In a historic move that marks the most significant reform of worker legislation in decades, the Indian government implemented four new labour codes on Friday. This comprehensive overhaul aims to simplify complex regulations while simultaneously enhancing protection for workers across the nation.
Redefining Wages: The Core Change
The most crucial modification introduced by the new codes concerns the fundamental definition of 'wages'. Under the revised framework, wages now explicitly include basic pay, dearness allowance, and retaining allowance. Furthermore, the codes mandate that at least 50% of total remuneration must be counted as wages for calculation purposes.
This change directly addresses a long-standing practice where employers structured salary packages to minimize the wage component. Previously, basic pay and dearness allowance often constituted a small fraction of the total cost-to-company (CTC), with the majority allocated to various allowances that did not count toward critical benefits like provident fund or gratuity.
An official statement clarified: "'Wages' now include basic pay, dearness allowance, and retaining allowance; 50% of the total remuneration shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits."
Impact on Social Security and Employer Costs
The redefined wage structure is expected to significantly affect the calculation of various social security contributions, including Provident Fund (PF), Employees' State Insurance Corporation (ESIC), Workmen's Compensation, and maternity benefits.
Madhu Damodaran, regional managing partner at AM Legals, explained: "The definition of 'wage' under the labour codes is likely to impact the base for calculation of various other social security contributions. It will depend upon how individual employers have structured their salaries into different components."
The impact on gratuity payments promises to be particularly substantial. Since gratuity calculations depend on the last drawn wages and years of service, the higher proportion of basic pay and dearness allowance in the wage base will result in significantly larger lump-sum payouts upon employee exit.
Damodaran further elaborated: "With this notification, all statutory benefits and contributions will apply on deemed wages, which is at least 50% of a person's salary. This would lead to a huge increase in gratuity payout because up until now gratuity was calculated on basic salary, which could be less than 50%. But now it will have to be calculated on at least 50% of the wage."
While this development represents excellent news for employees, it simultaneously increases financial obligations for employers. "While this is great for employees, it will also increase the cost for employers," Damodaran added.
Extended Benefits for Fixed-Term Employees
The labour reforms bring welcome changes for fixed-term employees regarding gratuity eligibility. Previously requiring five years of continuous service, fixed-term employees will now qualify for gratuity benefits after completing just one year of service.
According to Puneet Gupta, partner at People Advisory Services-Tax, EY India: "For employees on roll, the previous eligibility of five continuous years continues to be applicable."
Preeti Chandrashekhar, an independent employees benefit consultant and actuary, highlighted the government's intention: "The government basically wants to dissuade the practice of hiring people for a period of say 3 years to avoid paying gratuity. Now fixed-term employees will also become eligible for gratuity right after a year. They would also be eligible for all benefits on the same lines as permanent employees."
The changes may also affect Provident Fund and other social security contributions. However, according to Employees' Provident Fund Organisation (EPFO) rules, the existing ₹15,000 cap for statutory EPF contributions limits the immediate financial impact, unless employees voluntarily opt for higher contributions.
Kulin Patel, chief executive, partner and actuary at K. A. Pandit Consultants & Actuaries, India, noted: "The notified codes will enable many lower-income employees to have greater retirement savings due to higher deemed wages for EPF contributions and gratuity benefits."
Patel also emphasized the broader economic implications: "From an employer standpoint, better visibility of labour laws and easier compliances should also encourage the international business community to set up in India."
This landmark legislative overhaul represents the Indian government's concerted effort to modernize labour laws, balance worker protection with business growth, and create a more transparent framework for employer-employee relationships in the evolving economic landscape.
