Code of Wages 2019: Complete Explanation & Employer Compliance

India has had a history of labour legislation, many of which overlap with each other in terms of coverage, thereby causing confusion for both employers and employees alike. The Government of India has recently started implementing significant labour law reforms across the nation as per the recommendations of the 2nd National Commission of Labour. To ensure that definitions and approaches are clear and consistent, the Commission emphasised the significance of consolidating and simplifying labour laws. Consolidating labour laws would also enable more comprehensive labour coverage because different labour laws apply to various employee classifications and across various thresholds. In response to the National Commission of Labour recommendations, the four Codes on wages, labour relations, social security, and occupational safety were introduced in Parliament.

There are currently over 40 laws governing wages, industrial relations, social security, workplace safety, and working conditions. For Indian industries, the proliferation of rules and regulations has been a major source of concern because it frequently leads to increased resources, documentation, administrative time, and costs. The new labour codes seek to harmonise India’s various labour laws and streamline the country’s various compliance requirements. Each code governs a specific area of labour law, as indicated in the title, and aims to codify and replace earlier laws in that area.

Thus, the Government of India began considering a plan in 2015 to consolidate India’s 44 labour laws into four codes in order to rationalise labour laws and improve ease of doing business. Besides the ‘Wage Code’, the other three are the ‘Occupational Safety, Health and Working Conditions Code’, the ‘Industrial Relations Code’, and the ‘Code on Social Security.’

Objectives of the Code of Wages, 2019

The idea for introducing the new Labour Wage Code, 2019, was to universalise, consolidate and create uniformity amongst all labour laws in India, and to include workers of the organised and unorganized sectors. The Code subsumes the following four laws:

The Payment of Wages Act, 1936
The Minimum Wages Act, 1948
The Payment of Bonus Act, 1965
The Equal Remuneration Act, 1976

The Code on Wages, 2019, has been notified on 08 August 2019, and the provisions of the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976 have been rationalised and subsumed therein. However, given the strong pushback from all involved, the coming into effect of the Code is therefore constantly being deferred by the government.

The Code on Wages, 2019, also known as the ‘Wage Code’, is an Act of the Parliament of India that consolidates the provisions of four labour laws concerning wage and bonus payments and makes universal provisions for minimum wages and timely payment of wages for all workers in India.

The key features or main objectives of the Code are:

To provide for universal minimum wage across employments in organized and unorganized sector. This is sought to be achieved by simplifying and rationalising the existing complex minimum wage structure.
To ensure uniform applicability of the timely payment of wages, irrespective of wage ceilings and different industrial sectors.
To regulate wages and bonus payments in all employments where any industry, trade, business, or manufacturing is carried out.
To remove multiplicity of definitions and authorities which existed under the previous four labour laws. It is intended that the ease of compliance will incentivise setting up of more enterprises thus more opportunities.
To promote equity and labour welfare and sustainability of enterprises, thereby catalyzing economic growth and creation of employment opportunities.

Thus, the focus of the new wage code is not limited to labour welfare; the concerns of the employer have also been taken into account. In this way, by balancing the needs of workers as well as employers, the aim is to catalyze the economic growth of the country as a whole.

Salient Features of the Code of Wages, 2019

The new Code has 9 Chapters, 67 Sections and 26 definitions of constantly used terms. The salient features of the Code of Wages, 2019 are:

Broadened Scope: Provisions of wage shall apply to all employees, including both organised and unorganised sectors. As the Code of 2019 has extended universal and uniform provisions of wages to all, its extended and new legal coverage of minimum rates of wages’ to all ensures employees, new legal beneficiaries will be primarily vulnerable groups employees, new legal beneficiaries will be primarily rural, women, illiterate and the labour market (unorganised sector – workers, ST and OBCs, agricultural and construction labourers, workers in tiny and micro enterprises, etc.).
Uniform Definition of Wages: The definition of ‘wages’ slightly varied across Payment of Wages Act, Minimum Wages Act, and Payment of Bonus Act and this has resulted in varying interpretations. Therefore, the Wage Code seeks to provide a single uniform definition of ‘wages’ for computation and payment of wages to employees.
Distinction between Employee and Worker: The Wage Code provides separate definitions of ‘worker’ and ‘employee’. The definition of ‘employee’ is broader than that of ‘worker’.
Extension of Definition of Employer: The Code extends the definition of employer by classifying ‘contractor’ as employer.
Gender-neutral: The specific references to ‘man’ and ‘woman’ in the Equal Remuneration Act of 1976, which guaranteed equal pay for equal work for men and women, have been replaced by ‘gender.’ This has the potential to protect transgender communities from discrimination.
Universalisation of Provision of Minimum Wages: The Code provides for universal minimum wage across employments in organized and unorganized sector. The Code has introduced the concept of a statutory ‘floor wage’ to be fixed on the basis of the minimum living standard of a worker by the Central government in consultation with the State governments and CAB on wages. The minimum rates of wages fixed by the appropriate Governments shall not be less than the floor wage.

The Code enables the relevant government to choose the criteria for determining the minimum wage for various employments. The factors will be decided by taking into account the necessary skills, the difficulty of the work assigned, the geographical location of the workplace, and any other factors that the relevant government deems necessary.

Uniform Applicability – Timely Payment of Wages: The Wage Code will ensure uniform applicability of the timely payment of wages, irrespective of wage ceilings and different industrial sectors which previous laws like the Payment of Wages Act, Minimum Wages Act had placed restrictions. Also, in case of removal, dismissal, or retrenchment or resignation, or became unemployed due to closure, wages shall be paid within two working days.
Regular Adjustment of Minimum Wages: The Code outlines a uniform statutory criterion for initial setting and subsequent revision of minimum wage rates ordinarily in every five years. Wage rate fixation on time as pre fixed norms devoid of any arbitrary practices as witnessed presently. The Code provides for timely adjustment of minimum wages with respect to inflation in every six months – 1st April and 1st October – to protect real wages of the employees.
Digitization in Wage Payments: The Code has promoted electronic mode in wage payments so as to reach the workers more timely. It encourages payments through bank account and electronic mode.
Promotion of Gender Equality: As per the Code, there shall be no prohibition of gender-based discrimination among employees in establishments in matters related to wages, recruitment of employees and conditions of work by the same employer in respect of same work or work of similar nature done by any employee.

The Code also established Central and State Advisory Boards to decide on Minimum Wages and other related issues, and women’s representation on the boards was made statutory.

Payment of Bonus: Earlier, under the Payment of Bonus Act, the applicability was limited to employees drawing wages not exceeding INR 21,000 per month. Now, under the Wage Code, the appropriate government is empowered to fix the wage threshold for determining the applicability. Every employee, drawing wages not exceeding a monthly amount as notified by the Central or State Government, and having put in at least 30 days of work in an accounting year, will be entitled to an annual bonus at the rate of 8.33% of wages earned or Rs. 100, whichever is higher.
Reduction in Compliance Burden and Transaction Costs: On account of the amalgamation and rationalisation exercise, under the Code, the number of returns, registers, and filings required from employers has been significantly reduced.
Cultural Changes in the Inspection System: The Code of 2019 has brought about cultural changes in the inspection system to reduce corruption and arbitrariness and infuse transparency. Appropriate Government are required to appoint Inspector-cum-Facilitators who shall be deemed as a public servant for the purpose of the Code. Besides inspecting the establishments for the purpose of the Code, they are required to ‘advise and inform’ employers and workers relating to compliance with the provisions of this Code. The appropriate Government may lay down an inspection scheme. This may also provide for generating a “web-based inspection” and calling of information relating to inspection under this Code electronically.
Payment of Dues/Burden of Proof/Limitation Period: The Code puts the responsibility of payment of dues and burden of proof on the employer in case of claims relating to non-payment of dues. Limitation period for filing claim before the Authority has been increased to 3 years as against 6 month to 2 years at present to give workers more time to resolve their claims. The Code also envisages a ‘Fast track claim adjudication process’.
Offences and Penalties: The Code establishes a quasi-judicial appellate authority to handle disputes. No court inferior to that of a Metropolitan Magistrate or Judicial Magistrate of the first class shall try the offences under this Code. For imposing penalty, the appropriate Government are required to appoint officer not below the rank of Under Secretary.

The Code has incorporated the Standardized penalty provisions, introduced the concept of ‘graded penalty’ and has enhanced penalty provisions especially fine amount manifold. This would act as a strong deterrent and expected to improve compliance and effective application.

Important Definitions:

(i) Establishments: Any place where any industry, trade, business, manufacture or occupation is carried on and include Government establishment.

(ii) Workers: Any person (except an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.

(iii) Employee: Any person employed, on wages by an establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward.

The Wage Code provides separate definitions of ‘worker’ and ‘employee’. The definition of ‘employee’ is broader than that of ‘worker’.

(iv) Employer: It means a person who employs, whether directly or through any person, or on his behalf or on behalf of any person, one or more employees in his establishment. It includes:

Authority/Manager/MD having ultimate control of any other establishments.
Occupier/Manager of a factory under Factory Act, 1948.
Government at all levels – Central, State and Local Authorities.
Contractor.
Legal representative of a deceased employer.

Thus, the Code extends the definition of employer by classifying ‘contractor’ also as employer.

(v) Wages: The Code of 2019 provides a clear and uniform definition of ‘wages’. The definition of ‘wages’ slightly varied across Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act and this has resulted in numerous litigations. Therefore, the Wage Code seeks to provide a single uniform definition of ‘wages’ for the purposes of computation and payment of wages to the employees.

“Wages” means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money, if the terms of employment were fulfilled, be payable to a person employed in respect of his employment.
Includes:

Basic Pay
Dearness allowance
Retaining Allowance

Doesn’t Include:
The definition of wage specifically excludes –

bonus;
the value of house-accommodation;
contribution by employer to any pension or provident fund (PF), and the interest accrued thereon;
any conveyance allowance/travelling concession;
any sum paid to the employed person to defray special expenses entailed on him;
house rent allowance;
remuneration payable under any award/settlement between the parties or order of a court/tribunal;
any overtime allowance;
any commission payable to the employee;
gratuity payable on termination;
any retrenchment compensation or other retirement benefit payable to the employee.

The Code further provides that the allowances provided under the heads (a) to (i) should not exceed 50% of the total remuneration paid to the employee. In case such allowances exceed 50% of the total remuneration, the excess amount paid to the employee will form part of wages.

As the new definition of wages caps allowances at 50% of total compensation, Provident fund (PF) and gratuity components and take-home pay of employees will be impacted. Earlier employers would structure their salaries into base wage (basic salary) and other perks (like PF) to ensure that benefits (like PF) are being paid on the base wage only. However, given this change, benefits will now have to be calculated on at least 50% of the total remuneration of an employee. This will boost the outgo of the take-home salary of the employee. This will, in turn, also reduce the payout for higher employees, while the PFs will go up. Post-retirement benefits will also see their cost rise as the contributions to provident funds, gratuity increase.

The Supreme Court in Regional Provident Fund Commissioner (II) West Bengal v Vivekananda Vidyamandir (AIR 2019 SC 1240), observed that many employers in the wage structure have been camouflaging essential parts of basic wage as ‘other allowances’ in order to exclude the same from calculation of salary for ascertaining PF contribution.

For instance, if one assumes basic salary to be INR 10,000 per month for a person who earns INR 30,000 per month as cost to company, for the purposes of PF, the contribution under the present laws would amount to INR 1200, leaving the rest as in-hand salary for the employee. However, once the 2019 Code comes into effect, (basic salary will stand increased to INR 15,000 as per the new definition of “wages”). The employee’s in-hand salary would now dwindle down to INR 26,400 as the augment in basic wages will now lead to an escalation in PF contributions (for both the employee and employer), reducing the take home salary of the employees.

Neither employees nor employers appear to be happy with the change to the definition of wages. For employees, anything that impacts take home salary and changes their tax outcome is not welcome. Similarly, for India Inc to change its pay structure across the board will be a herculean task. Further, the amounts to be paid to PF will also stand increased thereby resulting in a higher compliance burden for all companies. Given the reduced take home salaries, employees will demand hikes in emoluments such that their cash in hand is not affected. Given the strong pushback from all involved, the coming into effect of the Code is therefore constantly being deferred by the government.¹

The Code of 2019 also restricts ‘in-kind payments’ to a maximum of fifteen percent of total wages. It also provides that the ‘Overtime compensation’ would be twice the normal wage extended to all employees (not just for workers); a written consent must be obtained before subjecting employees to overtime.

Appropriate Government:

In relation to an establishment carried on under the authority of Central Government – railways, mines, oil field, major ports, air transport, telecommunication, banking and insurance company, or a corporation or other authority established by a Central Act or CPSUs/Autonomous bodies – the Central Government.
In relation to any other establishment – State Government.

Floor Wage and Minimum Rates of Wages²

The Code of 2019 has extended the legal coverage of both ‘floor wage’ and ‘minimum rates of wages’ to all employees. New beneficiaries will be industry vulnerable groups within the labour market – rural, women, illiterate, below middle level of education, casual workers, ST and OBCs, agricultural and construction labourers, and those in tiny and micro enterprises.

The Code has introduced the concept of statutory ‘floor wage’ to be fixed on the basis of minimum living standard of a worker. Floor wage by the government in consultation with the State governments and CAB on wages. Floor wage can be a single floor for the entire country or different floor wages for different geographical areas.

‘Minimum rate of wages’, to be fixed by the Central and State governments, shall be either equal to or above the ‘wage floor’ and can’t be reduced to the level of floor, if such wages are already higher. The Code enables the relevant government to choose the criteria for determining minimum wage for various employee categories. The factors will be decided by taking into account the necessary skills, the difficulty of the work assigned, the geographical location of the workplace, and any other factors that the relevant government deems necessary.

Regular adjustment of minimum wages – The Code outlines a uniform statutory criterion for initial setting and subsequent revision of minimum wage rates ordinarily in every five years. This ensures wage fixation on time as per fixed norms, devoid of any arbitrariness as witnessed presently. The Code provides for timely adjustment of minimum wages with respect to inflation in every six months, 1st April and 1st October, to protect real wages of the employees.

Thus, the 2019 Code:

has simplified and rationalised the existing complex wage structure. It is expected to reduce the number of minimum wage rates in India from the existing 1,915 rates across States to a minimum of 3 to a maximum of 12 rates, etc. Further, through reducing the number of fewer and effective wage rates, it is expected to improve enforcement, compliance and the effective application of the minimum wage system in the country.

Timely Payment of Wages

The Code has universalised timely payment of wages to all employees and in all establishments irrespective of the extent of wages and different industrial sectors, which previous laws like the Payment of Wages Act, Minimum Wages Act had placed restrictions. This is a significant development in terms of wage protection of all employees and enables them to receive their wages on time.

Also, the Code has promoted digitisation in wage payments through bank accounts and electronic mode. In case of removal or dismissal, or retrenchment or resignation, or becoming unemployed due to closure, wages shall be paid within two working days.

The Code has put the responsibility of payment of all dues and burden of proof on the employer in case of claims relating to non-payment of dues. Limitation period for filing claim before the Authority has been increased to 3 years as against 6 months to 2 years at present. The Code also envisages ‘fast track claim adjudication process’.

Wage Period and Time Limit:

Daily basis – at the end of the shift;
Weekly basis – on the last working day of the week;
Fortnightly basis – before the end of the second day after the end of the fortnight;
Monthly basis – before the expiry of the seventh day of the succeeding month.

Deductions

The 2019 Code lays down that there shall be no deductions from the wages of the employee, except those as are authorised under this Code.

Under the Code, an employee’s wages may be deducted on certain grounds, including:

fines,
absence from duty,
accommodation given by the employer,
recovery of advances/loans given to the employee,
income tax or other statutory levy.

However, the total amount of deductions shall not exceed 50% of employee’s total wage in any wage period. If the deduction exceeds 50%, the excess amount may be recovered.

Promotion of Gender Equality

As per the 2019 Code, there will be prohibition of gender-based discrimination among employees in establishments in matters related to wages, recruitment of employees and conditions of work by the same employer in respect of same work or work of similar nature done by any employee.

“Work of similar nature” is defined as work for which the skill, effort, experience, and responsibility required are the same when performed under similar working conditions. Dispute as to whether a work is of same or similar nature shall be decided by such authority as may be notified by the appropriate Government.

The specific references to “man” and “woman” in the Equal Remuneration Act of 1976, which guaranteed equal pay for equal work for men and women, have been replaced by “gender.” This has the potential to protect transgender communities from discrimination.

The Code also established Central and State Advisory Boards to decide on Minimum Wages and other related issues, and women’s representation on the boards was made statutory.

Incentivisation of Businesses by Reduction in Compliance Burden and Transaction Costs

On account of the amalgamation and rationalisation exercise, under the Code, the number of sections has been reduced to 69 from existing 111 sections in four wage related regulations. Further, there is uniform and common definition of frequently used terms – ‘wages’, ‘workers’, ‘employees’, ‘employers’, ‘establishments’, ‘appropriate government’.

The Code has reduced the number of authorities, tripartite boards, and will be implemented only through 1 rule instead of 8 different rules that exist at present.

Cultural Changes in the Inspection System [Inspector-Cum-Facilitator]

The Code of 2019 has brought about cultural changes in the inspection system to reduce corruption and arbitrariness and infuse transparency.

Appropriate Government are required to appoint Inspector-cum-Facilitators who shall be deemed as a public servant for the purpose of the Code. Besides inspecting the establishments and imposing fines, they are required to “advise the establishments assigned and imposing fines, compliance with the provisions and inform” employers and workers relating to the provisions of this Code.

The appropriate Government may lay down an ‘inspection scheme’ which may also provide for generation of a web-based inspection and calling of information relating to inspection of an establishment electronically. Appropriate Government may by notification confer such jurisdiction of “randomised selection of inspection” for purposes of this Code to Inspector-cum-Facilitator.

The Code mandates inspector-cum-facilitator to provide prior opportunity to employer to rectify and comply with the provisions of the Code “by way of written directions” before initiating prosecution. If the employer fails to do so, it is only then the inspector may proceed with prosecution. This is a significant step to help employers with the compliance obligations, as this Code is being implemented for the first time and is not applicable for repeat offence.

Determination of Bonus

There is no significant change from Payment of Bonus Act and the provisions relating to the payment of bonus are also consistent with the terms of Payment of Bonus Act. Earlier, the applicability was limited to employees drawing wages not exceeding INR 21,000 per month. Now, under the Wage Code, the appropriate government is empowered to fix the wage threshold for determining the applicability.

Under the Code, all employees whose wages do not exceed a specific monthly amount, notified by the Central or State government and who have put in at least 30 days of work in an accounting year will be entitled to an annual bonus. Annual Minimum Bonus will be at least:

8.33% of his wages, or
Rs 100, whichever is higher irrespective of allocable surplus.

An employee can receive a maximum bonus of 20% of his annual wages in an accounting year. In addition, the employer will distribute a part of the gross profits amongst the employees. This will be distributed in proportion to the annual wages of an employee.

Responsibility for Payment of Dues and Burden of Proof

Under the Code, every employer shall be responsible to pay all dues under the Code to every employee. Where an employer fails to make such payment, the company, firm, proprietor, owner of the establishment shall be responsible to pay.

Where a claim has been filed on account of non-payment or less payment of wages or bonus or for making deductions not authorized from the wages of an employee, the burden to prove that the said dues have been paid shall be on the employer.

Record, Return and Notices

Every employer of an establishment shall maintain a register containing particulars of persons employed, muster roll, wages and other details as may be prescribed.

Every employer shall display a notice on the notice board, at a prominent place containing abstract of Code, category-wise wage rates, wage periods, day or date and time of payment of wages, and name and address of Inspector-cum-Facilitator.

Every employer shall issue wage slips to the employees. Above provisions shall not apply in respect of employer to the extent he employs not more than five persons for agriculture or domestic purpose; but, if demanded, must provide reasonable proof of the payment of wages.

Offences and Penalties: Cognizance of Offences

No court shall take cognizance of any offence punishable under this Code except on a complaint made by:

Authority/official of the appropriate Government, or
by an employee, or
a registered Trade Union, or
an Inspector-cum-Facilitator.

Offences and Penalties: Power of Officers to Impose Penalty

For imposing penalty, the appropriate Government are required to appoint officer not below the rank of Under Secretary:

for holding enquiry and to summon and enforce attendance of any person acquainted with the case to give evidence or to produce any document, and
if, on such enquiry, he is satisfied that the person has committed any offence, he may impose such penalty as he thinks fit.

The Code has incorporated the Standardized penalty provisions, introduced the concept of ‘graded penalty’ and has enhanced penalty provisions especially fine amount manifold. This would act as strong deterrent and expected to improve compliance and effective application.

First offence:
Pays to any employee less than the amount due under the Code: Punishable with fine which may extend to fifty thousand rupees.Repeat offence:
Similar to one above within five years from the date of the commission of the first or subsequent offence: Punishable with imprisonment for a term which may extend to three months or with fine which may extend to one lakh rupees, or both.

First offence:
Contravenes any other provision of this Code or any rule made or order made or issued thereunder: Punishable with fine which may extend to twenty thousand rupees.

Repeat offence:
Similar to one above within five years from the date of the commission of the first or subsequent offence: Punishable with imprisonment for a term which may extend to one month or with fine which may extend to forty thousand rupees, or both.

Offences of non-maintenance or improper maintenance of records in the establishment:
Punishable with fine which may extend to ten thousand rupees.

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