The new Labour Codes (i.e., (i) Code on Wages, (ii) Code on Social Security, (iii) Code on Industrial Relations and (iv) Code on Occupational Safety, Health and Working Conditions), once notified, will herald the simplification and universalisation of labour regulations in India.
The current labour laws are currently governed by multiple legislations. The new Codes bring in with them better and wider coverage of the workforce for social security benefits, ease of compliance, digitisation of employees’ records and ease of access to information such as vacancies, etc.
A few of the reforms revolve around the timeline for payment of wages. The Code on Wages, 2019 has set specific timelines for payment of wages to employees/workers depending on the frequency of the wage payment (such as daily, weekly, fortnightly or monthly). It is to be noted that here (Code on Wages, 2019) the term ‘wages’ specifically excludes statutory bonus.
Currently, the provisions of Payment of Wages Act, 1936, which governs the wage settlement timelines is applicable only to workers with wages not exceeding Rs 24,000 p.m. For this purpose, wages include all salaries and allowances including bonus payable in accordance with the terms of employment.
However, the new Code does not specify any salary limit and covers all employees, thereby making this timeline universal. Hence, it is important for organisations to understand the implications in terms of meeting the related compliances and how this would impact the payroll process and timelines.
Timelines under new labour laws for full and final settlement of wages
The Code (passed by the Parliament) mandates that the payment of wages to an employee who is exiting an organization, be made within two working days of his/her removal, dismissal, retrenchment or resignation. Currently, not all the states’ legislations include “resignation” for determining this timeline of two working days.
For example, Tamil Nadu and Puducherry specifically include the category of resignation for this timeline in their respective state rules. Other states, such as Maharashtra and Tripura for instance, include only termination of employment by or on behalf of the employer as qualifying for the two-day timeline.
As an example, under the current regulations if an employee’s last working day is June 1, 2022, settlement of wages could happen anytime from June 30 to July 31. However, once the Codes are implemented, the employer would need to settle the relevant employee’s “wages” by June 3, 2022.
It is worth mentioning that under the Codes, the timelines have been mentioned in relation to the payment of “wages” due and there is a specific definition of the term “wages”. Therefore, one could take a view that this requirement relates only to wages and does not include terminal benefits such as gratuity, leave encashment etc. This aspect is expected to become clear once the final rules relating to the new codes are notified.
Nevertheless, this is a significant change brought in by the Code. Let’s look at how full and final settlement works at present.
In practice, full and final settlement by employers takes anywhere between one to two months, depending on the individual organization’s policies. In general, this time is taken by the employer to compute the regular wages/salary payable to the employee until his last working day, terminal benefits payable (such as gratuity, leave encashment), recompute income tax payable by the employee, recovery of pending advances/loans provided to the employee and return of employer-issued laptop, access/key cards, etc.
With six to eight weeks to make the full and final settlement after the last working day, employers do get sufficient time to work out the salary/wages payable, make changes to the tax computations, ensure return of assets, and complete all other processes required to make full and final settlement to the employees.
The Code now looks at drastically reducing this timeline to only two working days.
Organisations would be required to realign their payroll policies and processes significantly to ensure compliance with these revised timelines as stipulated in the Code on Wages and the relevant central rules.
Wage settlement for new joinees under new labour laws
A couple of other areas which companies would need to be mindful of include impact on wage settlement timelines for new joinees. The Code indicates that for monthly wage earners, the wages are required to be settled within seven days of the subsequent month and that the wage period cannot be more than one month.
While this appears reasonable enough, companies could face challenges in terms of new joinees onboarded during the month, where the joining date is after the payroll cutoff timeline. Here’s an example as to how it would impact a new joinee.
Each organization has a payroll cutoff timeline. For employees joining an organization after the payroll cutoff date, most employers process the first month payroll along with the subsequent month. For instance, if the payroll cutoff date is 25 of the month (say April 25, 2022), for all employees joining the organisation during the period 25 April 2022 to 30 April 2022, the salary is processed and paid along with the salary for May 2022, thereby making the first wage period longer than a month. This may trigger a non-compliance under the Code on Wages 2019. For a new joinee, this is likely to mean that he/she would get even a few days salary at the end of the joining month if he/she joined just a few days before the month-end.
Another provision which is of importance is the one relating to cap on the deductions. Employers have to ensure that deductions made from the salary relate to specifically permissible deductions (such as contribution to Provident Fund, tax deduction at source (TDS), etc.) and that the total deduction in any month should not exceed 50% of wages.
Where a new joinee joins an organization on 1 March 2022 (last month of the financial year) and opts for contributions such as NPS, Voluntary PF etc. in the month of March 2022, then the deductions for March 2022 (including contribution to PF, tax deduction, etc.) could exceed the 50% of wages for March 2022.
With more states publishing the Draft Rules, the implementation date draws closer than ever. Clarification as to whether the timeline for settlement of wages would be extended beyond two working days is anticipated. An extended timeline to begin with, followed by a phased reduction over the first few quarters of implementation of the Code could be an alternative to the two working day timeline right from the inception. The anticipated clarification would go a long way in the smooth implementation of these reforms that these Codes strive to bring about.
(Saraswathi Kasturirangan is Partner with Deloitte India, Radhika Viswanathan is Executive Director with Deloitte Haskins and Sells LLP and Vijayalakshmi Kartik is Manager with Deloitte Haskins and Sells LLP.)