How the latest labour codes will benefit most employees

Workers may see an increase in some statutory benefits such as gratuity and leave encashment

- Shipra Singh

The four new labour codes—the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health, and Working Conditions Code—aim to bring greater uniformity and clarity to salary structures.

However, the codes, notified on 21 November, also mean a mixed bag of outcomes for employees. While some statutory benefits, such as gratuity and leave encashment, are expected to increase, strengthening long-term financial security, certain allowances, like maternity benefits, may shrink.

Under the new codes, the definition of ‘wages’ has been standardized to include basic pay, dearness allowance (DA), and all other allowances unless specifically exempted. More importantly, at least 50% of an employee's total cost-to-company (CTC), including these components, must be used to calculate social security benefits.

A company doesn't need to increase basic pay to 50% of CTC to comply with the new definition of wages, according to Preeti Chandrashekhar, an independent employee benefit consultant and actuary. “The labour codes have introduced deemed wages for the calculation of social security provisions.”

The Code on Social Security also identifies exclusions such as house rent allowance, bonus, conveyance allowance and commissions, which will not be counted as ‘wages’ for social security calculations. The new wage definition mainly impacts the calculation of gratuity and leave encashment. This is how you can expect payouts towards different social benefits to change.

Calculation of gratuity

While the Payment of Gratuity Act, 1972 (PG Act), has been repealed, the provisions from this law have been replicated in the Code on Social Security without any change, except in the definition of wages’, said Atul Gupta, partner labour and employment practice, law firm Trilegal. “So, the formula to calculate gratuity and tax rules on it is the same,” he added.