Understanding the Code of Wages 2019: What Every HR Professional Needs to Know

Code of Wages, 2019

The Code of Wages, 2019 replaces:

The Payment of Wages Act, 1936
To regulate the payment of wages to employees, ensuring payments are disbursed on time without any undue deductions.

The Minimum Wages Act, 1948
To protect workers against low pay and enforce the fixing of minimum rates of wages.

The Payment of Bonus Act, 1965
To provide for the payment of bonuses to persons employed in certain establishments based on profits or production.

The Equal Remuneration Act, 1976
To mandate equal remuneration for men and women workers and to prevent gender discrimination in employment matters.

The "Code on Wages" Act has 9 chapters with 69 sections covering different aspects of payment of wages, minimum wages, equal remuneration, and payment of bonuses.

Separate definitions of who is a worker, not a worker, and who is an employee are given in the code.

The definition of "wages" has been unified with the intent to bring a uniform definition of "wages" across all legislation and to minimize litigation. Components included in wages are Basic Pay, Dearness Allowance, and Retaining Allowance, if any.

Also, what is excluded in wages, like for example, HRA.

The Act is extensive, and all HR professionals must make themselves thoroughly familiar with its key provisions.

Code of Wages Impact

The new ruling of capping allowances at 50% of total compensation will be a game-changer, as it changes the percentage of salary components such as Provident Fund, Gratuity, and Take-home pay. Many people focus on their current take-home pay, forgetting the importance of future financial security.

As per the new code, the basic pay should be above 50% of the total compensation offered to each worker. This ruling will increase the PF contribution in proportion to the variance in basic pay. One consequence of this provision is a reduction in the take-home salary of workers and an enhancement in post-retirement funds due to higher PF contributions and gratuity, which is beneficial for future needs and retirement. However, the reduction in take-home salary could affect workers as they need to adjust their monthly spending in proportion to reduced earnings.

One side effect of this ruling is that it will increase the financial burden on companies as they need to contribute higher amounts towards PF and gratuity. The new law will be advantageous from the employee's perspective in the long run, as post-retirement funds will increase due to the reduction in take-home salary and will push up companies' contributions for the welfare of employees. Companies may see reduced profits temporarily as a side effect.

All changes have positive and negative effects, but change is inevitable. One must adjust, understand, and tackle change by thoroughly understanding the new law.