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. In the previous post, we dealt with the definition of wages in the labour codes. Let us take a look at the points that payroll managers need to consider while implementing the labour codes.
Employee
According to the Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC), an employee is any person, “(other than an apprentice engaged under the Apprentices Act, 1961) employed on wages by an establishment to do any skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical, clerical or any other work, whether the terms of employment be express or implied.”
Worker
According to the Occupational Safety, Health and Working Conditions Code, 2020, a worker is any employee who does not hold a managerial position and draws a monthly salary of up to Rs 18,000.
Wage payment time limit
Clause 16 of the Wage Code, 2019 allows employers to fix the wage period as daily, weekly, fortnightly or monthly for employees. There cannot be a wage period greater than month.
Clause 17(1) states that for monthly wages, the wage payment should be made before the expiry of the seventh day of the succeeding month.
According to Clause 17(2), when an employee leaves an organization on account of termination or resignation, the settlement wages should be paid within 2 working days from the last day of service. Currently, organizations follow their own timelines for processing full and final settlement of exiting employees. Given the 2-day requirement, organizations will need to be running settlements throughout the month or have a specified last working date in a month for all exiting employees.
Minimum wage
Clause 5 of the Wage Code, 2019 requires employers to pay a wage not less than the minimum wage notified by the government whether it is time work or piece work.
Cap on salary deduction
Clause 18(2) states that deduction from salary has to be as per those specified in the code including loss of pay, loan/advance recovery, deduction for damage of goods, statutory deductions, etc.
Clause 18(2) states that in any wage period the deductions from salary cannot exceed 50% of the salary.
Overtime
Clause 14 of the Wage Code 2019 states that overtime should be paid at a rate which shall not be less than twice the normal rate of wages.
Leave encashment
The rules related to encashment of accumulated leave days are governed by state laws such the Shops and Establishment Act. It could be that the current wage definition in state legislations may differ from the wage definition specified in the labour codes. It is to be noted that the labour codes do not automatically subsume state legislations. The state governments are expected to amend their labour legislations in order to ensure harmony with the labour codes. Employers are expected to comply with state laws as they exist until changes are notified by the respective state governments.
According to the OSHWC Code, every worker, who has worked one hundred and eighty days or more in a calendar year, is entitled for one-day leave (with wages) for every twenty days of his work in the calendar year. However, the total number of days of leave that may be carried forward to a succeeding year shall not exceed thirty days.
The OSHWC Code empowers a worker to encash leave days, if they so wish, at the end of each calendar year. This includes accumulated leave days which exceed 30 in a year.
Provident Fund (PF)
The general view is that the wage definition in the new wage code will increase the PF contribution since the wage for PF calculation will increase. This is correct only for organizations which currently calculate PF on Basic. The PF department for a long time has maintained that PF should be calculated on gross pay and not on Basic pay. We have written about it here. Organizations who are already calculating PF on gross pay will see no significant increase in the PF amounts since PF on gross pay will more or less be in line with PF on the basis of the wage definition in the new wage code.
Also, the government has clarified that the wage ceiling (Rs 15,000) will be continued with and any PF calculation on wages beyond the wage ceiling shall continue to be voluntary and not mandatory.
Payroll managers should calculate PF on the basis of the new wage definition keeping in mind the wage ceiling of Rs 15,000 per month. All other rules related to PF shall continue to remain in force.
Employee State Insurance (ESI)
The ESI organization has, by way of a circular, acknowledged that the wage definition as per the labour codes is different from the wage definition under section 2(22) of the ESI Act, 1948. It remains to be seen if the new wage definition increases the number of employees under ESI coverage. The current ESI monthly wage ceiling of Rs 21,000 for determining eligibility of ESI coverage stands.
Currently, the wage definition for ESI eligibility and ESI contribution calculation are different. For example, certain variable heads of pay are excluded for ESI coverage eligibility while such heads of pay are included for ESI contribution calculation. Given that there is only a single wage definition as per the labour codes, should it be construed that wage for both ESI eligibility determination and contribution calculation are the same? A clarification from the ESI organization in this regard will be immensely helpful.
Gratuity
Organizations are likely to see a significant increase in gratuity amounts payable on account of the wage definition under the new labour codes.
The 5-year employment period requirement, for gratuity eligibility, remains for permanent employees. However, fixed-term employees, bound by a contract, shall be eligible for gratuity after one year of uninterrupted service. As and when the contract ends, gratuity becomes payable.
The formula for gratuity calculation remains the same.
Statutory Bonus
Statutory bonus shall be calculated as per the wage definition in the new wage code. The wage limit for determining statutory bonus eligibility shall be fixed by the appropriate government (the current limit is Rs 21,000). An employee should have worked at least 30 days in a year to be eligible for bonus. The current minimum of 8.33% of wages and the maximum of 20% of wages stand as they are.