HomeJAGRUK EMPLOYEESWhat Are The 4 Labour Codes? | Analysis & Status Update

What Are The 4 Labour Codes? | Analysis & Status Update

The better labour reforms a country has, the more is the ease of doing business, hence the more business and job opportunities for the nation. Better job opportunities equal better standards of living and less poverty too. Thus, it is always the aim of a country to promote good labour codes and more business. In India, the Labour Acts fall under the Concurrent List of the Constitution. This means that both the Central Government and all the State Governments can regulate labour laws. Currently, we have over 100 labour acts at the states level and over 40 labour acts at the central level. This has only convoluted and complicated the Labour Laws of the country, making ease of doing business not so easy after all!

To straighten out this loopy structure of labour codes, formation of the Second National Commission on Labour took place in 1999. In 2002 the Commission submitted a report which stated that the existing labour laws were too complex with archaic provisions and inconsistent definitions. The Commission’s recommendation was to consolidate existing labour laws into broader groups such as industrial relations, wages, social security, safety, and welfare and working conditions. This will help to improve ease of compliance and ensure uniformity in labour laws across the country. Furthermore, the government acknowledged the Commission’s report and as per their recommendation had 9 laws have been repealed and remaining 35 to be codified. This brought about the existence of 4 new and improved Labour Codes as follows:

  • Code on Wages, 2019
  • The Code on Industrial Relations, 2019
  • Code on Social Security, 2019
  • The Occupational Safety, Health and Working Conditions Code, 2019

How is an Act formed?

  • Firstly, a bill is tabled at the Parliament. This can either be a Private Member Bill or a Government Bill. A private member bill can be introduced by any member of the Parliament. But the chances of it passing are low. Meanwhile, the Government bill is introduced by a Minister and is more easily passed.
  • Secondly, the bill has to be passed by both Lok Sabha and Rajya Sabha. While some bills can pass with a simple majority of 50%, other major bills require a two-thirds majority. If the houses of Parliament feel the bill requires more work, then they can refer it to a Standing Committee.
  • Once both houses pass the bill, it is sent to the President of India for his approval.
  • After the President’s approval, the Act is published in the Gazette of India and any rules pertaining to it are notified. Unless the rules are notified the Act cannot be implemented.
  • Every Act has three parts to its name – Prefix + Name + Suffix. For example,
    • Prefix, such as Amendment or 3rd Amendment 
    • Name, such as Income Tax Act 
    • Suffix, such as year of the first enactment 1961
  • Lastly, the act is implemented.
labour codes

Four Labour Codes Update

Code on Wages, 2019

The Code on Wages Bill’s introduction was in March 2015 as a Draft of Labour Code first. Later, it was put out for public discussion for 30 days. After some initial changes, it was reintroduced at the Second Tripartite meeting in April 2015. It was first presented in the Lok Sabha on August 2017 but it passed on to the Parliamentary Standing Committee. In December 2018, the standing committee submitted its report but due to the dissolution of the Lok Sabha, the bill lapsed. In July 2019, the bill was reintroduced under a new name, Code on Wages Bill.

It was passed by both the Lok Sabha on 30th July 2019 and consecutively by the Rajya Sabha on 2nd August 2019. It received the President’s assent on 8th August 2019. But the implementation date and notification of rules got extended. The first draft of rules was released on 7th July 2020 for the public’s feedback. Once the feedback is received, the committee will review it again. Unless the final rules get notified, the Act cannot be implemented.

The Code on Wages Bill replaces the following four laws:

  • Payment of Wages Act, 1936
  • Minimum Wages Act, 1948
  • Payment of Bonus Act, 1965
  • Equal Remuneration Act, 1976

The major changes with the Code on Wages labour code are:

  • Previous labour codes applied mainly to organized sector of workers and employees. But the new labour codes will include unorganized sector of employees such as freelancers, gig workers, etc. as well.
  • The Central Government now hold power to set a standard national floor minimum wage. State governments will not be able to set a minimum wage below this standard.
  • Clear definitions of “wages”, “allowances”, and “basic”, which will stay same across different acts and laws.

Find more information on code on wages in Code On Wages Bill, 2019 | Complete Analysis.

The Occupational Safety, Health and Working Conditions Code, 2019

This one of the labour codes is going to regulate the health and safety conditions of workers in factories with over 10 employees and all mines and docs. It will replace existing 13 labour law codes relating to safety, health and working conditions. These are as follows:

  • Factories Act, 1948
  • Mines Act, 1952
  • Dock Workers (Safety, Health and Welfare) Act, 1986
  • Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996
  • Plantations Labour Act, 1951
  • Contract Labour (Regulation and Abolition) Act, 1970
  • Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
  • Working Journalist and other Newspaper Employees (Conditions of Service and Miscellaneous Provision) Act, 1955
  • Working Journalist (Fixation of Rates of Wages) Act, 1958
  • Motor Transport Workers Act, 1961
  • Sales Promotion Employees (Condition of Service) Act, 1976
  • Beedi and Cigar Workers (Conditions of Employment) Act, 1966
  • Cine Workers and Cinema Theatre Workers Act, 1981

This labour code’s introduction in the Lok Sabha was on 23rd July 2019. On 9th October 2019, it was referred to a Standing Committee. The committee gave its report on 11th February 2020. The major changes this one of the labour codes will bring are:

  • It will cover all establishments with 10 or more workers. Currently, different states have different minimum employee number for occupational safety labour law compliances. But this will standardize employee count across the country.
  • The Code also bars civil courts from hearing matters under the Code. Therefore, the only judicial recourse for a person aggrieved under the Code is to file a writ petition before the relevant High Court. This can have both its advantages and disadvantages.
upstox

The Industrial Relations Code, 2019

This one of the new labour codes will provide details regarding trade union formations, procedure for strike and lock-outs, standing orders, termination of workers, punishable charges, and resolution of industrial disputes. It will govern the professional relationship between employee and employer. This labour code’s introduced in the Lok Sabha was on 28th November 2019. It was later referred to a Standing Committee on 23rd December 2019. The committee’s report is still due. Once we receive it with the revisions, we can move to implementation process. The Industrial Relations Code will subsume three existing labour law acts which are:

  • The Trade Unions Act, 1926 
  • The Industrial Employment (Standing Orders) Act, 1946
  • The Industrial Disputes Act, 1947

The major changes this labour code will bring about are as follows:

  • Strikes and lock-outs will need a mandatory 14 days notice period. This will make it difficult for both parties to hold strikes and lockouts. Since the situation and pressure of events may change in the period.
  • Provisions of fixed-term employment across the board. So contract labours will benefit.
  • This code will allow the Government to defer, reject or modify awards/orders passed by Industrial Tribunals and the National Industrial Tribunal. This ultimately gives the government power over the judiciary. A similar provision in the Industrial Disputes Act, 1947 was struck down by the Madras High Court in 2011, as it violated the principle of separation of powers by allowing the government to change the decision of a Tribunal through executive action. Hence, final call on this law is awaited.
  • It will make retrenchment threshold of 100 workers in certain industries flexible. A notification from the central or state government will be enough to do the job. Read more about retrenchment limits in different industries in Employee Retrenchment & Lay-Off Rights | Industrial Disputes Act 1947.

The Code on Social Security, 2019

The social security code will ensure access to health care and financial security to employees and workers. It was introduced in Lok Sabha by the Minister of State for Labour and Employment, Mr. Santosh Kumar Gangwar, on 11th December 2019. But it got referred to the Standing Committee on 23rd December 2019. The committee’s report is awaited until Monsoon Session 2020. This is one of the most controversial labour codes. Since it will subsume major labour laws of PF, ESI and maternity. Hence, there was some argument to leave these acts out of it. It will subsume the following nine labour laws:

  • Employees’ Compensation Act, 1923
  • The Employees’ State Insurance Act, 1948
  • Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  • The employment exchange Act, 1959
  • Maternity Benefit Act, 1961
  • Payment of Gratuity Act, 1972
  • Cine Workers Welfare Fund Act, 1981
  • Building and Other Construction Workers Cess Act, 1996
  • Unorganised Workers’ Social Security Act, 2008

It will bring following major changes to labour laws:

  • It retains the existing autonomy of EPFO and ESIC. Thus, rejecting the proposal to merge them into one corporate entity.
  • It also rejects the proposal to let members switch from EPF to NPS and vice versa.
  • Fixed-term contract workers will be eligible for gratuity on a pro-rata basis. Currently, workers are not entitled to gratuity before completing five years of continuous service, as prescribed in the Payment of Gratuity Act, 1972.
  • Employees will get the option of reducing their provident fund contribution. Currently, at 12% of basic salary, employees can reduce it further. It will therefore increase their take-home pay. Although, employer contribution will stay the same.

Watch the video of the new labour codes below.

The four new labour codes are going to come into effect from 1st April 2021. This will in turn make all the companies review their wages and the CTC/salary structure to include the new definition of “wages”. Thus, the following article details the new definition of wages and how it will impact all the companies in the country.

Why the confusion regarding salary?

There are a host of allowances under wages which create confusion among employers and employees as to which ones should be implemented by them. There are two main reasons for the multiple allowances applicable – labour laws and income tax.

Our country has innumerable labour laws and each labour law has a different definition of “wages”. From PF, to ESI, to Gratuity and more, each law has a different definition of “wages”. The different definitions of “wages” lead to confusion. Meanwhile, employers try their best to structure the wages in such a manner that they have to pay as less as possible. On the other hand, employees also try to have minimum allowance deductions so that they get the maximum salary in-hand.

Apart from the above, employees try to get as many deductions and exemptions for their income tax as possible. Hence, they have various allowances like HRA, LTA, Hostel Allowance, TA and Medical Allowance, etc added to their salary structure so that they can ask for those exemptions and deductions in their ITR filing. All of this adds to the salary structure confusion.

What is the solution? New “Wages” definition

The solution to this problem comes in the form of the 4 new labour codes. All four labour codes have one particular definition of “wages”. Thus, the same definition will be used across all labour laws of the country.

As per the four labour law codes, the definition of “wages” is as follows:

“Wages” means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes,— 

(i) Basic pay; 
(ii) Dearness allowance; and 
(iii) Retaining allowance, if any, 

but does not include – 

(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment; 
(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government; 
(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
(d) any conveyance allowance or the value of any travelling concession; 
(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; 
(f) house rent allowance; 
(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal; 
(h) any overtime allowance; 
(i) any commission payable to the employee; 
(j) any gratuity payable on the termination of employment; 
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment.

What is the 50% wage rule?

The above definition may lead some employers to think that they can keep the basic wages minimum and put everything else under allowances. Thus, altogether the allowance payments would be minimal. But that is not possible due to the second part of the “Wages” definition. Here, the second part of “wages” definition states that:

Provided that, for calculating the Wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent, as may be notified by the Central Government, of all the remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

In layman terms, it means that if the sum of the components given in the exclusion under points (a) to (i) is more than 50% of the remuneration being given by the company then the excess part will be added to your wages. Thus, the basic and DA can never exceed 50% of the overall remuneration.

Example of wage calculation

WagesPerson APerson BPerson C
Basic150005000015000
DA600000
Retaining Allowances 000
Exclusions   
HRA60002500010000
Advance Bonus (Monthly)5830500
Conveyance200030002000
Sales Commission030003000
PF Employer Share 252001800
Over Time300050003000
Sum of Exclusions141033600020300
Sum of all remunerations 351038600035300
50% Limit17551.54300017650
Exclusions Exceed 50%?NONOYES
Add to Wages?002650

For Person A, the sum of all remunerations is Rs 35,103 and 50% of it is Rs 17,551. The sum of exclusions is Rs 14,103 which does not exceed 50% of sum of all remunerations. Hence, the wage structure is fine.

For Person B, the sum of all remunerations is Rs 86,000 and 50% of it is Rs 43,000. The sum of exclusions is Rs 36,000 which does not exceed 50% of sum of all remunerations. Hence, the wage structure is fine.

For Person C, the sum of all remunerations is Rs 35,300 and 50% of it is Rs 17,650. The sum of exclusions is Rs 20,300 which exceeds 50% of sum of all remunerations. Hence, the wage structure is not allowed. Thus, the difference of Rs 2,650 will be an addition to the Wages.

labour codes

Applicability of new wage rule

The definition of “employee” as per the labour codes states, any person (other than an apprentice engaged under the Apprentices Act, 1961), employed on wages by an establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward.

The new structure of wages will be applicable on all employees of a company. This is regardless of their salary amount.

Important points

  • Apart from the exclusion given in the definition of wages, any other component will be added to the Wages part. It doesn’t matter what you call it.
  • No bifurcation or splitting of minimum wages is allowable. The minimum wages has to be the sum of basic + DA. Minimum wages is applicable as per your state.
    In the Hindustan Sanitaryware and Industries Ltd. Vs The State of Haryana (29/4/2019) case, the Supreme Court had ruled that splitting of minimum wages was allowed. But after the new labour codes, it does not stand so.
  • PF, ESI, Gratuity, Bonus, etc., all will have the same wage definition. Although the ceiling can be different for each benefit. Example, PF is not applicable for salary above Rs 15,000 per month.
  • Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed 15% of the total wages payable to him, shall be deemed to form part of the wages of such employee.

Watch the video below for ore details.

Update on status of Labour Law Codes

Earlier it was believed that the labour codes would be implemented from 1st April 2021. But as of 31st March 2021, the Central Government has deferred the implementation of all four labour codes to an undecided later date. As per government officials, it is unlikely that the labour codes would be implemented from 1st April 2021.

This is because although all the labour codes have been passed by both the Houses of Parliament, all the states and union territories need more time to formulate the new rules in accordance with the labour codes. The Centre wants all rules to be notified before the new implementation to avoid any legal hassles later. The ongoing elections in some states has also led to this delay.

Furthermore, it was stated that the Labour Ministry is ready with the rules on four labour codes from their end. Hence, they will notify them once some states are ready with rules in their domain. As of now, only Jammu and Kashmir has notified rules for the codes while states like Uttar Pradesh, Bihar, Uttarakhand and Madhya Pradesh have put up draft rules for two Codes while Karnataka has put it up for one Code.

This delay in implementation of new labour codes was seen as a big relief for all companies. Since it will provide them with more time to rework the new salary structure for all employees.

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