Understanding the New Wage Code 2019: Can Employers Set Basic Salary Above 50%?

Dear All,

As per the new wage code 2019, which has become effective and applicable from 1st April 2021, I need clarification on some points.

Basic Salary Requirement

1. Is the 50% basic salary requirement a cap as per the law? Can an employer provide more than 50%, such as 60-70%?

Gratuity for Consultants

2. Is gratuity applicable to consultants on a pro-rata basis? Is there a minimum time period for gratuity calculation, and does this amendment apply to employees as well?

Dearness Allowance (DA)

3. Is Dearness Allowance (DA) a mandatory component of basic salary? Private organizations currently do not provide DA.

EPF Deductions for Exempt Employees

4. For exempt employees whose basic salary exceeds Rs 15,000 (the EPF threshold limit), on what amount will EPF deductions be calculated?

- Scenario (1): At the Minimum Wage
- Scenario (2): At the Rs 15,000 threshold limit
- Scenario (3): At 12% of the entire Basic

Bonus Payable and Gratuity Impact

5. I need clarification on the bonus payable (as per Section 26) and the impact of gratuity (Section 4(2) of the Payment of Gratuity Act).

Thank you.

Let me first ask you to carefully go through the definition of the term "wages" as defined under section 2(y) of the Code on Wages, 2019, and then read my following answers to your queries.

Definition of Wages

1) The definition of wages certainly connotes that the term is defined in such a manner that wages are a single package of remuneration comprising different components that are actually or can be expressed in terms of money. However, as the Code on Wages, 2019 consolidates the existing laws on payment of wages, payment of bonus, minimum wages, and equal remuneration transcending gender distinction, the definition needs to be uniformly applicable to all these inevitable aspects of employment. Therefore, the legal necessity arises to distinguish the various components in the remuneration structure as inclusive ones and excluded ones for the sake of uniform application and avoidance of misinterpretation resulting in exploitation. So far, the aspect of uniform application is covered. Still, the possibility of exploitation looms large, and therefore, a rider becomes imperative to fix a mark of demarcation between the included components and the excluded components in terms of the percentage of the sum of their broader classification, namely Inclusive Components comprising basic, dearness allowance, and retaining allowance, if any, and the Excluded Components, i.e., all other allowances which stand at a general ratio of 50:50. Therefore, there is no cap or limitation on any of the inclusive components, as you hold, but in fact, only a minimum is prescribed in relation to the total package of remuneration. By and large, therefore, the percentage of the sum of inclusive components can be anything over and above 50, depending on the discretion of the employer or the bargaining power of the employee.

Gratuity for Consultants

2) I may not be wrong if I presume that by "consultant," you actually mean a fixed-term contract employee. As per section 53 of the Code on Social Security, 2020, such an employee is entitled to gratuity on a pro-rata basis. Gratuity comes under Chapter V of the Code, which does not otherwise qualify the term employee as defined under section 2(26), and therefore, the conditions for the payment of gratuity remain as they are depending on the type of his contract of employment like regular, FTE, etc.

Dearness Allowance (D.A.)

3) D.A. is not mandatory as long as the industry wages do not fall short of the statutory minimum wages. Even then, it is not mandatory to introduce the component of D.A., and parity can be maintained by raising the basic or the consolidated wages, if it is the practice.

EPF Threshold Limit

4) The threshold limit of wages for EPF can be modified by the Central Government by means of notification. Therefore, it is to be calculated based on the threshold of salary or wages comprising the inclusive components only. I leave the impact of tax on excess contributions over and above the threshold limit to other senior members.

Clarification Needed

5) I am not able to understand this question. The poster may refer to the definition of wages occurring in the respective Codes.

Currently, as I understand, if a person is getting total wages greater than 15,000, the PF has to be calculated on 15,000. If a person is getting less than 15,000, the PF has to be calculated on full wages only.

Changes with the New Wage Code

So what will change with the new Wage Code? If someone is getting, say, 50,000, then does PF need to be deducted on 25,000, or will the limit of 15,000 for PF deduction remain? Can someone please clarify?

No provision in the definition of wages in the codes states that the basic should be 50% of gross wages or CTC.