Wage Definition Confusion: Do Quarterly Incentives Count as Wages Under the New Code?

Understanding Wage Definition for Incentives

Whether production incentive, variable payment, or any other incentive/allowance paid at an interval of three months or more, does it fall under the wage definition?

Dear Ramesh, the Production Incentive is not a part of wages, therefore it does not fall under the wage definition.

Wage Definition as per Payment of Wages Act

As per the Payment of Wages Act, the wages defined in Section 2(s): “Wages” means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages, and any other allowance.

It is in continuation of Mr. Prabath's reply as the question is based on the definition of wages under the Code on Wages, 2019, which is yet to be enforced.

Definition of Wages Under the Code on Wages, 2019

As per section 2(y) of the Code on Wages, 2019, only the components of basic pay, dearness allowance, and retaining allowance, if any, in the wage/salary structure have to be treated as the included components of wages, and all other allowances are excluded for the purpose of the Code. In the same breadth, however, the first proviso to the definition makes it mandatory to include the items narrated under clauses (a) to (i), if they exceed one half or such other percent, as may be notified by the Central Government, of all the remuneration calculated under this clause to the extent of the excess percentage.

Periodicity of Payment and Wage Definition

Since the periodicity of payment of the items mentioned in the post exceeds the maximum wage period of one month as fixed under section 16 of the Code on Wages, they cannot be deemed as wages for the purpose of the Code.

In my opinion, it will be part of the wages. Wage fixation is as per the definition of wages. The fixation of the wage period (SEC-16 of COW) and the time limit for payment of wages (SEC-17 of COW) have nothing to do with determining the wages as per COW.

Parts of Wage Fixation

In the fixation of wages, there are three parts:

Part 1: Definition of Wages

Wages mean all remuneration, whether by way of salaries, allowances, or otherwise, expressed in terms of money to be payable to a person and include Basic, DA, and retaining allowance.

Part 2: Exclusions from Wages

But does not include (a) to (k) where yearly payments like Bonus, LTC/LTA have been included.

Part 3: Consideration of Additional Payments

The 1st proviso to be considered: the payment made under (a) to (i), if more than 50% of all the remuneration calculated under the definition of wages, the excess of 50% will be added back to wages.

Therefore, payments like production incentives, any variable pay, etc., if not paid on a monthly basis, will also be considered for the purpose of the calculation of wages as per COW.

Example: SR. Manager Position

Basic - 12,000/- per month, HRA - 40% of Basic = 4,800/- per month, Fuel Allowance (To run his car) - 6,000/- per month. The total monthly gross = 22,800/- per month, and basic is 12,000/-, which is more than 50% of the monthly gross. Less liability for PF & Gratuity.

The employee is also paid 3,00,000/- per year as a furnishing allowance payable every alternate month @ 25,000/- (6 times a year), Retaining allowance - 4,00,000/- per year payable in each quarter 1,00,000/- per quarter (4 times a year), Profit-sharing incentive - 3,00,000/- per year payable half-yearly @ 1,50,000/- (2 times a year), and Bonus & ex-gratia - 3,00,000/- per year paid once a year.

Therefore, the total cash component in a year will be 22,800/- x 12 = 2,73,600/- + Furnishing - 3,00,000/- + Retaining Allowance - 4,00,000/- + Profit-sharing incentive - 3,00,000/- + Bonus & Ex-gratia - 3,00,000/- + Employer's PF Contribution - 12% of 12,000/- x 12 = 17,280/- = INR 15,90,880/-.

As per the definition of wages under COW, yearly Basic should be 50% of 15,90,880/- i.e., 66,290/- per month instead of 12,000/- per month.

Lawmakers are not fools to frame one definition where the employer will bypass as per the above calculation - this is my firm belief.

S K Bandyopadhyay (WB, Howrah)
CEO-USD HR Solutions