ministry of labour codes

Decoding New Labour Codes 2021

The Ministry of Labour and Employment formulated four codes on wages, industrial relations, occupational health safety & working conditions, and wages. These rules would have made dramatic changes to the present conditions and were set to be applied from April 1, 2021. However, some details are yet to be finalized so their implementation has been deferred for now.

labour codes

This article covers basic features of the new labour codes.

1. Definition of Wages

Under the old labour laws, there are 12 definitions of wages. Multiple definitions led to confusion and litigation costs. The new labour codes uniformly define wages to eliminate any confusion.

2. The Basic Pay should be 50% of Cost To Company

According to Code on Wages, 2019, wages paid to the employee include basic pay, dearness allowance, and retention payment. The Code on Wages, 2019 applied to the organized and unorganized sector.

According to the new labour code or new wages code, employers should make sure that 50% of employee’s cost to the company is basic pay. The rest of the 50% goes into other allowances of the employee like overtime, house rent, etc. Beyond the 50% basic if there are any additional allowances then those expenses will be remuneration added to the wages.

3. 48 Hours Work Time

The work time for one week is now set to 48 hours for one week. The employers are given the flexibility to choose the structure of 4 days a week, 5 days a week, or 6 days a week. The hours per week can’t exceed 48 hours.

4. Overtime payment

If an employee works for 15 minutes overtime then the employee must be paid by the employer.

5.Increase in Gratuity Cost of Companies

A gratuity amount is a lump sum amount paid to the employee as a token of gratitude for the services provided by the employee. Since the maximum basic pay is fixed at 50% of the Cost To Company, the Gratuity bonus of the employee inevitably increases. The amount of gratuity is to be calculated on a larger salary base that includes basic pay, allowances (including special allowances), this will lead to an increase in gratuity cost of companies.

The labour code increases the social security elements, provident fund, and other post-retirement policies. The take-home salaries will be affected, they are likely to be reduced under the new code.

6.Wider coverage

The coverage for each law was different, it depended on the type of work done by the employee and the coverage was limited to workers drawing certain wages. The new labour codes are to be applied to all the employees rather than looking at each law differently. The new codes give legal protection and the provision of legal remedy to every employee especially new-age employees like gig workers. The new laws are inclusive in nature.

7. F&F Settlements to be faster

Section 17 (2) of the Code on Wages mandates wages to be paid to an employee within two days of retrenchment, removal, resignation, dismissal. The formalities required to be completed with the HR and the exit process need to be completed quickly within the prescribed period. Companies need to make the required changes to make sure this happens.

Earlier, there were 44 central labour laws. The new labour codes merge the 44 labour laws into 4 labour codes namely Wage Code, Industrial Relations Code, Social Security Code, Occupational Safety, Health & Working Conditions Code. The labour codes will bring in significant changes and if these codes are applied, companies will be required to make major changes in the employment contracts of employees, the structure of compensation, etc.


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