What is the Code on Wages?

Definition

The Code on Wages, 2019 is one of the four Labour Codes that consolidates and replaces four existing wage-related legislations: the Minimum Wages Act (1948), Payment of Wages Act (1936), Payment of Bonus Act (1965), and Equal Remuneration Act (1976). It establishes a universal framework for wages, bonus, and gender pay parity applicable to all employees across all establishments.

Detailed Explanation

The Code on Wages represents a fundamental shift in how wages are defined and regulated in India. One of the most significant changes is the new definition of "wages," which specifies that basic pay must constitute at least 50% of the total remuneration. This means allowances (excluding certain specified allowances) cannot exceed 50% of the total compensation. This definition has a cascading impact on statutory contributions like EPF, ESIC, and gratuity, all of which are calculated on basic wages.

Under the existing framework, many employers structure compensation with a low basic salary (sometimes 20-30% of CTC) to minimize statutory contribution costs. The Code on Wages will require restructuring of salary components to ensure the basic wage threshold is met. For an employee with a CTC of INR 10,00,000, the basic salary would need to be at least INR 5,00,000, significantly increasing EPF and gratuity liabilities.

The Code introduces a national floor wage set by the central government, below which no state can fix its minimum wage. It also expands minimum wage coverage to all employees, including those in the unorganized sector who were previously outside the scope of the Minimum Wages Act. The payment of wages timeline is standardized: daily-wage workers must be paid by the end of the day, weekly by the last day of the week, fortnightly by the second day after the fortnight, and monthly by the 7th of the following month.

Bonus provisions under the Code apply to employees earning up to INR 21,000 per month, with the minimum bonus at 8.33% and maximum at 20% of wages. Equal remuneration provisions prohibit gender-based discrimination in wages and recruitment for the same or similar work.

Key Rules

• Basic wages must be at least 50% of total remuneration under the new wages definition
• A national floor wage will be set by the central government, applicable across all states
• Minimum wages will cover all employees in all establishments, not just scheduled employments
• Bonus is payable to employees earning up to INR 21,000 per month at 8.33% minimum
• Equal pay for equal work regardless of gender is mandated with penalties for violations
• Wage payment timelines are standardized based on the payment frequency
• Non-compliance penalties range from INR 10,000 to INR 1,00,000 with imprisonment for repeat offences

How TMS Helps

TMS provides comprehensive advisory on Code on Wages readiness, including salary restructuring analysis, impact assessment on statutory contribution costs, and payroll system upgrades. Our team helps clients model different CTC structures under the new wages definition and prepare compliant employment contracts and salary structures before the Code takes effect.

Related Terms

• Labour Codes 2020
• Minimum Wages Act
• CTC (Cost to Company)
• Payroll Processing