Definition of ‘wages’ in new labour codes leaves many unanswered questions

One of the key changes introduced by the labour codes is the standardization of the definition of ‘wages’ to be used for the calculation of various employee benefits. Currently, different social security and labour laws have different definitions of wages/salary to be considered for the calculation of benefits under that law. This has led to a lack of uniformity among different labour laws resulting in administrative challenges for employers while calculating these benefits. The new labour codes attempt to resolve this issue by introducing a uniform definition of ‘wages’ for the calculation of benefits. For simplicity, the definition can be broadly broken down into four parts as follows.

Included components: This part comprises the components of salary which should be included in wages. It covers all remuneration payable to a person in respect of his /her employment, i.e., all salary components—whether paid as allowances or reimbursements or provided as benefits to employees.

Excluded components: This part provides a list of salary components which are specifically excluded from the definition of wages, such as bonus payable under any law, commission, conveyance allowance or value of travel concession, house rent allowance, provident fund contributions, the sum paid to defray special expenses entailed by the nature of employment, etc.

Limit on excluded component: The definition of wages prescribes a limit on some of the excluded components specified above—such that if the sum of these exclusions exceeds 50% of all remuneration, the excess shall be added back to wages. This ensures that the excluded components do not exceed 50% of the total remuneration.

Inclusion of remuneration in kind: The definition also has an ‘explanation’ which provides that if any remuneration in kind is provided to the employee, the value of such remuneration in kind shall form part of wages to the extent of 15% of total wages.

Thus, it becomes necessary for employers to carry out a component-wise analysis to determine what constitutes ‘wages’ for employees in their organization. However, the way the definition has been drafted has created some ambiguity and has led to multiple possible interpretations of various terms used in the definition. There is need for clarity on these.

Whether one-time payments or other benefits such as variable or discretionary annual performance bonus, production incentive, etc., should be included in wages? If yes, then clarity is needed on how such ‘one-time payments’ or ‘annual payments’ should be considered for calculation of benefits such as overtime to be paid on a monthly basis, or gratuity to be paid on termination of employment basis the last drawn monthly rate of wages.

The definition provides a limit on exclusions to the extent of 50% of ‘all remuneration calculated under this clause’. However, the term ‘all remuneration calculated under this clause’ has not been explained and there is ambiguity on whether it refers to ‘wages’ computed as per the definition or ‘gross salary / CTC’ or all payments made by an employer to an employee (including benefits not forming part of CTC). While the definition provides for the inclusion of remuneration in kind in wages to the extent of 15% of wages, the meaning of the term ‘remuneration in kind’ has not been explained. Is the limit of 15% to be calculated on the basis of the definition of wages or all remuneration?

The definition provides for an exclusion for certain salary components but there is a lack of clarity on many of these exclusions such as – ‘the value of travel concession’, ‘remuneration payable under any settlement or award’, ‘commission payable to employees’ or ‘sum paid to defray special expenses entailed on the employee by nature of employment’. These phrases have not been defined or explained.

The introduction of a common definition of wages is a very positive step in realizing one of the stated policy objectives of the labour codes, which is to facilitate implementation and remove a multiplicity of definitions without compromising on the basic concepts of worker welfare and benefits. Considering some of the ambiguities in the definition, some clarifications by the authorities concerned before the labour codes are implemented will go a long way in achieving the policy objectives.

Sonu Iyer is partner and regional leader, people advisory services – tax, EY India. Puneet Gupta is partner, people advisory services – tax, EY India.