Labour Codes - Social Secutiry - Impact on determination of Gratuity
SOCIAL SECURITY
CODE – IMPACT OF WAGE DEFINITION ON GRATUITY BENEFITS
Standardisation
of “Wages” Definition”:
Hitherto,
the definition of “Wages” were quite diverse in various labour legislation for
the purpose of calculation of the same terms – wages / basic wages etc.
This created practical challenges while interpretation by regulators, courts
and administration of salary structures as well as computation and payments of
social security benefits, contributions and deductions to be made.
The
new unified definition of “Wages” introduced in the labour codes broadly harmonise
and simplify the term and to an extent, the foundation of calculation of
quantum and eligibility of various social security related benefits.
Social Security Code: Impact of new definition
The new
definition now has three parts to it - an inclusion part, specified exclusions
and conditions which limit the quantum of exclusions. It is an inclusive
definition and broad enough to cover almost all components of the compensation matrix
adapted by the Industries-
|
Definition
clause 2(88): Code
on Wages 2019 |
Definition
clause 2(s): Payment
of Gratuity Act 1972 |
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“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, — (a) basic pay; (b) dearness allowance; and (c) 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 of 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 fund, and
the interest which may have accrued thereon; (d)
any conveyance allowance or the value of any travelling 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, under any law for the time being in force: Provided
that for calculating the wages under this clause, if payments made by the
employer to the employee under sub-clauses (a) to (i) exceeds one-half, or
such other per cent. as may be notified by the Central Government, of the all
remuneration calculated under this clause, the amount which exceeds such
one-half, or the per cent. 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 sub-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 per cent. of the total
wages payable to him, shall be deemed to form part of the wages of such
employee; |
“wages” means
all emoluments which are earned by an employee while on duty or on leave in
accordance with the terms and conditions of his employments and which are
paid or are payable to him in cash and includes dearness
allowance but
does not include ·
any
bonus, ·
commission,
·
house
rent allowance, ·
overtime
wages and ·
any
other allowance. |
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Illustration
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Illustration
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Considering
definition of Wages as per Wage Code, wages for gratuity calculation will be
considered 50% of total remuneration. Thus in above scenario 24000(i.e.50% of
total remuneration) will be considered for calculation of gratuity resulting in
higher amount of gratuity payable
Though
certain components which are specifically excluded under the definition, it is
with a rider that such exclusions shall not exceed 50 per cent of the overall
remuneration, and in such an event, such excess amount beyond 50% (or a higher
percentage which may be specified by the Government) shall be added back deemed
as remuneration and will be considered as "wages". In case an
employee is given remuneration in kind the value of such remuneration up to 15
%per cent of total wages payable to him shall also be deemed to form part of
wages of such employee.
Impact on Gratuity
As
for Gratuity, the following excluded components will be considered for
determination of the 50% threshold and shall be added back to the Wages as
deemed Wages.
(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 of 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 fund, and the interest which may have accrued
thereon;
(d) any conveyance allowance or the value
of any travelling 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;
The
salary/wages to be reckoned for gratuity calculation being the last drawn
salary/wages, there could be a steep increase due to adding back the components
exceeding threshold of 50%, especially the house rent allowance(HRA) and commission (Performance Bonus, stock
option, etc) as the industry has to provide for significant HRA/bonuses basis
the Metropolitan rents, rank of seniority and performance onus basis overall
company’s turn over/profits, etc.,
It
is, therefore, prudent that the chambers/federations make a representation to
the Central Government to address this concern so that the Government can
consider these critical aspects while framing the Rules and bringing suitable
amendments to the Act/Rule, as the case may be. (while writing this blog, It is
understand that the CII has represented for revising the threshold to 60% and EFI
is contemplating to file its appeal.
Gratuity for Fixed Term Contract
Employment
Labour
codes have also validated Fixed term contract appointment. The rules say all
such workers would be “eligible for all statutory benefits available to a
permanent workman proportionately according to the period of service rendered
by him, even if his period of employment does not extend to the qualifying
period of employment required in the statute”. Workers hired under fixed-term
contracts will be entitled for gratuity from employers whenever their contract
ends, even if they have not completed five years of continuous service.
Overall Impact of Change in definition of
Wages
·
This
change in definition of ‘wages’ will have an impact both on employers and
employees.
·
This
could potentially lead to an increase in the liability of payment of
contribution towards PF, ESI and various other benefits.
·
There
may also be increase in the coverage of employees in the organisation and many
of the currently excluded employees may now come under the purview of such
labour laws / social security benefits.
·
Due
to the wide encompassing definition of wages, the liability of gratuity / leave
encashment etc. is also potentially likely to see an upward trend.
·
While
the higher contributions would be beneficial from a social security perspective,
however, the impact of the same on the employer’s wage bill will need to
be assessed.
·
It
is interesting to note that on account of employee contribution being mandatory
in few schemes like PF etc. there may also be a significant impact on the net
take home income for the employees.
·
While
the intent is simplification and standardisation as well, there are various
aspects even under new definition of wages (e.g. definition of remuneration in
kind, inclusion of variable pay, valuation rules for remuneration in kind,
etc.) which need to be clarified and addressed before the implementation of the
new codes.
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