New Labour Code Big Change In Salary Structure Will Take Home Pay Decrease Know Details
New Labour Code: The implementation of the four new labour codes has sparked widespread discussion regarding salary structures and employee take-home pay. The implementation of these codes will revive questions about how salaries are structured and whether the net pay of employees will witness a decline once the new definition of wages comes into effect. The primary concern revolves around the mandate that at least 50% of an employee’s total remuneration must be categorized as ‘wages’.
Until now, companies typically structured compensation packages to keep the basic salary component low – often less than 50% of the total Cost-to-Company (CTC) – using various allowances to make up the rest. This practice minimized statutory deductions like Provident Fund (PF). However, under the new regime, this structure will need an overhaul, directly impacting statutory calculations.
Standardised Wage Definition & The 50% Rule
The new labour codes introduce a standardised definition of wages. According to the rules, wages must include Basic Pay, Dearness Allowance (DA), and Retaining Allowance. Crucially, these components combined must constitute at least 50% of the total remuneration.
Impact on Statutory Contributions:
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Join on Telegram- Higher PF Deductions: Employee Provident Fund (EPF) contributions are calculated on basic pay (12% by the employee and 12% by the employer). A higher basic wage base means a larger deduction for PF.
- Increased Gratuity: Since gratuity calculations are also based on basic pay, the payout liability for companies and the benefit for employees will increase.
Will Take-Home Salary Decrease?
Industry experts suggest that the immediate take-home salary of employees could see a reduction. According to a report by India Today quoting Alay Razvi, Managing Partner at Accord Juris, the revised definition influences how retirement and statutory benefits are computed. Razvi clarified that while the change doesn’t mandate employers to hike the basic salary paid, the figure used for computing PF and gratuity will rise.
If employers do not increase the overall Gross Salary or CTC to offset these increased costs, the higher deductions for PF will be subtracted from the existing pay, resulting in a lower net salary for the employee.
| Component | Current Practice | New Labour Code Impact |
|---|---|---|
| Basic Salary | Often kept low | Must be at least 50% of Total Pay |
| PF & Gratuity | Lower contribution base | Base increases, leading to higher savings |
| Take-Home Pay | Comparatively higher | Likely to reduce due to higher deductions |
As per a report by The Economic Times, Suchita Dutta, Executive Director of the Indian Staffing Federation, noted that changes could reduce take-home pay if firms adjust salary structures to contain expenditure. However, Anjali Malhotra from Nangia Group highlighted that the unified definition ensures consistency in calculating social security benefits, potentially offering better retirement security in the long run.
Focus on Gig Workers Welfare
The new codes also bring positive news for the gig economy. Companies like Swiggy, Uber, and Zepto will be required to set aside 1-2% of their turnover specifically for the welfare of gig workers. This move aims to enhance social security without hampering the flexibility of the gig working model.
Additionally, the codes mandate that employees should receive their salaries by the 7th of every month. Currently, employees and employers alike are awaiting clarity on the final rules and practical implementation at the company level.
