Labour codes on the cards: Companies' PF liability to go up, workers to see reduction in take-home pay


The four labour codes are likely to see the light of day in a couple of months as the Centre is now keen to go ahead with the implementation of these laws; which among others will result in reduction in take-home pay of employees and higher provident fund liability of companies. Once the wages code comes into force; there will be significant changes in the way basic pay and provident fund of employees are calculated.

The labour ministry had envisaged implementing the four codes on industrial relations; wages, social security and occupational health safety & working conditions from April 1, 2021. These four labour codes will rationalise 44 central labour laws.

The ministry had even finalised the rules under the four codes. But these could not be implemented because many states were not in a position to notify rules under these codes in their jurisdiction.

Labour Codes is a concurrent subject

Labour is a concurrent subject under the Constitution of India and therefore both the Centre and states have to notify rules under these four codes to make them the laws of the land in their respective jurisdictions.

“Many major states have not finalized the rules under four codes. Some states are in the process of finalizing rules for the implementation of these laws. Central government cannot wait forever for states to firm up rules under these codes. Therefore it is planning to implement these codes in a couple of months as some time would have to be given to establishments or firms to align with new laws; a source told .

According to the source

some states had already circulated the draft rules. These states are Uttar Pradesh, Bihar, Madhya Pradesh, Haryana, Odisha, Punjab, Gujarat, Karnataka and Uttarakhand.

Under the new wages code; allowances are capped at 50 per cent. This means half of the gross pay of an employee would be basic wages. Provident fund contribution is calculated as a percentage of basic wage; which includes basic pay and dearness allowance.

The employers have been splitting wages into numerous allowances to keep basic wages low to reduce provident fund and income tax outgo. The new wages code provides for provident fund contribution as a prescribed proportion of 50 per cent of gross pay.

After the implementation of new codes,

The take-home pay of employees would reduce while provident fund liability of employers would increase in many cases. Once implemented; employers would have to restructure salaries of their employees as per the new code on wages.

Besides; the new industrial relation code would also improve ease of doing business by allowing firms with up to 300 workers to go ahead for lay-offs; retrenchment and closure without government permission.

At present all firms with up to 100 employees are exempted from government permission for lay-off; retrenchment and closure.

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