Implications of New Code on Social Security 2020 for Employers
The Indian Parliament recently passed several Labor Codes which amalgamated the existing central labor laws. The following Codes received the President’s assent on September 28, 2020:
- Code for Social Security, 2020
- Occupational Safety, Health, and Working Conditions Code, 2020
- Industrial Relations Code, 2020
These codes were introduced the previous year for consolidation and amendment of existing social security norms. The goal of the new codes is to extend the social security umbrella to each worker of the organized and unorganized sector of the Indian economy. These codes got approved by the Lower House of Parliament (Lok Sabha) on September 22, 2020, and from the Upper House of Parliament (Rajya Sabha) on September 23, 2020. Social security codes consolidate all the relevant provisions of the previous nine central labor laws to further simplify and rationalize them.
The 4th code, the Code on Wages, has received the President’s consent in 2019. The Central Government has already introduced the Draft Code on Wages (Central) Rules, 2020 for the public’s reference. As the aforementioned codes have the President’s assent, it is expected that the Government will introduce the respective rules and schemes to get the opinions from experts and public scrutiny. Subsequently, it will notify the date (through Official Gazette) when these codes will come into force and become effective.
The following table will give you a clear understanding of the existing definition and the new definition of ‘wage’ as prescribed in the codes for calculating the contribution to PF.
|Particulars||Previous Provisions||New Code Provisions (Code on Social Security, 2020)|
PF contribution to be paid on the following components of salary:
(a) Basic wages.
(b) D.A. (including the cash value of any food concession); and
(c) Retaining allowance (if given).
|PF contributions payable on defined ‘wages.’ in the code|
|Definition of ’Basic wages’ / ’Wages’|
All emoluments in as per the terms of employment that are payable in cash.
What Was Not covered:
(a) the Cash value of any food concession;
(c) House-rent allowance;
(b) Any dearness allowance (i.e., all cash payments paid to an employee on account of a rise in the cost of living);
(d) Overtime allowance;
f) Commission or any other similar allowance;
(e) Bonus; and
(g) Presents made by the employer
All remuneration (e.g., salaries, allowances, or otherwise) expressed in terms of money or capable of being expressed in terms of money. These include basic pay, dearness allowance, and retaining allowance (if any).
What’s not covered:
(a) Bonus payable under any Law, which is not part of remuneration payable under the terms of employment;
(c) Conveyance allowance or any travelling concession;
(b) House rent allowance;
(d) Value of house accommodation;
(h) Contributions to PF (including interest accrued thereon, if any);
(g) Overtime allowance;
(e) Allowance for Supply of electricity, water, or other amenities or services excluded from the computation of wages by any order of the Government;
(i) Remuneration payable under any award or settlement between the parties;
(j) Amount paid to defray special expenses; and
(l) Retirement benefits, Retrenchment compensation, or ex gratia on termination of employment.
The excluded components listed from (a) to (j) were the same in aggregate exceeding 50% or of such percentage as notified by the Government, shall form part of wages.
Remuneration in kind (given in lieu of whole or part of the wages) to the extent it does not exceed 15% of the total wages will be included in the definition of ‘wages.’
Salient Features of the Code on Social Security 2020
Definition of 'Wages' Is ChangedA uniform definition of wages is introduced to make the calculation of Indian social security / provident fund (PF) contributions easier. This will clear the ambiguity surrounding the part of wages/salary to be considered for calculating PF contributions especially in the case of expatriate employees.
Maintaining Own PF trust Is Restricted for EstablishmentsUnder the existing laws, any establishment can have its own PF trust. This is because there was no threshold of minimum employee strength needed for the formation of the trust. Under the new Code, an establishment can only establish and manage its trust if it has an employee strength of 100 or more.
Widening of Social Security CoverThe existing code covers workers of the organized sectors. However, it has got nothing for the workers of the unorganized sector. But, under the new Code, workers from unorganized sectors are included to bring them under social security cover. Even self-employed people are not left out and have been included in the codes.
Option to Opt-out of Voluntary CoverageThe existing law enables voluntary coverage for establishments where the strength of employees is lower than the threshold (20 employees at any time of the year). Thus, PF laws are not mandatory for such establishments. However, if the establishment is covered voluntarily, there is no option for them to opt out even if the employee falls below the threshold of 20. The new Code gives the option to opt-out from voluntary coverage.
Limitation period for assessments and enquiriesFor matters related to Employee’s Provident Fund (EPF) and Employees State Insurance (ESI), a limitation period to initiate inquiry from the authorities for assessment and determination of money due from employers is set at five years. Further, a two-year period is introduced to complete the enquiries. Earlier, no limitation period was prescribed for EPF/ ESI.
Gratuity must be paid on rendering services for 5 years or less in specific casesThe new Code has made it mandatory to disburse gratuity payments in respect of the following upon rendering services for a period of:
- Three years – For working journalists;
- On employment termination on account of death or disablement or expiration of fixed-term employment, or any other similar event notified by the Central Government (as applicable, on a pro-rata basis).
Foreigner employee to Must Obtain Aadhar to Establish IdentityThe code has made it compulsory to obtain Aadhaar from foreign employees if they qualify as 'resident' under the Aadhaar Act, 2016. As per the Aadhaar Act, any individual will be qualified as a 'resident' where he or she has been in India for 182 days or more in the preceding 12-months before the date of application to get Aadhaar enrolled.
What do the Experts Believe?
As per the experts, the introduction of a new definition of ‘wages’ deserves a careful review from the companies. They must review the salary structure, particularly for the payment which is more than 50% of remuneration on account of various excluded components and 15% addition for the benefits paid in kind. However, the Government should give further clarification on the inclusion/exclusion of stock awards and tax borne by the companies (generally applicable in case of expatriate employees) on ‘benefits in kind’. There could be a potential increase in the cost of expatriate assignment to India in case all such benefits get covered under PF’s purview.
In the existing laws, the bonus is excluded from ‘basic wages’ while calculating PF contributions. However, in the new Code, only the bonus payable which is not part of the terms of employment is excluded from the “wage’ definition for PF purposes. So, a clarification is required in this regard, especially for ‘performance bonus,’ ‘guaranteed bonus,’ and ‘joining bonus,’ generally paid by the company.
Also, the Expatriate employees generally receive several assignment-specific allowances like Spousal Assistance Allowance, Children Education Allowance, Hardship Allowance, Assignment Premium, etc. and these have not been specified in the exclusion list of wages. Therefore, the treatment of such allowances in the new code must be analyzed to understand its impact on the salary structure of the expatriate.
The newly introduced concept of ‘fixed-term employee’ may also impact the expatriates coming to India on a fixed-term basis. They may not be eligible for gratuity on completion of such employment with an Indian company. This will increase the cost of short and long term assignments.
Further, the requirement of obtaining Aadhaar for foreign nationals may give rise to practical difficulties in applying for Aadhaar which is based on the biometrics of the individual.
The introduction of a limitation period for assessments will give certainty to establishments to resolve past years matters. This will also help to get rid of the burden of maintaining supporting documents/ books for a longer period.
Companies must keep a closer watch on rules to be notified by the Central Government. They may also start re-evaluating the existing salary structures of employees to understand the impact these codes will have on the workforce and the steps that need to be taken for compliance under the new code.
Other Features of the Code
- All employers must register themselves as prescribed by the Central Government.
- Once notified, these Code will apply to each entity but could be subject to a minimum threshold of employees.
- Every establishment will be required to maintain records of employees and their work hours and wages paid. The companies should also have to give them proper wage slips.
- Employees shall even be susceptible to contribute an equivalent percentage of wages to their PF accounts.
- In the construction sector, there could be a Social Security Cess of 1-2% applied to the value of construction of the building. This additional social security Cess should be paid for by the building developers. The term “building and construction work’ is clearly defined to eliminate ambiguity in this regard.
- As per the code, each employee must be insured by the corporate for Employees State Insurance Fund.
- Both the employer and employee will contribute to the ESIC.
- Employees’ contribution is going to be paid by deductions from the gross salary.
- If the employer fails to contribute their part, the ESIC should give the advantages to the workers and recover the capitalized value of contribution paid to the worker from his employer later.
- To ease out the process of bringing unorganized sector workers under the umbrella of Social Security, various ambiguous terms like “Gig Worker”, “Unorganized Workers”, and “Platform Workers” are defined in the codes.
- Working women are going to be entitled to maternity leave of up to twenty-six weeks.
- The governments across the country must come up with welfare schemes for unorganized sector workers.
- Companies must publish vacancy on the career centre of their official website.
- The Central Government may come up with any special ESIC scheme for unorganized sector workers.
What Should be the Next Step for Employers?
The new norms could seem far away from implementation as of now to some employers, but the truth is it might be released any time this fiscal year, i.e., 2021-22. As indicated by the norms of the codes, a company must register with the Government to work under this code and comply with it.
Now, understanding the various points of this code and the way it will subsume various other laws might be complex for corporate owners. Also, the new registration process for these codes could also prove to be a time-consuming undertaking. All of these are the reasons enough for the corporates to think of collaborating with a financial consultancy firm.
It will prove beneficial for employers if they consult some reputed financial and legal advisory firm to have an understanding of the new codes. The companies can also outsource their task associated with registration for the code and other compliance-related matters to the legal firm and focus on their main work. Legal firms have experts who will spend considerable time understanding the codes once they are notified. Therefore, they are the best source to sail through the changing scenarios due to the new codes.
So, this brings us to the end of this blog we understood the changes brought by the Central Government through new Codes on Social Security. This may help in improving the quality of life for millions of small wage workers in India. The new codes are aimed toward bringing essential Social Security to each worker in the country be it someone from the organized sector or unorganized sector. The code will also streamline the procedures of implementing welfare schemes of central and state governments for the poor and marginalized workers of the country. The codes are brought as a reform for the employment sector, and it will be good to see their impact on the lives of employees and companies in the future.