offences, penalty & compounding [Clauses 54 & 56]

» Broadly speaking, the Code contemplates 3 kinds of contraventions i.e. (a) payment of an amount that is less than the amount due to the employee under the Code; (b) non-maintenance or improper maintenance of records under the Code; and (c) any other contravention of the Code.

»  Where an employee has been paid an amount that is lesser than the amount due to the employee under the Code, the employer is punishable with a fine of Rs. 50,000 for the first contravention. If the employer is again convicted for a similar offence within 5 years from the date of commission of the first offence, then on such second or subsequent offence the employer shall be punishable with imprisonment for a term that may extend to 3 months or with a fine of up to Rs. 1 Lakh or with both.

» For not maintaining proper records, the employer is punishable with a fine of up to Rs. 10,000.

» For any other contravention, the employer is punishable with a fine of Rs. 20,000 for the first contravention. If the employer is again convicted for a similar offence within 5 years from the date of commission of the first offence, then on such second or subsequent offence the employer shall be punishable with imprisonment for a term that may extend to 1 month or with a fine of up to Rs. 40,000 or with both.

» The Code allows the employer to be given an opportunity to cure his / her first–time contravention of ‘certain’ provisions of the Code (i.e. offences other than payment of amounts lesser than amounts due under the Code). In such cases the Code prescribes that the Inspector–cum–Facilitator shall give an opportunity to the employer to comply with the Code within identified time period and if complied with, no prosecution shall be initiated. No such opportunity to cure a breach of the Code shall be granted if violation of similar nature is repeated within a period of 5 years from the date of first violation and a prosecution shall be initiated right away.

» Please note that such opportunity to cure is not available with respect to offences involving non–payment of the amounts due to an employee as per the provisions of the Code.

» The Code also provides for an ability to compound offences under the Code, at any time before or after initiation of the prosecution. Offences under the Code can be compounded for a sum of 50% of the maximum fine prescribed. However, once compounded, another compounding will not be permitted within a period of 5 years of the commission of a similar offence which was earlier compounded.

Concluding Remarks

The Code has been passed by the both the Houses of the Parliament and has also received Presidential assent. Its date of enforcement is yet to be notified in the Official Gazette, upon which, the Current Laws relating to wages will stand repealed.

On one hand the Code emphasizes on compliance as it increases the cost of non-compliance. Gone are the days when employers could take it easy on non-payment of overtime wages as Shops & Establishments laws hardly provided a deterrent with a paltry fine. At the same time, diligent employers who are willing to comply with the Code get an opportunity to compound the offence. Prior to the Code, only some States had introduced provisions for compounding offences in their respective States. The Code makes this opportunity to compound uniformly available and is a step forward in the direction of ease-of-business. In some cases, the Code also provides an opportunity to rectify breach and in which case employers need not worry about prosecution.

Authors:

Rachit Bahl, Partner
Atima Mukherjee, Senior Associate

Date: September 5, 2019