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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

“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.

Illustration

 

Salary components

Amount

Basic Pay

20000

HRA

14000

Conveyance allowances

14000

Total remuneration

48000

Gratuity ( 6 yrs )

83077

Illustration

 

Salary components

Amount

Basic Pay

20000

HRA

14000

Conveyance allowances

14000

Total remuneration

48000

Gratuity ( 6 yrs )

69231

 

 

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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