The Government of India notified four labour codes – the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 – into existence on 21-Nov-2025. According to a press release issued by the government, these labour codes “lay the foundation for a protected, future-ready workforce and resilient industries, boosting employment and driving labour reforms.”
Let us take a look at how the labour codes impact payroll processing.
Repeal of labour legislations
According to the Government of India, the 4 labour codes consolidate 29 central labour laws. in other words, all of the labour laws which govern payroll processing have been subsumed into the labour codes.
Clause 69 (I) of The Code on Wages, 2019, repeals the following enactments.
1. The Payment of Wages Act, 1936.
2. The Minimum Wages Act, 1948.
3. The Payment of Bonus Act, 1965.
4. The Equal Remuneration Act, 1976.
Section 104(I) of The Industrial Relations Code, 2020, repeals the following enactments.
(a) The Trade Unions Act, 1926.
(b) The Industrial Employment (Standing Orders) Act, 1946.
(c) The Industrial Disputes Act, 1947.
Section 164(I) of The Code on Social Security, 2020, repeals the following enactments.
1. The Employee’s Compensation Act, 1923.
2. The Employees’ State Insurance Act, 1948.
3. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
4. The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959.
5. The Maternity Benefit Act, 1961.
6. The Payment of Gratuity Act, 1972.
7. The Cine-Workers Welfare Fund Act, 1981.
8. The Building and Other Construction Workers’ Welfare Cess Act, 1996.
9. The Unorganised Workers’ Social Security Act, 2008.
Section 143(I) of The Occupational Safety, Health and Working Conditions Code, 2020, repeals the following enactments.
(a) The Factories Act, 1948.
(b) The Plantations Labour Act, 1951.
(c) The Mines Act, 1952.
(d) The Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955.
(e) The Working Journalists (Fixation of Rates of Wages) Act, 1958.
(f) The Motor Transport Workers Act, 1961.
(g) The Beedi and Cigar Workers (Conditions of Employment) Act, 1966.
(h) The Contract Labour (Regulation and Abolition) Act, 1970.
(i) The Sales Promotion Employees (Conditions of Service) Act, 1976.
(j) The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979.
(k) The Cine-Workers and Cinema Theatre Workers (Regulation of Employment) Act, 1981.
(l) The Dock Workers (Safety, Health and Welfare) Act, 1986.
(m) The Building and Other Construction Workers (Regulation of Employment
and Conditions of Service) Act, 1996.
Given the expansive nature of the labour laws which have been repealed, the government has retained certain remnants of the earlier framework of labour laws for the sake of continuity. For example, Section 164(2)(b) of The Code on Social Security, 2020, retains certain legislations under the Provident Fund Act for a period of 1 year from the date of notification of the code.
the Employees’ Provident Funds Scheme, 1952, the Employees’ Deposit Linked Insurance Scheme, 1976, the Employees’ Pension Scheme, 1995 and the Tribunal (Procedure) Rules, 1997 framed or made under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the rules, regulations and schemes made or framed under the Employees’ State Insurance Act, 1948, shall remain in force, to the extent they are not inconsistent with the provisions of this Code for a period of one year from the date of commencement of this Code;
In addition, the codes state that anything done as per rule, notification, order, etc. under the repealed legislations shall be given effect under the new framework as long as such an action is not contrary to the provisions of the new codes. This means that the current labour practices are to be continued with unless the codes explicitly state otherwise. This directive is useful because the payroll managers, wondering where to start with regard to implementing the new codes, need to worry only about the changes specified in the new codes.
The payroll managers, as the first step, need to make note of the wage definition in the codes.
Definition of wages
The definition of wages is important because prior to the new labour codes, each legislation (pertaining to PF, ESI, gratuity, etc.) had its own definition of wages on the basis of which the contributions/deductions were calculated. Given that the labour legislations are subsumed into the new codes, it is important to define wages for the purpose of calculations pertaining to PF, ESI, gratuity, etc. The good thing is that the definition of wages is the same for all payments, contributions, deductions for PF, ESI, gratuity, etc. from now on.
All the 4 codes define the term wages as follows.
“Wages” means all remuneration whether by way of salary, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes,—
(i) basic pay;
(ii) dearness allowance; and
(iii) retaining allowance, if any,
but does not include––
(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate
Government;
(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
(d) any conveyance allowance or the value of any travelling concession;
(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
(f) house rent allowance;
(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
(h) any overtime allowance
(i) any commission payable to the employee;
(j) any gratuity payable on the termination of employment;
(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment:
From the above, it is clear that certain heads are to be included in the definition of wages and certain heads are not to be included. In other words, if an employer uses a pay component which is not explicitly stated in the not-to-be-included list, the pay component should be included in the definition of wages. Given that employers pay cash salary under heads of pay such as “other allowance” and “special allowance” which are not explicitly mentioned in the not-to-be-included list, such heads should be included for wage calculation.
Wages should be at least 50% of the total remuneration
If the total amount paid under the not-to-be-included list is higher than 50% of the total remuneration, the wage amount shall be deemed to be 50%. For example, let us look at the salary break-up below:
Basic (included in wage definition): Rs 10,000
HRA (excluded from wage definition): Rs 20,000
In the above example, the remuneration under the “Not Included” list is about 67% of the total remuneration while the remuneration under the “Included” list is about 33% of the total remuneration. Since wages should be at least 50% of the total remuneration, wages in the above example shall be calculated as Rs 15,000 (50% of the total remuneration) and not Rs 10,000 (Basic).
What about non-cash remuneration?
According to the labour codes, any payment in kind (non-cash) which exceeds 15% of the total remuneration shall be added to the wages. For example, if the non-cash remuneration is 20% of the total remuneration, the 5% amount (in excess of 15%) shall be deemed to be wages.
Should salary structures be modified to reflect the 50% rule?
In the above example, should Basic be modified as Rs 15,000 (50%) and HRA be modified as Rs 15,000 (50%)?
There is nothing in the labour codes which requires that the amounts under the different pay heads be modified to reflect the 50% rule while presenting a compensation structure. However, all calculations which are on the basis of the wage amount under the codes should be carried out as per the wage amount conforming to the 50% rule even if a compensation structure does not readily reflect the 50% rule.
Some thoughts on wage definition
While the attempt to standardize the definition of wages is welcome, the definition as it is exists now is ambiguous.
1. It looks as though all fixed heads of pay are considered for wage definition while variable heads of pay have been left out. However, this cannot be taken as the rule since there is no reference to fixed or variable nature of a head of pay in the wage definition. How should a variable head of pay such as Night Shift Allowance be treated? There is no explicit reference to variable heads such as Night Shift Allowance in the excluded list of heads of pay.
2. There is a reference to travelling concession in the excluded list. Organizations typically pay Leave Travel Allowance (LTA) as cash salary each month and tax it as per the travel bills submitted by the employee. Should LTA be included in the definition of wages or should it be excluded to the extent travel bills are submitted?
3. How should non-cash remuneration which may be paid on a one-off basis be considered? For example, there can be a one-time transfer of company assets to an employee. Also, what about perquisites such as ESOP? Should such a remuneration be left out of wage definition?
4. How should fixed heads of pay paid out in non-monthly periodicity (say, quarterly or annually) be treated for wage definition. How will the 50% rule apply to quarterly or annual heads of pay?
We will look at the issues that payroll managers need to keep in mind while implementing the labour codes, in the next part of this post.