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The financial effect on the organizations due to the new definition of wages under the New Wage Code (NWC)

The 4 New Wage Codes (NWC) which are going to create a paradigm shift in the way the industry & individual work in this country is going to hit the market soon. Companies, reeling under the Covid impact, are reviewing potential changes in the salary structure by running various models to comply with the wage code and determine compensation costs. Big-ticket components under analysis include a retrospective increase in liabilities for benefit plans, such as gratuity and leave encashment, particularly for organizations where the employee base is long-tenured.


The 4 codes are


1.The Code on Wages, 2019, 

2.The Code on Social Security,2020, 

3.The Industrial Relations Code,2020, 

4.The Occupational Safety, Health, and Working Conditions Code,2020, 




(i) Social Security benefits as in the statutory payment of the PF Contribution and ESI Contribution will be increased with respect to the Coverage of the employees in numbers, and followed by the more statutory liability of the PF & ESI thereof


(ii) Gratuity liability of the old employees will extraordinarily be increased because of the new definition of wages (50% concept) and last drawn wages concept too


(iii) Payment of bonus liability may also increase due to the new definition of wages and that too, there is no salary rider fixed by the Central Government in the new Code


(iv) Encashment of earned leave liabilities because of the new definition of wages as well as the new rider has been legislated under the provision of OHS Code, 2020 for payment of unused earned leave


(v) The Minimum Wages which are going to be notified in two-component i.e., Floor Wages (Basic Wages) and DA and both components of the minimum wages will qualify the definition of “Wages” as defined under the NWC. Therefore, the outsourcing establishment i.e., contractors will not be allowed to bifurcate the minimum wages into different components to reduce statutory liabilities. But the principal employers have to check on this point to reduce their future statutory liability including litigation etc.


(vi) Additional liabilities will also come upon e-Commerce Unicorns i.e., Ola, Uber, Jio-mart, Amazon, Courier Companies, etc. They will be henceforth liable to ensure the social security of their employees and will have to contribute at such rate not exceeding 2% but not less than 1% of the annual turnover of the or 5% amount paid salary or payable by an aggregator to their employees


As per the NWC "wages" means all remuneration whether, by way of salaries, 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, — 

1. basic pay;
2. dearness allowance; and
3. 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 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 the fund, and the interest which may have accrued thereon;

d. any conveyance allowance or the value of any traveling 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:


Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half or such other percent. as may be notified by the Central Government, of all remuneration calculated under this clause, the amount which exceeds such one-half, or the percent. so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause: 


Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g), and (h) shall be taken for computation of wage. 


Explanation: Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen percent of the total wages payable to him, shall be deemed to form part of the wages of such employees. 


My views on the same (inspired by other senior professionals & a lot of material on Google & the World Wide Web)


If employer makes wages /remuneration as enumerated under clause (a) to (i) (supra), except Tribunal’s award amount, and which exceeds one-half or such higher % of wages, will be deemed as remuneration, and shall be, accordingly added in ‘wages’ for statutory compliance under the provisions of the Social Security Code,2020 as well as to the other Codes also.


Hence the Statutory Salary Structure of the employees should be more than 51% of their gross wages or cost to the company (CTC) and the rest components of the allowances can be fixed by the employer, not more than 49% as enumerated in the exclusion clause of wages definition.


According to the new definition of wages, the bifurcation of the minimum wages cannot be allowed because minimum wages is also notified in two components i.e., Basic + DA and both components are coming under definition of wages.

How they are handling this currently is due to the concept of CTC mostly private companies have already fixed statutory salary structure of their employees at a lower side and allowances portion at higher sides to reduce the statutory liabilities.

But henceforth they will have to change their CTC as per the NWC, so expect a hit of their bottom-line soon. The pertinent question here is ,will this change the way an organization hires employees and contractors?