The corporate industry is re-analyzing the compensation structure after the change made in the definition of 'wages' under the new labor rules, which will come into action from April 1st, 2021.
Facing potential high compensation pay-outs and implementation challenges, many companies are evaluating various permutations and combinations of salary structures to reduce their impact on their finance and also on employees. Some HR says that the practice will streamline the structure of the organization, roles can be delivered from home, and those that can follow a hybrid model of delivery.
In addition, businesses have been conveyed to the government through industry associations with greater clarity as to whether components such as cars, bonuses, stock options, etc. provided by the company fall under the new definition of wages.
Definition Under the Code of Wages
The definition under the Code of Wages, 2019, consists of three components: Basic pay, dearness allowance, and retention payment.
Experts believe that corporate houses started analyzing the cost-to-company (CTC) structure due to the 50% cap is now on exclusions and remuneration in kind as an inclusion. The new wage code states that the base salary will be a maximum of 50 percent of an employee's CTC. Accordingly, allowances such as holiday travel, house rent, conveyance, and overtime will be part of the remainder.
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Avik Biswas, partner at IndusLaw says that "If the payment made under exclusions exceeds 50 percent, the excess amount will be deemed as remuneration and will accordingly be added to wages," Avik Biswas further added that “Once the changes in labor codes are imposed, Companies will need to revise their employee compensation packages in such a way that the basic salary, dearness allowance and retaining allowance is at least 50 percent of the total salary, while the other components (allowances, etc.) are capped at 50 percent of the total wages”.
Experts say that depending on how wages are arranged and calculated, there will be long-term cost and tax implications for both employers and employees. Anandorup Ghose, partner, Deloitte India says that “Most companies are looking at a scenario to keep basic pay at 50 percent of the total salary to comply with the code”, However, this is likely to have several knock-on effects. These include benefits related to basic pay for companies and an increase in the amount of payment, covering both statutory and non-statutory benefits, such as encashment of leaves, superannuation, etc.
Experts say possible scenarios include lower cash-in-hand to some employees, higher gratuity payments by companies, the higher tax liability on senior management employees at the time of availing of gratuity, among others. Navneet Ratan, Director, Performance and Awards, AON Consulting said that “Preliminary estimates point to a 3 percent to 6 percent increase in overall employee compensation costs for companies. However, effects will vary on different pay components”. For instance, the increased outgo for gratuity pay-outs linked to basic salary could range between 30-40 percent and 80-90 percent for some companies, depending on the demographic profile of senior employees and how long they have been with the organization.
Our advice to clients has been to prepare for best- and worst-case scenarios, both from the perspective of cost and impact on employee and employer", says Rattan.
Problems that Many Employers Face
Nishant Madhukar, HR head at Ferns N Petals, agrees that the new rules are likely to increase the employer's liability towards retirement benefits, such as leave encashment, gratuity payouts as the basic salary increases. "More contribution towards provident fund would impact the take-home salary, which, if the employer intends to match, will add to the cost to the company," he says.
Madhukar shares the dilemma that many employers face. "If the employer wants to maintain the same CTC, the take-home will get reduced. And if the take-home is to be maintained, the CTC will increase," he says. Meanwhile, there is no change in the tax exemption bucket, thus there will be an attendant effect on the tax liability.
Vikram Shroff, partner, Nishith Desai Associates expressed that Employers are skeptical about restructuring their CTC components or maintaining the status quo until there is more clarity about these concepts, he further added that At the moment, in the absence of a clear situation, a wait-and-watch approach may seem practical.
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Another issue is that many workers are struggling with the concerns of gigs and platform workers under the New Labor Code. The Code on Social Security recognizes non-traditional forms of work engagement, including gigs and platform workers. Another problem that many employers are grappling with are concerns of gig and platform workers under the new labor codes. Code on Social Security identifies non-traditional forms of work, including gigs and stage workers. The Code envisages the determination of social security schemes by the central and state governments with financial contributions from the industry. Many experts highlighted that the code envisages that employers' contribution will be 1-2 percent of annual turnover and not more than 5 percent of the actual amounts payable to gigs and platform workers. However, experts also pointed out that the definition of 'turnover' needs more clarity. Experts say They need more clarity on 'turnover'; whether it refers to the revenue of the entire unit or only the revenue earned from the platform in question. "Unless the government comes back with clarity, companies would be reluctant to restructure the remunerations of gig workers", says Biswas. HR experts point out that most companies are already looking to make work-from-home (WFH) a permanent feature of their work model. Several organizations are in the process of evaluating roles that could be delivered from home, and those that need to follow a hybrid model. HR experts say most companies are already looking to convert their work model to the work-at-home (WFH) model permanently. Organizations are evaluating roles that can be delivered from home, and which need to follow a hybrid model. Experts also say that over time and performance evaluation criteria are also likely to undergo a change with a greater focus on availability and accountability. In addition, businesses are opening up to invest in new performance measurement tools and technology. However, most HR experts agree that the new definition of wages is likely to simplify and standardize remuneration packages over time. "The long-term impact of the code may be that the organizations might start to look at simplified salary structures, with a lesser number of components in the pay," says Rattan. The re-balance could, however, see some tax-friendly components disappear from the structure."
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