The Unified Wage Framework
The Code on Wages, 2019 represents a fundamental restructuring of wage-related legislation in India. By consolidating the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976 into a single comprehensive statute, the Code creates a unified framework governing how employees across India are compensated.
For employers, this consolidation brings both simplification and new obligations. The Code extends wage protections to all employees, regardless of wage level or establishment type. The concept of a floor wage introduces a national minimum below which no state can set its minimum wage. The definition of wages has been standardised, affecting calculations for bonus, gratuity, and provident fund contributions.
The Wages Definition: A Paradigm Shift
Understanding the new definition of wages is essential for compliant compensation structuring. Under the Code, wages means all remuneration expressed in terms of money, including basic pay, dearness allowance, and retaining allowance. Critically, the definition excludes specific components and caps others.
Excluded from wages are statutory bonus, overtime allowance, house rent allowance, conveyance allowance, gratuity, and retrenchment compensation. However, a significant restriction applies: if the excluded components exceed 50 per cent of total remuneration, the excess is treated as wages for all statutory purposes.
This 50 per cent rule fundamentally alters compensation structuring. Employers who have relied heavily on allowances to minimise statutory contributions must reconsider their salary structures. A structure where basic pay plus dearness allowance constitutes only 30 per cent of total compensation will result in 20 per cent of the remaining components being reclassified as wages.
Practical Implications
Consider an employee with a total monthly compensation of Rs 100,000. If basic pay and dearness allowance total Rs 35,000, with Rs 65,000 in various allowances, the 50 per cent rule is triggered. Since only Rs 50,000 can be excluded, Rs 15,000 of the allowances become wages. The effective wages for statutory calculations become Rs 50,000, not Rs 35,000.
This impacts provident fund contributions, gratuity calculations, and other statutory benefits. Employers should model the impact on their existing structures and communicate changes to affected employees.
Minimum Wage Framework
The Code introduces a floor wage concept. The Central Government will fix a floor wage considering minimum living standards. No state minimum wage can fall below this floor. The floor wage will be reviewed and revised at intervals not exceeding five years.
States retain authority to fix minimum wages above the floor based on skill levels, geographical regions, and employment types. The complexity of multiple minimum wage rates persists, requiring employers to track applicable rates for each employee category and location.
Time-Rate, Piece-Rate, and Output
Minimum wages may be fixed by time, piece, or by reference to output. For piece-rate workers, employers must ensure that a worker of ordinary skill working under normal conditions earns at least the time-rate minimum wage for the hours worked.
This requires careful tracking. If a piece-rate worker's earnings fall short of the time-rate minimum for hours worked, the employer must make up the difference. Maintain records of hours worked alongside output to demonstrate compliance.
Payment of Wages
Wages must be paid before the expiry of the seventh day from the end of the wage period for establishments with fewer than 1,000 employees, and before the tenth day for larger establishments. The wage period cannot exceed one month.
Payment must be in current coin or currency notes, or by cheque, or by crediting to the employee's bank account. Cash payments are permitted only where prescribed. In practice, bank transfers have become the standard for organised sector employers.
Deductions
The Code limits permissible deductions from wages. Fines, deductions for absence, deductions for damage or loss, deductions for services, deductions for advances, deductions for income tax, provident fund, insurance premiums, and cooperative society dues are permitted, subject to conditions.
The total deductions cannot exceed 50 per cent of wages in any wage period. Maintain detailed records of all deductions, including the basis and employee authorisation where required.
Overtime Wages
Employees working beyond normal working hours are entitled to overtime wages at twice the normal rate. The normal working hours are as prescribed by the appropriate government but cannot exceed eight hours per day.
Overtime is calculated on the basis of wages as defined in the Code. The 50 per cent rule applies here as well, meaning overtime calculations must use the statutory wages figure, not just basic pay.
Bonus Provisions
The bonus provisions from the Payment of Bonus Act are incorporated with modifications. Every employee drawing wages up to Rs 21,000 per month and employed for at least 30 days in an accounting year is entitled to bonus.
The minimum bonus is 8.33 per cent of annual wages or Rs 100, whichever is higher, regardless of profits. The maximum is 20 per cent of annual wages. Bonus must be paid within eight months from the close of the accounting year.
Compliance Infrastructure
Establish robust payroll systems that correctly classify wage components under the new definition. Ensure your systems can calculate the 50 per cent rule automatically and adjust statutory calculations accordingly.
Maintain registers and records as prescribed. While the Code promises simplified compliance through technology and electronic registers, documentation requirements remain substantial. Digital records must meet authenticity and preservation standards.
Train HR and payroll personnel on the Code's requirements. The transition from four separate laws to one unified code requires understanding both what has changed and what remains familiar. Periodic refresher training addresses evolving interpretations and state-specific rules.
