New labour codes define ‘wages’ — How this impacts your basic salary, pension, gratuity and EPF benefits, explained

The Indian government on 21 November consolidated 29 Labour Laws into four comprehensive Labour Codes, namely — the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020) and the Occupational Safety, Health and Working Conditions Code (2020).

The amendment “streamlines compliance, modernises outdated provisions, and creates a simplified, efficient framework that promotes ease of doing business while safeguarding workers’ rights and welfare”, the Centre said in its release.

What is the uniform definition of wages?

In particular, the Code of Wages and Code on Social Security are set to directly impact workers' salary structure, including how much of your pay is now basic salary, and the inclusion of pension, EPF, and gratuity in your salary breakdown.

The reforms have issued a “uniform definition of wages”, per which “wages” now include basic pay, dearness allowance (DA), and retaining allowance. Further, 50% of the total remuneration (or such percentage as may be notified) shall be added back to compute wages, ensuring consistency in calculating gratuity, pension, and social security benefits.

Thus, in effect, the new labour codes could reshape your pay cheque.

How does new labour code impact your salary structure?

Adjustments to salary structure possible

As per the codified definition, all parts of your salary structure will now be treated as remuneration unless exempted (and such parts have been capped at 50%), this broadly means that elements such as Provident Fund (PF), Employees' State Insurance Corporation (ESIC), Workmen’s Compensation, and maternity benefits will see tweaks.

According to Sajai Singh, Partner at JSA Advocates & Solicitors, “Under the Code, “wages” now include:

(i) basic pay;

(ii) dearness allowance; and

(iii) retaining allowance (if any).

The following components are explicitly excluded from the definition of “wages”: (i) the value of any housing accommodation;

(ii) employer contributions to pension and provident fund,

(iii) conveyance allowance and travel concessions;

(iv) sums paid to an employee to cover special expenses;

(v) house rent allowance;

(vi) overtime allowance;

(vii) commissions;

(viii) gratuity;

(ix) retrenchment compensation; and

(x) other retirement benefits, and any ex-gratia payments made on termination of employment.”

This effectively increases the contributions to PPF, gratuity and bonus which is calculated based on basic pay. The drawback is that your take home salary may decrease.

He added that since the code now limits the proportion of excluded components, if these exceed 50% of the employee’s total remuneration, they will be added back to the “wages” category. “The idea is to ensure that “wages” (i.e., basic pay + dearness allowance + retaining allowance, if any) constitute at least 50% of the total remuneration for the purpose of computing social security contributions. As the Code does not specify which variable component should be reclassified as wages, the interpretation currently given is that the component that most closely bridges the gap between the included components and the 50% threshold will be moved into the “wages” definition,” he said.

Thus, the excluded component that is nearest in value to the differential between (i) the included components and (ii) 50% of total remuneration will be reclassified, he explained.

EPF becomes timebound

• The government has imposed a five-year limit for initiating EPF inquiries.
• Further, recovery proceedings are to be completed within two years (extendable by one).
• Suo-moto reopening of cases has been abolished, ensuring timely resolution.
• Employers appealing EPFO orders now need to deposit only 25% of the assessed amount (down from 40–70%), reducing financial burden and ensuring ease of business and access to justice.

Gratuity available after one-year of fixed employment

• As per the new codes, fixed-term employees become eligible for gratuity after one year of continuous service, down from the earlier requirement of five years.
• Notably, since gratuity is calculated based on the last drawn wages and years of service, with basic salary set comprise a larger proportion of pay, the exit lump-sum is expected to also increase.

Key Highlights: What are major updates for wages?

• Universal Minimum Wages: The Code establishes a statutory right to minimum wages for all employees across both organised and unorganised sectors. Earlier, the Minimum Wages Act applied only to scheduled employments covering ~30% of workers.
• Introduction of Floor Wage: A statutory floor wage shall be set by the Government based on minimum living standards, with scope for regional variation. No state can fix minimum wages below this level, ensuring uniformity and adequacy nationwide.
• Criteria for Wage Fixation: Appropriate Governments will determine minimum wages considering workers’ skill levels (unskilled, skilled, semi-skilled and highly skilled), geographic areas, and job conditions such as temperature, humidity, or hazardous environments.
• Gender Equality in Employment: Employers shall not discriminate on the basis of gender, including transgender identity, in recruitment, wages, and employment conditions for similar work.
• Universal Coverage for Wage Payment: Provisions ensuring timely payment and preventing un-authorised deductions will apply to all employees, irrespective of wage limits (currently applicable only to employees earning up to ₹24,000/month).

• Overtime Compensation: Employers must pay all employees overtime wages at least twice the normal rate for any work done beyond the regular working hours.
• Responsibility for Wage Payment: Employers, including companies, firms, or associations, shall pay wages to employees employed by them. Failure to do so makes the proprietor/ entity liable for unpaid wages.
• Inspector-cum-Facilitator: The traditional role of “Inspector” is replaced with “Inspector-cum-Facilitator,” emphasising guidance, awareness, and advisory roles alongside enforcement to improve compliance.
• Compounding of Offences: First-time, non-imprisonable offences can be compounded by paying a penalty. Repeat offences within five years, however, cannot be compounded.
• Decriminalisation of Offences: The Code replaces imprisonment for certain first-time offences with monetary fines (up to 50% of the maximum fine), making the framework less punitive and more compliance oriented.