Key impact areas of the new labour codes

Sneha: Hello everyone! Welcome to Grant Thornton Bharat Podcast. In this edition of our podcast, we are here to talk about the new labour codes introduced by the Government of India.

Labour reforms in India have been widely discussed for years. A concurrent subject, both the Central and state governments have the authority to frame laws on the subject. The codes were losing relevance in the current context of economic development, global trade conditions, growth etc. Further, the damage caused by the pandemic necessitated an overall reform. The new codes are surely a welcome move for new forms of doing business, such as the gig economy, aggregator business models, etc.

Today I have with me Akhil Chandna, Associate Partner, Grant Thornton Bharat to share his insights on the recent changes and some of the key impact areas.

Thank you so much Akhil for joining us.

Akhil: Thanks Sneha, happy to share my thoughts on this new development. 

Question: So, Akhil, the new Codes not only address the numerous flaws in the existing framework, but also propose long-term solutions. What according to you is the underlying theme behind these four codes? 

Akhil: Broadly speaking, there are 4 major themes in these codes -

• Removing multiple definitions across codes – for example, the definition of Wages will be common across all the codes
• Facilitating use of technology and ease of compliance is the next common thread wherein aspects related to registrations, filing, inspection, calling for information etc. will be completely online under the new codes;
• Provisions have been brought in for Compounding of offences and Aid in effective enforcement - This demonstrates that government’s intent is not to punish, but to give all possible opportunities to the eligible establishments for making all non-compliance good; and
• Finally, to ensure transparency & accountability from both the government and industry.   

Question: Indeed, transparency and accountability are key for creating a vibrant economy thriving with equal opportunities.  Coming to the first code, The Code on Wages, could you please share your thoughts on how this code is set to impact businesses and employees, especially the salaried class?

Akhil: The biggest change under the Code on Wages has brought with respect of its universal applicability to all organisations and employees, unlike earlier legislation where only scheduled employments were covered. The next key change is the new definition of ‘Wages’ which is again uniform across the 4 Codes, wherein specified exclusions such as HRA, Overtime Allowance, Conveyance Allowance, employer’s contribution to PF and Pension, etc. have been prescribed for calculating the ‘wages’. The important point to note here is that such exclusions exceeding 50% of the total remuneration, would also form part of the wages. The expanded definition of ‘wages’ would form the base for determining benefits such as overtime, gratuity and leave encashment payable under various codes which are likely to be on a higher side, this would result in a potential increase in overall compensation cost for employers.

On the other hand, in case of employees, the actual impact on the net salary in hand would depend on factors such as the compensation structure in their establishments, whether the contribution to provident fund is on actual basic salary or restricted to 12% of Rs 15,000 per month, which is the statutory limit under current EPF Scheme.

Apart from these, the other change that merits attention is Fixation of Floor Wages by the Central Government for different geographical areas. Going forward, State Governments shall not be able to fix minimum wages less than the floor wages prescribed by central government. Other effective changes relate to Prohibition of discrimination on ground of gender, Timeline for full and final settlement which will be 2 working days from the date of separation of employees, Disqualification from bonus on account of sexual harassment, etc. 

Question: The code on wages, among other things, seeks to address the issue around stagnant wage rates, address wide variations in wage rates within and across states, expand coverage of workers in the law. In this scenario, which sector do you think is most likely to be impacted and how should businesses go about preparing for the change? 

Akhil: We cannot pick any one sector as the most impacted sector, as the widened scope of applicability under the Wage Code impacts all establishments where any sort of Industry, Trade, Business, manufacture or occupations is carried on and it includes government establishments as well. So it’s difficult to pick which sector is most impacted.  Therefore, impact will be there for every sector for sure, however, severity is something which will differ from organization to organization based on the size, geographical spread, etc.

When we talk about the readiness of an organization for the new regime, I feel that businesses will now have to take a deep dive and re-look on all the related aspects vis-à-vis provisions of the Code, for example compensation structure, salary disbursement timelines and related impact on its cash flow, HR policies including but not limited to employment, loans and advances, working hours, etc. 

And believe me it's not that simple!

Question: Coming to the second big reform, that is, Code on Social Security, 2020. This code has widened the coverage of social security benefits specially  to the workers in the unorganised sector, such as contract workers, gig workers, migrant workers etc. While it reflects how the unorganised sector might finally get its due, what you think could be some of the practical challenges with implementing such a reform?

Akhil: Well, the Code on Social Security amalgamates 9 existing central labour laws relating to provident fund, employees’ state insurance, compensation, gratuity, maternity benefit etc. only with the goal to extend social security to all employees and workers either in the organized or unorganized sector.

Bringing in the unorganized sector is one of the most significant changes envisaged.  However, while benefits are sought to be provided for workers in the organized sector comprising of construction workers, gig and platform workers, there are many other open points as of now, such as

• how would the funds be allocated,
• mechanism for providing the benefits to such workers,
• whether there would be any specific eligibility criteria for availing the benefits such as threshold limits, or number of working hours or working at a specific place, etc.

Another challenge under this Code pertains to determining Gratuity payable. The Code provides for payment of gratuity to Fixed term Employees on proportionate basis without completion of 5 years of continuous employment. Also, as I mentioned earlier, the change in definition of Wages under the Wage code would impact the salary to be considered for computing Gratuity and other retirement benefits. Employers need to factor in the additional cost once the codes are implemented.

Among other challenges, I would like to highlight the issue that pertains to International Workers in whose case Provident Fund is contributed on their full salary without any threshold limits. However, with the change in definition of wages, it is expected have a significant impact on the PF contribution for International Workers which would definitely require a review.

Question: Thanks Akhil.  It clearly shows the code may impact large portion of both organised, unorganised businesses as well as aggregator businesses and International Workers.

Akhil, most importantly, when do you think these laws will come into force? 

Akhil: All the 4 codes have received the President’s assent by September 2020 and the rules forming part of the codes are also in public domain as of now. However, the Codes will come into force on the date which will be notified by the Central Government.  The government had earlier indicated its intent to implement the new labour codes across the county effective 1 April 2021.  However, the state governments also need to publish the State rules under the codes for implementation and as on date only a few states such as Karnataka, Uttar Pradesh, Madhya Pradesh, Punjab, Bihar, etc have come out with the draft rules. Therefore, we expect that it will take few more months for the government to be in a position to notify the date of implementation.

Also, there are still many ends to be tied up before the new codes can be made effective – for example,

• the Rules under the four codes need to be notified. This would also include the EPF, EPS, ESI and other Schemes for various category of beneficiaries under the Social Security Code, Formats for returns, registers, etc;
• Appointment of appellate authorities, Industrial Tribunal, and other Bodies under the Codes and Composition of offence Schemes are some of the key aspects which are expected to be notified in the coming months.

Question: Till the time these codes comes into force, what would be your advice to businesses?

Akhil: companies across the economic segments should make use of the interim time period to apprise themselves on the provisions under the new Codes as applicable to their establishments, review the changes they would need to make in compensation structure, policies, processes, etc and work towards preparing for the transition to the new labour code regime.

Sneha: Thank you so much Akhil for your valuable insights with us.

There are bound to be teething issues in implementing such a big change across the country.  However, one would hope that the Central and State governments would work in tandem with establishments, industry bodies and other stakeholders to facilitate a smooth transition.

That was all from Grant Thornton Bharat Podcast. Stay tuned as we bring you the latest developments in Labour Codes

Don’t forget to subscribe to our channel on Spotify, Apple Podcast, Google Podcast, Jio Saavn.