Definition of ‘wage’ in new labor code leaves many unanswered questions

One of the major changes introduced by labor codes is the standardization of the definition of ‘wage’ which is used to calculate various employee benefits. At present, different social security and labor laws have different definitions of wages/salaries for computing benefits under that law. This has led to lack of uniformity in various labor laws resulting in administrative challenges for employers while computing these benefits. The new labor codes try to address this issue by introducing a uniform definition of ‘wage’ for computing benefits. For the sake of simplicity, the definition can be roughly divided into four parts.

Included Components: This part covers the components of salary that should be included in wages. It includes all remuneration payable to a person in respect of his employment, i.e., all salary components—whether paid in the form of 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, value of conveyance allowance or travel concession, house rent allowance, provident fund Contribution, amount paid to meet special expenses connected with the nature of employment etc.

Limit on Excluded Component: The definition of wages stipulates 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 will be added back to the wages. It ensures that the excluded components do not exceed 50% of the total remuneration.

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

Thus, it becomes necessary for the employers to conduct a component-wise analysis to determine what is the ‘wages’ for the employees in their organisation. However, the way the definition is drafted has created some ambiguity and has given rise to many possible interpretations of the different terms used in the definition. Clarity is needed on these.

Should lump sum payments or other benefits such as variable or discretionary annual performance bonuses, production incentives, etc. be included in wages? If so, there is a need for clarity on how such ‘lump sum payment’ or ‘annual payment’ is to be computed for computing benefits like overtime paid on monthly basis or gratuity to be paid on employment basis to be supposed. Last drawn monthly rate of wages.

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

The definition provides an exclusion for certain salary components but there is a lack of clarity on many of these exclusions such as ‘value of travel concession’, ‘remuneration payable under any settlement or award’, ‘commission payable to employees’ or ‘ A sum paid to meet special expenses imposed on the employee by the nature of employment’. These phrases are not 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 Labor Code, which is to facilitate the implementation and multiplicity of definitions without compromising on the basic concepts of worker welfare and benefits. is to be removed. Considering some of the ambiguities in the definition, some clarifications by the concerned authorities before implementing the labor codes 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.