The Code on Wages 2019: Impact on cost to company

The Code on Wages 2019: Impact on cost to company

The Code on Wages, 2019 is applicable to all the employees of every establishment. This means the code applies not only to workers but to the supervisors and executives as well.

The Code on Wages, 2019 has defined “wages” in great detail. The same definition is quoted in the subsequent three labour codes passed by Parliament in 2020. According to Section 2 (y) of the code, “wages" mean the entire remuneration paid to an employee while in employment and include: (i) basic pay; (ii) dearness allowance; and (iii) retaining allowance, if any.

However, “wages” do not include:

(a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;

(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate government;

(c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;

(d) any conveyance allowance or the value of any travelling concession;

(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;

(f) house rent allowance;

(g) remuneration payable under any award or settlement between the parties or order of a court or tribunal;

(h) any overtime allowance;

(i) any commission payable to the employee;

(j) any gratuity payable on the termination of employment;

(k) any retrenchment compensation or other retirement benefit payable to the employee or any ex-gratia payment made to him on the termination of employment.

However again, for calculating the “wages” under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceed one-half, or such other per cent as may be notified by the central government, of all the remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent so notified, shall be deemed as remuneration and shall accordingly be added to the “wages” under this clause.

This clause defines “wages” as consisting of the basic pay, the dearness allowance and the retaining allowance if any. However, if these three components were to add up to less than 50 per cent of the total defined remuneration, then the 50 per cent figure arrived at will be regarded as “wages”.

Following the enactment of the Code on Wages, 2019, four existing Acts stand repealed. The concerned acts are: The Payment of Wages Act, 1936, The Minimum Wages Act, 1948, The Payment of Bonus Act, 1965 and The Equal Remuneration Act, 1976.

The Code on Wages, 2019 is applicable to all the employees of every establishment. This means the code applies not only to workers but to the supervisors and executives as well. The new definition of “wages” will ensure that the minimum wages as prescribed by the the Government from time to time would strictly be complied with, while eliminating the scope for reducing the contribution to terminal benefits, because of the bifurcation method applied by employers in the past. Admittedly, once the code becomes operational, the new definition of “wages” is likely to add to the financial burdens of several companies.

Evolution of wage structure with allowances

When I commenced my corporate career in 1970 as an Assistant Engineer with Mukand Iron & Steel Works (now called Mukand), there was nothing like the concept of cost to company (CTC). The appointment letter given to me merely carried details of the monthly basic pay, the Grade in which I was placed, and the annual increment applicable to that grade. There was also mention about the monthly dearness allowance that I would receive based on the consumer price index. In my first payslip, the total of these two items – basic pay and dearness allowance – amounted to a princely sum of Rs 1,050 per month.

No other allowances were payable to me, either monthly or annually, during the first two years of my service, except the annual bonus declared by the company before Diwali based on the earnings for the previous year. This pattern of monthly wages continued largely in the same manner as I moved up the organisational hierarchy by way of promotion, as well as movement from one organisation to another in my corporate career. Just to reiterate, the basic pay and for certain years the Dearness Allowance continued to be the most important components of my monthly remuneration.

In India, the concept of CTC had its origins in the information technology (IT) companies from around mid-1980’s. Alongside, consulting firms began to undertake surveys of executive remuneration for providing a comparative picture of a company’s standing in respect of its compensation levels and for determination of industry wise benchmarks. Some select companies formed remuneration clubs for similar purposes, primarily for exchange of salary details and compensation practices. These new developments necessitated having to assign cash value to perquisites extended to executives especially in multinational companies. Later, when the income tax rates were rationalised and the tax-free perquisites came up for scrutiny, companies began to treat all items of compensation as taxable. This automatically led to the legitimisation of the concept of CTC.

Simultaneously, there were other developments. The practice of including dearness allowance in the monthly salary of executives was abandoned by most companies. Also, in negotiations of long-term wage settlements with trade unions, organisations tried to introduce new allowances. This was done mainly to limit the rise in basic pay and monthly dearness allowance, as these two items had an impact on several other payments such as overtime rate, annual bonus, leave encashment, contribution to provident fund and gratuity.

In enterprises which have field force for supporting the sales and marketing effort, there has been a practice of negotiated tax-free daily allowance for local and out station working of the field force as the job entails travel, boarding and at times lodging expense. Here the tax-free daily allowance is normally paid without any supporting vouchers and at times higher than the normal expense. The eligible tax-free daily allowance is quite often part of a negotiated long-term wage settlement.


CTC is the nomenclature presently used by Employers while making an offer of employment to show case total remuneration. The final figure shared can be misleading as in some cases it includes items such as performance bonus payable at its maximum (for which amount limited number of persons qualify), monetary value of Subsidised snacks and meals, and gratuity (which again is payable only when an employee completes a minimum of five years of service). Many new employees get at first impressed with the CTC figures shown on the paper, but later feel disappointed when they realise that the monthly take home pay is very much lower, and not one twelfth of the CTC amount, as they had assumed that it would be.

Some companies offer an à la carte system where employees can opt for allowances of their choice within the negotiated CTC limits. This is done for two purposes: 1) cash now as against deferred payment and 2) reduction of tax liability.

The CTC represents a company’s total annual expenditure on an employee. CTC computation includes all the payments, in cash and in kind, the direct payments and the money value of the welfare benefits and perquisites extended to an employee. Hence, to avoid any misunderstanding or subsequent disappointment, the CTC components should be explained clearly and carefully to a new joinee.

Elements of CTC

The items defined under section 2 (y) of the code fall into three categories of the CTC format in vogue among the companies. They are as follows:

A) Direct benefits to an employee – (i) basic pay, (ii) dearness allowance, (iii) retaining allowance, (a) bonus, (d) conveyance allowance, (e) special expenses, (f) house rent allowance or reimbursement, (g) amount payable under an award, (h) over time allowance, (i) commission.

Allowances such as shift allowance, education allowance, dress allowance, and any other allowance which form part of the direct benefits but have not been defined anywhere in the Code, will have to be considered as elements of item (e) special expenses and be regarded as part of remuneration.

However, medical allowance or reimbursement, medical insurance premium and leave travel reimbursement, which are shown as part of CTC, may not have to be included in calculating the remuneration under the code.

B) Indirect Benefits to an employee include the item value of house accommodation. Which under Section 2 (y) (b) of the code is defined as: “the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government”. House accommodation to employees plus supply of electricity, water is generally provided in the company’s township. In some cases, accommodation is provided to essential staff or persons in top management cadre. There is a method of computing the value of accommodation, if provided free, as per existing income tax laws.

There are organisations that hich provide also the following benefits: interest free loans for buying assets, food coupons in lieu of subsidised meals, payment of medical insurance premium, free transport to office and free uniform. All these items form part of indirect benefits, but they have not been defined anywhere in the Code. On the other hand, they are being shown as part of CTC by the organisations. These items stay as grey areas and there is a danger that they may become objects of arbitrary interpretation by the Labour & Employment Department.

C) Saving contribution to an employee refers to item 2 (y) (c) of the code contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon. Organisations were including the contributions made by the Employer to the employee’s Pension and Provident Fund accounts under the existing law, in the employee’s CTC. However, the interest which may have accrued to the contribution in the year was never considered as part of CTC, as this is not paid by the employer. Be that as it may, for the first time ever, the interest accruing to the contribution has been made a part of remuneration under the new code. This is clearly a new development.

Many companies operate superannuation fund for their executives. The contribution to the superannuation fund, amounting to 15 per cent of an employee’s basic salary (plus dearness allowance, if any), is solely made by the employer. The Government of India has presently set an aggregate limit of Rs 7.5 lakh for employer contributions to the Provident Fund (PF), National Pension System (NPS) and superannuation fund (SF), any contribution beyond which is taxable for the beneficiary, otherwise this amount does not at present attract any liability. In fact, the code seems silent about SF. The SF is, no doubt, a pension fund, and the code does make a mention of pension fund. But the pension fund referred to under item 2 (y) (c) in the Code is about the pension scheme which forms part of the PF. SF does not get discussed at all in the Code.

This is yet another grey area. It would, therefore, be advisable to include the employer’s contribution to the superannuation scheme as part of remuneration. There are companies that have stock options for certain category of employees and this could be a grey area for it to be considered as remuneration based on the Income Tax Act.

Impact on companies

The two items, that pose a problem in computing an employee’s remuneration for a financial year, are overtime and annual bonus. In the case of workers, over time earnings are a part of remuneration. However, the payments are likely to vary from month to month and the exact amount will only be known at the end of the year. Similarly, the annual bonus payable to employees could vary from year to year as the final amount is based on the available allocable surplus. Of course, it is entirely a different matter that in quite a few companies, the quantum of bonus is negotiated and settled with the trade union and is in no way related to the allocable surplus.

All organisations have to calculate the “wages” as defined under the cde and see whether the existing basic pay, dearness allowance and retaining allowance together amount to more than 50 per cent of the remuneration for every one of their employees, whether they are executives, supervisors, workers or even contract workers. If it does, there would not be any additional financial liability to the company when the code becomes operational.

But in organisations where the “wages” do not add up to 50 per cent of the remuneration, extra provision will have to be made for leave encashment and gratuity payments. As for the employer’s contribution towards PF, as long as the present limits are in force at – 12 per cent of the wages subject to a present wage ceiling of Rs 15,000 pm – the additional financial impact is likely to be marginal. If, however, the wage ceiling of Rs 15,000 were to be enhanced or removed, then there is bound to be additional liability, once the code becomes operational.


In cases where the wages paid amount to less than 50 per cent of the total remuneration, organisations need to take corrective measures to remove the anomaly forthwith. The easiest way is to enhance the basic pay gradually while granting annual increments.

Organisations should also institute reasonable limits to leave accumulation and urge their employees to avail of their annual leave regularly. This will reduce a company’s liability considerably when it comes to leave encashment.

There is a provision in the code that the full and final settlement of a departing employee will have to be completed within two working days. This may not pose a problem in the cases of retirement, retrenchment or dismissal of an employee. However, in the cases of resignation

without advance notice, making full and final settlement of the dues within two working days can be a big challenge, as processing of the monthly payroll in most enterprises is outsourced. Hopefully, this issue can be resolved by ensuring that the departing employee has to serve the notice period.

Confusion still persists among the professionals of most companies as to which components of the CTC are to be included in computing the remuneration, to determine the quantum of “wages”. It would hugely benefit organisations, trade unions and employees, if the Ministry of Labor & Employment, Government of India can release question and answers by sharing real life examples to explain how the “wages” are to be calculated. This will help the organisations to duly comply with all the provisions of the new code and spare them from being harassed at a later date by government agencies for non-compliance, which, in many cases, could be merely due to ignorance or misunderstandings.


Dr. Rajen Mehrotra is Past President of Industrial Relations Institute of India (IRII, Former Senior Employers’ Specialist for South Asian Region with International Labor Organization (ILO) and Former Corporate Head of HR with ACC Ltd. and Former Corporate Head of Manufacturing and HR with Novartis India Ltd. E-Mail:

Published in April 2021 issue of Current Labour Reports.

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