Introduction
When the Government of India notified the Code on Wages, 2019, it marked a major shift in the way salary structures would be viewed across the country. While employers were initially focused on the consolidation of four laws, the Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act, the more significant change came from how ‘wages’ itself was defined under the Code. And that definition has direct consequences on what we now call basic pay.
The new definition under Section 2(y) of the Code introduced a formulaic approach to how salary components should be treated. Particularly, it stated that basic pay and dearness allowance combined must form at least 50% of total wages. Any allowance amount exceeding 50% of the total CTC would be deemed a part of wages. This one clause has quietly forced a complete re-look at compensation models used by Indian businesses.
Many employers have traditionally used a flexible CTC format, where special allowance, HRA, and various reimbursements formed a larger part of monthly pay. Under the new payroll rules under the Code on Wages, such components cannot dominate the salary structure beyond a limit. It’s not merely a matter of format; it’s a matter of compliance.
Below are key reasons why businesses must re-assess wage structures urgently:
- The Code on Wages’ impact on basic pay changes the take-home vs statutory balance
- Old salary templates may lead to non-compliance by default
- Gratuity and PF costs are likely to rise with increased basic pay
- The statutory floor now applies even to private agreements or negotiated contracts
Understanding the basic pay definition under the Code on Wages is therefore not optional; it is essential for any company aiming to stay compliant with current payroll laws.
Understanding the Legal Definition of ‘Wages’ Under the Code
The single-most important shift under the Code on Wages is the way the term “wages” has been defined. Unlike previous statutes, where wage components were interpreted in fragments, the Code attempts to bring a unified definition. For employers, this impacts how basic pay is computed, how benefits are linked, and more importantly, whether the current structure stands compliant under the new payroll rules under the Code on Wages. Read our other article: How to Check if a Company Name Is Available in India.
Section 2(y) of Code on Wages, 2019 – Inclusions and Exclusions
As per Section 2(y) of the Code, “wages” include basic pay, dearness allowance, and retaining allowance (if any). However, it excludes several allowances and benefits from its scope, though with a limit.
Here’s the structure:
- Included in Wages:
- Basic pay
- Dearness allowance (DA)
- Retaining allowance
- Excluded (up to 50% of total remuneration):
- HRA
- Bonus (not statutorily mandated)
- Overtime allowance
- Employer contribution to PF or pension
- Conveyance, travel and food reimbursements
- Gratuity payable on termination
- Commission based on productivity
However, if the total excluded components exceed 50% of total remuneration, the excess shall be deemed as part of wages.
In effect, this enforces a 50:50 ratio between fixed wages and allowances, which was not explicitly required under earlier labour laws.
Comparison with Previous Labour Laws
Under the previous regime, there was no fixed ratio imposed between basic and allowances. Employers had discretion to design cost-to-company (CTC) structures in ways that legally minimised liability towards statutory contributions.
For example:
| Pre-Code Structure | Post-Code Requirement |
| Basic Pay – ₹20,000 | Basic must be ≥50% of CTC |
| HRA – ₹10,000 | Excess HRA added back to wages |
| Special Allowance – ₹20,000 | Allowances >50% get absorbed into wage |
| Total – ₹50,000 | Wages recalculated at ₹25,000+ |
Thus, under the wage structure changes in India, employers can no longer push the majority of pay under special allowances or reimbursements. This marks a significant shift from the older practice of minimising basic costs to controlling costs.
Illustrative Example
Let’s consider a ₹1,00,000/month CTC.
If structured as:
- Basic: ₹25,000
- HRA: ₹20,000
- Special Allowance: ₹40,000
- Bonus: ₹10,000
- Conveyance: ₹5,000
This structure puts 75% of the salary under excluded heads. Under the Code, anything above 50% (i.e., ₹50,000) must be added back to wages. Thus, ₹25,000 of the allowance bucket is deemed part of wages, pushing actual “wages” to ₹50,000.
This significantly increases the employer’s contribution towards EPF, gratuity and other linked benefits.
Employers must therefore review every contract that defines compensation, as the Code on Wages’ impact on basic pay alters its very foundation.
How Basic Pay is Affected: Key Compliance Changes for Employers
The biggest concern for HR, finance, and legal teams today is not theoretical compliance, but practical restructuring. The new basic pay definition under Code on Wages triggers multiple internal changes, especially for companies where variable or allowance-heavy structures were standard.
The 50% Rule and Re-alignment of Allowances
The Code states that total exclusions (such as HRA, overtime, bonus, travel) must not exceed 50% of total remuneration. This means basic + DA must be 50% or more. If not, the excess exclusions get added back.
This directly hits companies using cost-effective structures to reduce liability.
Key compliance changes include:
- Revisiting salary templates used for new hires.
- Revising existing employment agreements.
- Realigning allowances and reimbursements.
- Recalculating PF, gratuity, and bonus thresholds.
- Updating payroll software and tools accordingly.
The shift is structural. Employers cannot simply tweak numbers; they must rewrite logic.
Treatment of Variable Pay, Bonuses, and Incentives
Another grey area is how variable components like performance bonuses or sales incentives are treated.
Under the Code:
- Statutory bonus (under the Bonus Act) is excluded from wages.
- Discretionary bonus (not linked to statute) is counted in the exclusion cap.
- If these exclusions push the total beyond 50%, the extra portion is absorbed into “wages”.
This affects organisations offering quarterly incentives, retention bonuses, and ex gratia rewards. Many firms may now hit the 50% exclusion limit much faster.
Examples – Realigning Pay Structures
Let’s look at a practical case.
| CTC | Pre-Code Basic (₹) | Post-Code Basic Requirement (₹) | Difference |
| ₹12,00,000 | ₹3,60,000 (30%) | ₹6,00,000 (50%) | ₹2,40,000 |
Impact:
- Employer’s PF contribution increases
- Gratuity base increases
- Take-home salary reduces unless CTC is increased
This is precisely why payroll compliance under labour codes now requires both legal and financial recalibration.
Key Considerations for HR and Compliance Teams
- Check if the current pay structure violates the 50% rule.
- Assess the financial impact of increasing basic pay.
- Communicate transparently with employees, particularly where the net salary may drop.
- Update HRMS and payroll tools with new formulas.
- Keep a record of any structure changes to defend against labour inspections or audits.
Employers must treat this not as a routine HR policy change, but as a compliance overhaul. Non-adherence doesn’t just invite fines, it creates exposure under multiple other labour statutes as well.
Components of Wage vs. Allowance: Legal Tests and HR Challenges
Under the Code on Wages, not all payments made by an employer form part of “wages.” The law introduces a list of inclusions and exclusions, and more importantly, sets a cap on exclusions. As a result, determining which salary elements can safely remain outside the wage definition becomes a compliance minefield.
This section discusses the legal tests HR must apply and challenges that businesses now face when aligning salary structures under the new payroll rules under the Code on Wages.
What Allowances Are Excluded from Wages?
The law does not give employers blanket discretion to exclude any allowance. Instead, it provides an exhaustive list of exclusions. These exclusions are valid only up to 50% of the total remuneration. Beyond this cap, the extra portion will be added back into “wages.”
Excluded allowances (subject to the 50% ceiling):
- House Rent Allowance (HRA)
- Conveyance allowance
- Employer’s PF contribution
- Gratuity payable on exit
- Overtime allowance
- Commission linked to productivity
- Retrenchment compensation
- Leave encashment
- Bonus is not part of the statutory obligation
This means, for example, if HRA and special allowance together make up 60% of the total pay, the extra 10% becomes part of wages, thereby affecting the basic pay definition under the Code on Wages.
Table – Sample Remuneration Breakup and Inclusion Test
| Component | Monthly (₹) | Included in Wages? | Notes |
| Basic Pay | ₹30,000 | Yes | Core part of wages |
| HRA | ₹20,000 | (up to 50%) | Allowed as exclusion if total exclusions < 50% |
| Special Allowance | ₹15,000 | (up to 50%) | May breach 50% cap |
| Bonus (non-statutory) | ₹10,000 | (up to 50%) | Excess gets added back |
| Conveyance | ₹5,000 | (up to 50%) | Capped inclusion |
| Total Excluded Components | ₹50,000 | Partial | Anything above ₹45,000 (50%) added back |
In this example, exclusions exceed 50%, so ₹5,000 is added to wages, increasing the PF and gratuity base.
Legal Interpretation and Caution
Unlike earlier laws, where such exclusions were loosely interpreted, the Code on Wages’ impact on basic pay is very specific. Employers can no longer defend exclusion-heavy structures during audit or litigation.
Important tests:
- Is the allowance a part of the 9 exclusions provided under Section 2(y) of the Code?
- Does total exclusion breach 50%?
- If yes, has the excess been added back to “wages”?
Failure to comply may lead to liability for underpaid PF, bonus, or gratuity, affecting payroll compliance under labour codes.
Challenges for HR and Legal Teams
- Revisiting old CTCs to assess violations.
- Structuring offers without breaching exclusion limits.
- Managing expectations around HRA, bonus, or travel heads.
- Updating salary templates and annexures across locations.
- Dealing with State-level variations and inspector interpretations.
The wage structure changes in India are more than a formatting issue; they shift how compensation is viewed legally.
Impact on Payroll, CTC Design, and Take-Home Salary
From a purely legal standpoint, what the Code on Wages has introduced is not just a compliance burden; it’s a structural correction. Businesses that previously had flexibility in framing their cost-to-company (CTC) models must now contend with a definition of “wages” that overrides how they’ve historically approached payroll. That creates internal, external and financial friction.
Shift in CTC Perception and Planning
It used to be that CTC was a fluid term. Not unlawful, just convenient. An HR head could draft a ₹10 lakh CTC offer by adjusting how much went into basic, how much into HRA, and how much was held back as performance-linked. But now, with the basic pay definition under Code on Wages pinning down what must be counted as “wages” and what cannot exceed 50%, employers have much less wiggle room. Especially in organisations where salary structures weren’t standardised, the shift is sharp.
Some of the internal changes that are now necessary:
- Review every CTC issued to see if basic pay forms at least 50%.
- Higher contributions to Provident Fund and Gratuity are becoming unavoidable.
- Take-home pay may fall unless CTC is grossed up.
- Sales and operations teams are flagging concerns over budget constraints.
- Finance heads must now recalibrate annual employee cost projections.
This goes beyond numbers. The Code on Wages’ impact on basic pay is rewriting internal compensation philosophy, something many companies are still struggling to articulate in their boardrooms.
Reduced Leeway in Salary Structuring
For years, the trend in Indian businesses has been to keep basic pay low and allowances high, particularly special allowance, which was often used as a buffer to round off numbers. But with the 50% rule now firmly in place, that strategy no longer works.
You can’t just keep splitting CTC into more components and assume it’s safe. Even if you create ten different allowance heads, they’ll be clubbed and capped under the new payroll rules under the Code on Wages.
This leaves employers with limited routes:
- Avoiding a high basic pay now carries risk, not benefit.
- Incentive-heavy roles (like sales) may inadvertently breach the cap.
- Custom pay designs are hard to defend under labour inspections.
- Senior hires expecting negotiable structures may need re-education.
It’s not just about rewriting offer letters. It’s about shifting from a market-driven pay model to a statutorily-aligned one, which isn’t always popular.
Recruitment, Banding, and Internal Pay Equity
Let’s say your company hires a manager today on a compliant structure, with ₹6 lakh of basic in a ₹12 lakh CTC. But last year, someone else was hired in the same role, same pay, but with only ₹3 lakh basic. Now there’s a disparity. Not just in take-home but in PF, bonus, gratuity, all linked to “wages.”
If this isn’t addressed:
- Employees may begin questioning pay parity.
- Unions or internal HR committees could escalate the matter.
- Labour officers may raise concerns during inspections.
What began as a payroll rule can end as a people issue. And businesses must prepare to deal with that.
Key Action Points for HR and Finance Teams
Let’s call it what it is: a full structural cleanup. Below are priority items that need attention:
- Pull out all current and historic salary breakups
- Create a mapping sheet to test 50% wage compliance.
- Adjust PF and gratuity cost estimates for the next 4 quarters.
- Brief senior HR staff and recruiters about offer structure limits.
- Review employment agreements and annexures for older definitions of “wages”.
- Document all changes made, including internal memos, to evidence compliance.
Don’t wait for the Code to be “formally enforced” in your State; the payroll compliance under labour codes is now being looked at holistically, and silence is not a shield.
Sometimes, it’s not just what’s written in the law that creates risk, but what’s not fixed internally. And in many companies, the wage structure changes in India are now sitting quietly inside payroll software, waiting for a labour officer to flag them.
Provident Fund, Gratuity & Bonus: Cost Impact for Employers
The ripple effect of the Code on Wages impact on basic pay goes beyond restructuring payroll; it directly raises the financial outlay on statutory contributions. For many employers, especially mid-sized firms with cost-sensitive operations, this change can materially affect profitability unless it is anticipated and budgeted for.
Provident Fund – Higher Contributions Tied to Increased Basic
As per the Employees’ Provident Funds and Miscellaneous Provisions Act, PF contributions are computed as 12% of “basic wages” from both employer and employee. With the basic pay definition under Code on Wages effectively requiring that 50% of total remuneration be designated as wages, this widens the PF base substantially.
Previously, many employers operated with basic pay at 30–35% of CTC. The new threshold, 50% or more, increases the statutory contribution significantly.
Example:
| CTC (₹/month) | Pre-Code Basic (30%) | Post-Code Basic (50%) | Employer PF (₹) Before | Employer PF (₹) After |
| 1,00,000 | ₹30,000 | ₹50,000 | ₹3,600 | ₹6,000 |
That’s an incremental cost of ₹2,400 per employee per month, or nearly ₹29,000 annually per employee. Scaled across a team, it adds up.
Gratuity and Bonus – Rising Liability Due to Widened Wage Base
Gratuity too is computed on the last drawn basic + DA. So, by elevating basic, the wage structure changes in India also lift long-term liabilities.
Assume an employee stays 5 years. Under the previous structure (₹30,000 basic), gratuity payout at exit = ₹86,538. Under the new structure (₹50,000 basic), it goes up to ₹1,44,230, a ~66% increase.
Similarly, bonuses under the Payment of Bonus Act (where applicable) must now be calculated on higher wages. Though caps may still apply, where companies pay ex gratia or performance-linked bonuses outside the Bonus Act, the impact deepens.
What Happens if This Isn’t Implemented?
While the new payroll rules under the Code on Wages are yet to be enforced uniformly across all states, the central definition of “wages” is already driving inspection notes and audit queries.
If employers:
- Continue to offer low basic pay
- Don’t recompute PF and gratuity
- Fail to align their software to the 50% inclusion rule
They risk exposure under:
- The PF Act – for under-reporting
- The Bonus Act – for miscalculation
- The Labour Codes – for wage definition violations
Financial exposure aside, reputational risk, especially for funded startups or public companies, can be severe.
Checklist for HR & Finance Teams
Transitioning to the Code on Wages framework is not a one-time policy note; it’s a phased, careful compliance realignment that affects contracts, payroll, software, internal communication, and budgeting. Below is a consolidated checklist to ensure proactive payroll compliance under labour codes and avoid future disputes.
1. Review Existing Offer Letters, Appointment Contracts & Annexures
- Pull out templates used over the past 2–3 years.
- Scrutinise how “wages” and “CTC” are defined.
- Check basic as % of total CTC, if <50%, flag for review.
- Identify high-risk contracts (e.g., incentive-heavy, special allowance-heavy).
- Verify if annexures still contain old definitions (from pre-Code laws).
If the basic pay definition under Code on Wages is not explicitly reflected, contracts may be non-compliant, even if payroll itself is updated.
2. Redesign Salary Templates and Payroll Software
- Update HRMS software to auto-flag salary structures that breach the 50% rule.
- Standardise offer templates across functions and geographies.
- Remove discontinued allowance heads or rename per Code language.
- Coordinate with finance and external payroll vendors to align calculation logic.
- Run simulations to assess the future cost impact of salary realignment.
Tip: Use historical salary data to test how new logic will affect PF, bonus, and tax deductions, before rollout.
3. Communicate Internally with Leadership and Employees
- Prepare an internal briefing note for CXOs and team heads.
- Set up 1:1 discussions with senior management (especially in functions like sales and finance).
- Build communication templates for employees who will see changes in their take-home pay.
- Document the rationale, link to the statutory requirement, not “company policy”.
- Maintain a tracker of communications and sign-offs for audit readiness.
This is especially important in sectors where retention is sensitive to take-home pay changes.
4. Monitor State-Specific Developments
- Track whether State Rules have been notified for implementation.
- If not, follow the central rules for structure guidance.
- Watch for FAQs or clarifications issued by the Labour Ministry.
- Assign a compliance SPOC or external counsel to stay updated.
Even where the Code isn’t formally enforced, inspectors are already referencing it in queries, so acting early helps.
5. Build an Internal Record of Steps Taken
- Create a dated compliance memo outlining salary structure changes.
- Attach snapshots of old vs new payroll logic.
- Maintain a master list of employees affected and resolution steps.
- Archive correspondence with software vendors or HRMS teams.
- Keep legal review notes ready for future inspections or disputes.
The best defence under the Code on Wages impact on basic pay is to show intent, readiness, and a documented good faith effort.
Timeline for Implementation & State Rules Status
The Code on Wages was passed to unify India’s wage and salary framework, but in practice, its implementation remains patchy and uneven. While the Central Government’s notification triggered widespread corporate attention, most States haven’t formally issued their own rules, and this creates a compliance gap that’s difficult to ignore, especially for companies with teams across multiple cities.
Technically, the Code is active, but when it comes to payroll specifics and inspections, a lot depends on whether the State Government has notified its corresponding rules. The confusion lies here. Many employers are unsure if they should start restructuring their payroll now or wait for their State to move.
Where Things Stand as of Now
Some States have moved forward. Others haven’t. For example:
- Karnataka, Maharashtra, and Uttar Pradesh have released draft rules, but have yet to notify final versions.
- Tamil Nadu, West Bengal, and a few North-Eastern States have yet to formally publish any rules.
- Delhi, Rajasthan, and Gujarat issued draft frameworks but are still sitting on implementation timelines.
So, if you’re operating pan-India, you’re probably working with an uneven rulebook right now.
But the basic pay definition under the Code on Wages is still valid. Just because the State hasn’t notified its rules doesn’t mean employers can ignore the wage definition in Section 2(y) of the Code. Labour officers and inspection authorities have already begun using it as a reference point in PF and gratuity assessments.
What Should Employers Do in the Interim?
If you’re waiting for official letters from every State to begin restructuring your payroll, you’re probably already late. Here’s what we’re seeing across advisory clients:
- HR teams in large metros are proceeding with implementation based on Central wage definitions.
- Inspections in Bengaluru and Mumbai are already referencing the 50% rule during the review of salary slips.
- Notices served to companies are citing the Code on Wages’ impact on basic pay, regardless of State notifications.
This effectively means: the definition of wages is operational, even if the inspection forms aren’t.
Recommended Action for Multi-State Employers
There’s no perfect solution here, but there is a practical one. In our view:
- Treat the new payroll rules under the Code on Wages as a national baseline.
- Don’t hold back payroll restructuring on the assumption that your State will delay indefinitely.
- Keep track of State-wise developments through a monthly internal tracker.
- If budget permits, consider maintaining a short compliance memo to record the steps taken.
And finally, if any part of your CTC structure shows basic pay below 50%, flag it. It’s not worth waiting to fix. The wage structure changes in India are not theoretical anymore. They’re already being enforced in pieces.
Practical Examples: Before and After Salary Break-up Table
To demonstrate the real-world financial and structural shift brought about by the Code on Wages, let’s consider a typical ₹10,00,000 annual CTC. Under the old regime, employers would commonly place only 30–35% of the CTC under “basic pay,” keeping the rest under allowances and reimbursements to minimise statutory payouts.
Now, with the wage structure changes in India and the 50% threshold rule becoming the standard, the same structure needs reworking.
Before vs. After Comparison – ₹10 Lakh CTC
| Component | Pre-Code Structure (₹) | Post-Code Structure (₹) |
| Basic Pay | 3,00,000 | 5,00,000 |
| HRA | 1,50,000 | 2,00,000 |
| Special Allowance | 3,00,000 | 2,00,000 |
| Bonus | 50,000 | 50,000 |
| Medical + Travel Reimb. | 1,50,000 | 50,000 |
| Total CTC | 10,00,000 | 10,00,000 |
| PF Contribution (Employer) | 36,000 | 60,000 |
| Gratuity (5 years) | ~58,000 | ~96,000 |
As seen, the increased basic pay definition under the Code on Wages pushes up PF and gratuity costs. But it also aligns payroll with statutory expectations, reducing exposure to audit penalties.
Observations and Actionable Points
- Take-home pay may decrease slightly unless the employer compensates by increasing CTC.
- For new hires, offer letters must clearly show “wages” as 50% or more of gross.
- Payroll software logic must be updated to reallocate components.
- Older employees on legacy structures should be migrated in a phased manner.
Summary – Financial and Legal Trade-Off
Employers gain long-term compliance stability by transitioning now. The cost is immediate, yes, but the benefit is avoidance of future penalties, back pay orders, and reputational risk. Especially for funded startups, MNCs, and exporters, adhering to the payroll compliance under labour codes is now not just best practice, it’s a due diligence necessity.
Common Employer Mistakes and Legal Exposure
As the market slowly adjusts to the structural realities of the Code, many employers, especially in mid-sized companies and startups, are still operating with legacy salary models and outdated contract language. These gaps aren’t just technical; they’re legal vulnerabilities. Mistakes that look small on paper can lead to notices, penalties, or even retrospective liabilities if challenged by labour authorities.
Mistake 1 – Not Updating Wage Definitions Internally
A major issue we’ve seen is employers continuing to use pre-Code terminology in their salary annexures, appointment letters, and internal HRMS systems. Even where payroll software is reconfigured, HR templates still refer to “gross salary” and “allowances” in ways that conflict with the new wage construct.
This causes a disconnect. Labour inspectors reviewing employee files will compare salary slips with contract annexures. If definitions of “wages” don’t match what’s prescribed in the Code, it could lead to findings of non-compliance, regardless of intent.
Mistake 2 – Using Old Appointment Letters and CTC Structures
The second and more visible error is that companies are still issuing appointment letters that reflect outdated wage logic. Structures where basic pay forms 30–35% of the CTC may have been industry standard in the past, but they’re not compliant with the basic pay definition under the Code on Wages anymore.
If an employer continues to use old salary formats:
- It risks failing to meet the 50% rule.
- Gratuity, PF and bonus calculations may be legally incorrect.
- It may be seen as deliberate avoidance by auditors.
- Backdated PF or gratuity liabilities could be imposed.
- Misalignment in internal records weakens legal defence.
This is a high-risk zone, particularly in the case of terminations, inspections, or whistleblower escalations.
Mistake 3 – Misinterpreting the Exclusion List
Section 2(y) of the Code outlines specific exclusions that don’t count toward “wages.” Many employers, in trying to remain compliant, have started renaming allowances or pushing more into performance incentives, wrongly assuming they’re exempt.
What’s often missed is that:
- The list is exhaustive, not illustrative.
- All exclusions must collectively not exceed 50% of total remuneration.
- Once above 50%, the excess is added back to wages.
- Even if labelled differently, intent and frequency matter.
So, trying to game the rule by overloading special allowance or reimbursements does not work and exposes the company further.
The solution is not in renaming components. It lies in accepting the wage structure changes in India and aligning contracts accordingly.
Conclusion: Immediate Next Steps for Employers
The Code on Wages impact on basic pay has already altered the legal terrain for how salaries are structured in India. And while enforcement timelines vary across States, the definition of wages is central and enforceable now. Doing nothing isn’t neutral anymore. It’s risky.
Here’s what employers should consider doing, immediately:
- Pull out salary structures of all employees at junior and mid-levels and review the basic-to-CTC ratio.
- Standardise all offer templates and remove outdated terms like “gross salary” unless clearly defined.
- Align PF, bonus, and gratuity calculation logic to match the 50% wage rule.
- Speak with HRMS and payroll software vendors, make sure backend logic is updated.
- Prepare a legal memo or board note documenting changes made for internal recordkeeping.
If you’re a founder, CFO, or HR lead reading this, remember: the payroll compliance under labour codes is no longer a theoretical discussion. It’s operational.
Companies that adapt early will gain in terms of risk shielding, smoother audits, and better internal morale. Those who delay will be forced to catch up, at a much higher cost.
FAQs: Code on Wages and Basic Pay Compliance
Q1. Is the 50% basic pay rule applicable to everyone?
Yes, mostly. The rule about keeping basic pay at 50% or more of total remuneration is not role-specific. It applies to all employees, whether junior or senior, unless a very specific category has been exempted by the government, which hasn’t really happened yet. So even if enforcement is staggered, the rule as such is live.
Q2. Our employees’ basic pay is around 30%. Are we non-compliant?
If the current basic is less than 50%, and it’s been structured that way consistently, it’s likely to be flagged under the Code. You may not get pulled up immediately, especially if your State hasn’t enforced it, but from a legal standpoint, the risk is there. Backdated PF or bonus issues could surface during inspections. The definition of “wages” under the Code is clear.
Q3. Can sales team or incentive-heavy roles be kept outside the 50% logic?
Not really. While it’s understood that variable-heavy teams (sales, business development) operate differently, their fixed pay still needs to follow the wage definition. You can pay incentives, but not at the cost of pushing basic below the legal threshold. Renaming everything as “performance pay” won’t work if the fixed portion is too low.
Q4. Does the same compliance apply to startups or smaller companies?
Yes. There’s no carve-out in the Code for MSMEs or startups. Whether you’re a 15-member team or a large MNC, the wage definition and Code on Wages’ impact on basic pay stays the same. The enforcement might come slower, but the obligation is there.
Q5. Our State hasn’t notified its rules yet. Can we wait?
Technically, you could wait. But practically, that’s not advisable. Several States haven’t issued formal rules yet, but inspection officers are already using the central definition. Therefore, the safer route is to assume the rule is in effect. If you operate in multiple States, it’s even more important to align.
Q6. Will employees‘ take-home reduced because of these changes?
It depends on how the structure was earlier. If the old salary had a very low basic and high reimbursements or incentives, and you now increase the basic to meet the 50% rule, PF and gratuity will rise. That can affect the take-home unless the CTC is adjusted upward. Some companies are absorbing the cost; others are doing phased transitions.
Q7. Do we have to change all previous offer letters, too?
Not necessarily. You don’t need to reissue old appointment letters. But if your employees are still active, it makes sense to issue an updated annexure showing the new structure aligned to the basic pay definition under the Code on Wages. That way, there’s no confusion during audits. For new hires, make sure the revised structure is built in from Day 1.
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