Employers may need to review offer letters if the new Wage Code goes into effect on April 1, 2021, which may result in a lower net pay for most employees. The new definition of salary is part of the 2019 Wage Code approved by Parliament last year. The rules for enforcing the law were also tightened last year.
Along with the other three codes on labor relations, social security and occupational health, safety and working conditions, the implementation of the Wage Code is scheduled for April 1 next year.
Under the 2019 Wage Code, the government has capped allowances at 50 percent of total compensation. Payroll experts, therefore, say that this will mean higher costs for employers and lower pay for employees.
To comply with the new rule, employers will now have to increase the proportion of the base salary that leads to an increase in the Provident Fund (PF) and the bonus contribution by the worker and the employer.
Currently, the social security contribution is set at 12 percent for both the employer and the employee.
Prashant Singh, Vice President and Business Director of Payroll Compliance and Outsourcing, TeamLease Services, said: “Employee take-home pay will be affected. It is expected to decrease 4 to 10 percent as a contribution to retirees such as PF and the tip will go up. “
However, the PF contribution will be affected only if the employee’s PF salary is less than 15,000 rupees a month, Singh noted.
Singh also said such a recast would require employers to review offer letters in accordance with the modified proposals and would entail additional expenses on the part of employers.
“Since 50 percent of salary has to be a base salary and allowances cannot be above that threshold, it will definitely have an impact on the net pay of employees,” Lohit Bhatia, President, Workforce Management, Quess Corp , said.
“Any change in employee compensation must be reflected in the employment letter, so now each employer will have to submit new employment letters with further breaks,” added Bhatia.
“The good news is that the drafting of the standards is still ongoing, so the implementation of the Code is likely to come around the new financial year when, in any case, employers and organizations conduct evaluations. Employers will now have time to calibrate the numbers and offer employment letters with new compensation structure, so it will be like hitting two birds with one stone. On the one hand, employers will be right by law and would give compensation letters with new breaks and also take care of employee evaluations, as organizations have not evaluated the current fiscal year due to the prevalence COVID-19
situation, “Bhatia commented
Gaurav Kumar, founder and CTO of Valyu. AI, a fintech startup offering salary solutions, said: “Employers will need a restructuring of current offerings and compensation structures. Financially, the higher deductions towards PF and Gratuity will eventually be borne by the employee.”
For most employees, this will be a hit in their take home pay. For middle and upper income groups, the impact will continue to be contained. However, for many of these people, it will mean a lower contribution to the Public Welfare Fund and the National Pension System, ”added Kumar.
The Wage Code, 2019, was approved in August of last year and is likely to be implemented as of April 1, 2021. It consolidates four laws relating to wages and bonuses, namely: Wage Payment Law, 1936, Law Minimum Wage Act, 1948, Bonus Payment Act, 1965, and Equal Remuneration Act, 1976.
The draft rules on the Wage Code was presented by the government in July this year.
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