Short-Term Pain Long term Gain – The New Wage Code 2021

Introduction

Currently, employee pay structures in terms of basic pay and allowances are not standardised across organisations. There are multiple ranges of basic pay prevailing.

New Wage Code

The government has come out with new compensation rules to increase the social security benefits for employees and standardise the pay structure considered for long-term benefits.

Code wage Bill was passed in Rajya Sabha on 2nd Aug 2019. Lok Sabha passed the bill on July 30, 2019. The Code will subsume four labour laws — Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act and Equal Remuneration Act. After its enactment, all these four Acts would be repealed.

Central government came up with a new wage rule notified under the Code of Wages 2019, which will come into force with effective from April 2021.

Earlier the company at its own discretion can decide upon on the components for salary breakup. This is, however, will change with new wage rules.

As per the new rules, the allowance component cannot exceed 50 per cent of the Total Salary. This implies that the basic salary has to be atleast 50 per cent.

This statutory requirement is mandatory for all the company to contribute atleast 50% towards Basic & D.A. which creates uniformity in payment of salary components.

A company whose outflow in terms of total salary, where the non-allowance component is less than 50% will have its cost increased upon implementation of this new code. Gratuity, PF contribution may rise under new code.

An employee’s tax savings would increase with increase in PF contribution.

Short-Term Impact

Employees’ perspective, the Net Take home salary will get reduced.

Employer’s salary cost will increase while retirement benefits’ cost will increase substantially.

Long-term term benefit:

From employers’ perspective, organisations having higher basic component will generate better employee engagements.

From employees’ perspective, increases savings for retirement.

Key takeaways:

  • Companies will have to restructure salary packages upon notification made by the govt.
  • Allowance component can’t exceed 50% of total salary, as per new rules.
  • This essentially means basic salary has to be 50%.
  • In order to comply, companies will have to increase basic pay part of CTC.
  • This will further increase gratuity payments and employees’ contribution to PF.

Endnotes

While the net pay component for an employee will reduce considering the long-term savings increase, the move is a welcome measure for them. Employers shall factor the revised structure in their costs.

To find out how the new wage code will revise the salary costs, please find the use the link below.

https://drive.google.com/file/d/1mI5c6MeLTDxg5Ydk3jOf1CSwuqVcA2_3/view?usp=sharing

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