The Four Labour Codes
The Code on Wages, Industrial Relations Code, Social Security Code, and Occupational Safety Code consolidate 29 existing labour laws into four comprehensive statutes. While the codes received Presidential assent, their implementation awaits notification of the effective date by State governments.
This delay has created an unusual situation. The legal framework exists but is not yet operative. Organisations must prepare for a future they cannot precisely time. However, the direction is clear, and the prudent approach is to begin preparation now rather than scramble when notification comes.
Wage Definition Changes
The most significant change is the definition of wages under the Code on Wages. Basic wages must constitute at least 50 per cent of total remuneration. This has far-reaching implications for salary structuring as many organisations currently maintain basic wages at 30 to 40 per cent of CTC.
The arithmetic is straightforward but the consequences are substantial. Provident Fund contributions are calculated on basic wages. Gratuity is calculated on basic wages. Leave encashment is calculated on basic wages. When basic wages increase as a proportion of total compensation, all these liabilities increase correspondingly.
Impact Analysis
The revised wage definition affects multiple calculations. Provident Fund contributions will increase substantially for employees whose basic wages currently fall below 50 per cent. Both employer and employee contributions will rise, affecting take-home pay and employer costs simultaneously.
Gratuity liability will rise proportionally. For organisations with long-tenured employees, the actuarial impact on gratuity provisions can be material. This is a balance sheet issue, not just a P&L concern.
Bonus calculations under the Payment of Bonus Act will also be affected. The definition of wages for bonus purposes aligns with the new definition, potentially increasing bonus payouts for many employees.
Employer Cost Implications
Our analysis indicates that for organisations with low basic wage structures, total employment costs could increase by 15 to 25 per cent. This is not a minor adjustment. It requires careful financial planning and potentially renegotiation of existing employment terms.
The challenge is compounded by the inability to unilaterally restructure salaries. Employees may resist changes that reduce their take-home pay even if the overall compensation package increases due to higher employer contributions. Managing this transition requires sensitive communication and clear explanation of the regulatory compulsion.
Fixed Term Employment
The Industrial Relations Code formally recognises fixed term employment across all sectors. This is a significant liberalisation. Fixed term employees are entitled to the same benefits as permanent employees on a pro-rata basis, including gratuity if the term exceeds one year.
This creates opportunities for workforce flexibility while ensuring that fixed term workers are not treated as second-class employees. Organisations can use fixed term contracts for project-based work, seasonal demand, or specialised assignments without the compliance burden of contract labour regulations.
Preparation Strategy
Organisations should conduct a comprehensive audit of current compensation structures against Labour Code requirements. Identify the gap between current basic wages and the required 50 per cent threshold. Model the cost impact. Develop a transition plan that balances compliance with employee relations.
Our Under Pivot Labour Code methodology at AMLEGALS assists organisations in this transition. The goal is minimum disruption and optimal cost management while achieving full compliance. The Labour Codes are coming. Preparation today prevents crisis tomorrow.
