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Why New Wage Code May Result in Lower Take Home Salary for Employees Next Year

Representative image.

Representative image.

According to the Code on Wages, 2019, the government has put a cap on the allowances at 50 percent of the total compensation. The payroll experts, therefore, say this will entail higher costs for employers and a lower take home pay for employees.

Employers may have to revise offer letters if the new Code on Wages becomes effective from April 1, 2021, which may result in a lower take-home salary for a majority of employees. The new definition of wages is part of the Code on Wages, 2019 passed by Parliament last year. The rules to enforce the law were also firmed up last year.

Along with the other three codes on industrial relations, social security and occupational health safety and working conditions, the implementation of the Code on Wages is planned from April 1 next year.

According to the Code on Wages, 2019, the government has put a cap on the allowances at 50 percent of the total compensation. The payroll experts, therefore, say this will entail higher costs for employers and a lower take home pay for employees.

In order to abide by the new rule, employers will now have to increase the proportion of the basic pay leading to an increase in the Provident Fund (PF) and gratuity contribution on part of both the worker and the employer.

Presently, the contribution towards social security is pegged at 12 percent for both the employer and the employee.

Prashant Singh, Vice President and Business Head- Compliance and Payroll Outsourcing, TeamLease Services said: "The take home pay of the employees will take a hit. It is expected to go down by 4 to 10 percent as the contribution towards retirals such as PF and gratuity will go up."

The contribution towards PF will, however, be impacted only if the employee's PF wage is less than Rs 15,000 per month, Singh noted.

Singh also said such a recast would require the employers to revise the offer letters as per the changed propositions and would entail added expenses on the part of employers.

"Given that the 50 percent of the wages has to be basic pay and the allowances cannot be above that threshold, it will definitely have an impact on the net take home wages of employees," Lohit Bhatia, President, Workforce Management, Quess Corp, said.

"Any change in the compensation of employees has to be captured in the employment letter so now every employer will have to give new employment letters with new breakups," Bhatia added.

"The good part is that the rule writing is still underway so the implementation of the Code is likely to happen around the new financial year when employers and organizations in any case give appraisals. Employers will now get the time to calibrate the numbers and offer employment letters with new compensation structure so it will be like hitting two birds with one stone. On one hand employers will be right by law and would give compensation letters with new breakups and also take care of appraisals of employees as organizations have not given appraisals for the current financial year due to the prevailing COVID-19 situation," Bhatia remarked

Gaurav Kumar, Founder and Chief Technology Officer, Valyu. AI, fintech startup providing salary solutions, said: "Employers will need a restructuring of current offers and compensation structures. Financially, higher deductions towards PF and Gratuity will eventually be borne by the employee."

For most employees, this will be a hit on their net take home salary. For the mid and high-income groups, impact will still be contained. However, for many of these people, it will mean a lower contribution towards Public Provident Fund and National Pension System," added Kumar.

Code on Wages, 2019, was passed in August last year and is likely to be implemented from April 1,2021. It consolidates four laws relating to wages and bonuses, namely - Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965, and Equal Remuneration Act, 1976.

The draft rules on the Code on Wages were floated by the government in July this year.

first published:December 25, 2020, 08:10 IST
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