Increment impact
“If the basic pay to gross pay ratio is around 30% and it moves up to 60% after implementation of the ‘Code on Wages’ . we would expect the liabilities on account of the above schemes to double, said Aon India practice leader (retirement and benefits solutions) Vishal Grover.
Gratuity will be payable to fixed-term employees, irrespective of whether they complete five years of employment. The new codes may also allow an employee to leave encashment at the end of every year. Most companies will recast their salary structure to comply with the wage code, said Genius Consultants CMD R P Yadav. “Expenses will increase for fixed-term employment where gratuity becomes mandatory. For the high salary & mid salary group, the cost implication will be lower. However, for the lower salary range group the impact will be 25-30%,” said Yadav, adding that this year’s increment may be impacted.
Consolidated 29 central labor laws
The retrospective increase in gratuity and leave encashment liabilities and additional provident fund (PF) contributions, for instance, may lead to a review of the salary increment budgets for 2021. Provident Fund contributions will increase. If organizations adopt the expanded definition of wages as earlier PF was calculated only on ‘basic pay’ and dearness and other special allowances.
The government has consolidated 29 central labor laws into four codes, including wages and social security. Nishith Desai Associates head (HR laws) Vikram Shroff said the labor codes had introduced some fresh concepts. However, the most important change is the expanded definition of ‘wages.’ “This definition is consistent across all the four labour codes and will have considerable implications for both employers and workers, with the possibility of adversely affecting take-home pay,” said Shroff.
Computation of wages
The computation of ‘wages’ under the new codes includes basic pay, dearness, retaining, and special allowances. Specified items like HRA, conveyance, statutory bonus, overtime allowance, and commissions have been excluded for computing wages, which, under the code, should be at least 50% of the total remuneration. Accordingly, if these specified exclusions cross 50% of the remuneration, the excess amount will be considered to determine ‘wages’ under the codes. For instance, gratuity, which was earlier calculated on the basic salary, will now be computed on ‘wages,’ which could result in higher pay for the employee and a larger outgo for the employer.
Typical compensation structure
India’s compensation structure across industries comprises basic salary. which is in the range of 30% to 50% of the gross. while allowances make up the balance. Some companies, said experts plan to take the basic pay to 50% of the remuneration to capped the specified exclusions at 50%. Nitin Sethi sees a rise of 6-10% in a company’s wage bill, in case it now provides a basic salary at 20-30% of the total compensation. Those whose basic salary is already at 40% of the gross cost implications would be lower, at around 3-4%.
Increment impact
“If the basic pay to gross pay ratio is around 30% and it moves up to 60% after implementation of the ‘Code on Wages’, we would expect the liabilities on account of the above schemes to double,” Gratuity will be payable to fixed-term employees, irrespective of whether they complete five years of employment.
The new codes may also allow an employee to leave encashment at the end of every year. Most companies will recast their salary structure to comply with the wage code, said Genius Consultants CMD R P Yadav. “Expenses will increase for fixed-term employment where gratuity becomes mandatory. For the high salary & mid salary group, the cost implication will be lower. However, for the lower salary range group, the impact will be 25-30%,” said Yadav, adding that this year’s increment may be impacted.