The Wage Code, 2019 is an act of the Parliament of India subsuming the provisions of four previous labour laws concerning wage and bonus payments. The act makes the provisions of minimum wages and the timely payment of wages for all workers in India universal. It seeks to rationalise and regulate central laws pertaining to wages, industrial relations, social security, along with occupational safety, health and conditions.

This Code seeks to bring in uniformity in the way the term ‘wages’ is defined by providing a single comprehensive definition. Such a definition is necessary because different acts such as The Payment of Wages Act 1936 and The Minimum Wages Act 1948 have slightly varied definitions of what the term ‘wage’ is.

As per the Wage Code, the term ‘wages’ refers to all the remuneration whether, by way of salaries, allowances, or otherwise, which is expressed in terms of money and includes basic pay, dearness allowance, and retaining allowance if any. This comprehensive definition of ‘wages’ as given under the Code has excluded certain components , such as the value of house accommodation, supply of electricity, water, house rent allowance, bonus payable under any law, contributions to a pension or provident fund, as well as several types of specific occupational and retirement-related compensation.

The sum of these specified exclusions usually should not exceed 50% of all remuneration, and in case it does, this excess amount will be considered as ‘wages’. The intent behind this is to prevent companies from adopting compensation structures in which the wages have been reduced to below 50% of the total remuneration.

The Code has also broadened the scope of the term ‘employee’ by including managerial and administrative work. This curtails the employer’s Right to Deductions from the wages of managerial and administrative employees. Furthermore, employers may not be able to enforce clawback provisions (where an employee has to pay) negotiated with employees, or make adjustments in the final payment at the time of their exit from employment.

Therefore, all in all, an employer’s cost per employee will rise.

One of the provisions of the wage code concerns the new structure to basic pay. The Government seeks to increase the contribution of provident fund (PF) and gratuity of employees in the private sector which, in turn, reduces their take-home salary. The Code affirms that the contribution needs to rise to 50% or more as opposed to the current levels of approximately 40%. This new rule is likely to come into effect from April 2021. The increase in contribution of provident fund in the salary of employees has many implications, which can be understood from two perspectives – the individual’s perspective and the government’s perspective.

From an individual’s perspective, an increase in provident fund and gratuity contribution implies less current income but the person stands to gain in the future. The take-home salary of employees will reduce as a major chunk of it will now be locked up for years as PF and gratuity. This rule affects salaried individuals. From a household’s perspective, individuals will spend the same amount for their monthly expenditures as before, but the amount left with them will reduce due to a fall in take-home salaries. With this, savings of individuals will scale down, which will negatively affect private investments.

From the Government’s perspective, it can be seen that the amount invested as provident fund and gratuity will increase. This implies that the government will have more liquid funds in its hands, which need to be returned only after a long period of time. The Government will thus have more funds to utilise for public benefit and welfare. A rise in liquid funds may positively affect public expenditure. But when analysing this further, it is clear that there are several factors at play.

Primarily, private investment is going to reduce, as even though people will have funds on paper, their liquid assets (cash) will reduce tremendously. On the flip side, the Government will have access to more liquid assets which will, in turn, enable them to increase their expenditure and investments. Looking at this from the point of view of extra liquidity in the hands of the Government, the investment that will increase will be dedicated to public welfare and the general well-being of society. This would entail greater investment in the infrastructural sector particularly. Although this is good from the perspective of long term growth and development, the economy may not show the same results. With this scheme in place, consumer behaviour will also be affected. As with less income in hand, rational individuals will tend to reduce their expenditure which, in turn, will have a bearing on the retail market. There will be a chance of excess supply in the economy which will make prices fall, thereby affecting the national income of the country negatively.

Secondly, this scheme directs the savings of individuals to provident funds and gratuity in particular. By doing so, the Government is taking away some part of people’s right to choose. It can be argued that in a free country such as ours, one must be allowed to utilize their funds in whichever way they think of: for some that avenue may be PF and gratuity while for others it might be other investments or insurance. However, if this scheme were to come into effect, this freedom is curtailed as people would be required to save a greater part of their income than before, as the Government sees fit.

As mentioned earlier, an indirect effect of this increased contribution towards gratuity & provident funds, and the resultant reduced disposable income, is the fall in consumption expenditure – a key indicator of economic activity. This in turn affects the incentive to do business and overall investor sentiment in the country.

Even though the Code mainly impacts those working in the private sector, to eliminate any sort of uncertainty with respect to the salaries of government employees, the Labour Ministry has also included a suggestion to increase their take-home salary in order to support them through the COVID-19 pandemic. This could further affect the acceptance of this Code on the grounds that the pandemic has dealt a more severe blow to private sector employees who do not enjoy the security that comes along with a government job.

If the Wage Code is implemented April onwards, there seems little doubt that it would face significant resistance from employees as well as employers, as it could further add to their financial stress. In the last year, incomes have fallen, jobs have been lost, and the economy has taken a big hit. It is not an overstatement to say that increased provident fund contributions can certainly wait.

By Nikita Rajagopal