How Upcoming Labour Codes Could Affect Your Salary, Gratuity, and PF

The introduction of Labour Codes in India marks a significant shift in the landscape of employee benefits, rights and protections. As part of these reforms, four labour codes are designed to replace 29 current central labour laws relating to wages, social security, occupational safety and industrial disputes.

India has a unique opportunity to become a manufacturing hub as companies adopt the “China+1” strategy. To attract foreign investments, it may be crucial to enforce labour codes that bring in transparency, simplification & digitization in compliance, provide flexible workforce models and ensure social security for all, making India more competitive in the global manufacturing landscape.

Although all four Labour Codes were notified by 2020, their implementation has been pending for over four years. State governments are required to notify rules under these codes, and to date, 34 states and Union Territories have published draft or final rules under one or more of the labour codes. However, the Central Government is yet to announce the date of implementation of these labour codes.

Impact of Labour Codes

The Labour Codes are designed to empower employees by enhancing their rights and protections. Employees are encouraged to understand the implications of these changes and how they can benefit from them.

Once in force, the Labour Codes may have an impact on employee hiring models, employee benefits and other HR and payroll policies affecting employees. Some key impact areas of the Labour Codes that impact employees are discussed below.

Uniform definition of ‘wages’

Under the current laws, varying definitions of ‘wages”http://economictimes.indiatimes.com/”salary‘ are used to calculate benefits, leading to a lack of uniformity, multiple interpretations, and frequent litigation.

To address this issue, one of the key changes introduced by the labour codes is the standardization of the definition of ‘wages’ for calculating benefits across all labour codes, including Gratuity, Provident Fund, Employees’ State Insurance, and Statutory Bonus.

Along with uniformity, the new definition also increases overall benefits in the hands of employees. For example, under the current law, an employee is eligible for gratuity on termination of employment at the rate of 15 days’ basic salary for each completed year of service. Under labour codes, gratuity will be 15 days’ wages (as defined in labour codes and will cover components other than basic salary also) for each completed year of service.

For Provident Fund, for 1 year from implementation of Labour Codes – if an employee’s basic salary exceeds the threshold ceiling as defined under current scheme (currently, Rs. 15,000), there may be no impact on Provident Fund contributions.

However, there is ambiguity regarding the coverage of various components of remuneration within the definition of ‘wages’ – which requires clarification from the authorities.

Definition of ‘worker’ and its impact

The definition of ‘worker’ under the labour codes closely aligns with the definition of ‘workman’ under the existing Industrial Disputes Act, 1947. Employees who are not engaged in ‘supervisory’, ‘managerial’, or ‘administrative’ roles may qualify as ‘workers.’

While the definition of ‘workman’ under current labour laws had limited applicability-primarily concerning industrial disputes and retrenchment-the definition of ‘worker’ in the Labour Codes is significantly broader.

Individuals classified as ‘workers’ will be entitled to additional benefits, including overtime pay, leave encashment, retrenchment compensation (where applicable). Moreover, there are specific provisions that apply exclusively to ‘workers,’ affecting various policy-related aspects, such as working hours, annual leave, standing orders, etc.

However, identifying employees who may qualify as ‘workers’ under the labour codes can be challenging due to the lack of clarity in the definition. The terms ‘supervisory,’ ‘managerial,’ and ‘administrative’ have not been defined, and its interpretation has been a matter of extensive litigation in the past (under the existing laws).

Impact on HR / Payroll policies

The Labour Codes significantly influence various aspects of HR and payroll policies. Some provisions within the Labour Codes overlap with existing state-specific Shops and Establishments laws (which are not subsumed under Labour Codes), leading to potential conflicts, particularly regarding working hours, leave, and similar matters.

Employees working in organizations with operations across multiple states may notice variations in policies as they would depend on state rules under the labour codes. Furthermore, since certain provisions of Labour Codes apply exclusively to ‘workers’, it will need to be seen whether the policies would differ for different levels / bands in an organisation.

Social security for gig and platform workers

The Labour Codes formally define the terms ‘gig worker’ and ‘platform worker’ and also extend the coverage of social security benefits to such workers. Under the Labour Codes, the Central Government is empowered to formulate social security schemes for gig and platform workers covering life and disability cover, health and maternity benefits, old age protection etc. Such schemes may be funded by the Central Government, State Government and aggregators, who may be required to contribute 1-2% of their annual turnover towards the social security fund.

This is a significant step towards providing social security to a segment of workforce that has largely remained unregulated up until now.

Workforce models

The Labour Codes explicitly prohibit the use of contract labour for the ‘core activities’ of an organization, except in certain exceptional circumstances. On the other hand, fixed-term employment has been officially recognized as a valid employment model, subject to specific conditions and compliance requirements.

For example, individuals may take up fixed term employment which will be valid for specific time-period instead of taking up permanent employment. If such fixed term employment is for more than 1 year, the employee will be eligible for gratuity under the labour codes which is only available after 5 years of employment under the current law.

Furthermore, the codes empower states to implement flexible work arrangements. Some states, such as Haryana and Odisha, have included flexible working options in their draft rules, which also allow organizations to adopt a four-day work week.

The recognition of fixed-term employment and the introduction of flexible work arrangements provide employees with more options for work-life balance. Employees should explore these opportunities and discuss flexible working models with their employers.

Way forward

The new Labour Codes represent a transformative opportunity for employees in India, enhancing their rights and protections in the workplace. By getting to know these changes and actively engaging with their organizations, employees can ensure they benefit from better working conditions and opportunities that these reforms are designed to deliver.

The article is authored by Puneet Gupta, Tax Partner, EY India