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Decoding the Code on Wages 2019: Why the move to protect workers can backfire

Decoding the Code on Wages 2019: Why the move to protect workers can backfire

Decoding the Code on Wages 2019: Why the move to protect workers can backfire
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By Minu Dwivedi  Aug 20, 2019 2:23:58 PM IST (Updated)

The Code on Wages, 2019 has received the assent of the President of India on August 8, 2019. Its provisions will come into force from the appointed date to be notified by the central government.

The Code on Wages, 2019 (Code) has received the assent of the President of India on August 8, 2019. Its provisions will come into force from the appointed date to be notified by the central government. The Code merges, simplifies and rationalises the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976.

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The obvious advantages of the Code are facilitating implementation through removal of superfluous and archaic provisions, multiplicity of statutory definitions, overlapping enforcement authorities and reduction in reporting requirements, number of statutory registers to be maintained, and cost of statutory compliance, to name a few. The larger aim is to bring about better transparency and accountability in the enforcement of labour laws, which is an ambitious and urgent step. But, whether that is the complete picture is a moot question.
As its name suggests, the Code incorporates all the essential elements related to wages, ensuring the regular and timely payment of full minimum wages (without unauthorised deduction or gender discrimination), overtime, and a minimum bonus.
While the existing laws offered statutory protection of wages to about 40 percent of the organised workforce, the Code covers 100 percent of the total workforce in one stroke – organised as well as unorganised – including even the managerial and supervisory employees who were previously exempt.
Under the Code, the central government will set the floor wage (FW), which could vary for different geographical areas. The state governments will fix the minimum rate of wages (MW) payable to employees, which cannot be below the FW notified for that area by the central government. No employer can pay to any employee wages less than the MW notified by the state government for the area, establishment, or work, or discriminate among employees doing the ‘same work or work of a similar nature’ on gender basis. Such MW would probably be the initial wage at the time of entry into employment, with extra allowance for experience, loyalty, and years of service over and above the MW. Moreover, while hailing the MW as a ‘sustenance wage’, special effort has been made to de-link it from employee productivity and efficiency.
In addition, MW need to be paid to all employees in its entirety (without any deduction other than authorised deductions) and within the prescribed time limit. The appropriate government is empowered to mandate the payment of MW by cheque, digital or electronic mode, or direct credit to the employee’s bank account. Further, establishments employing 20 or more employees during an accounting year are still obliged to pay a minimum bonus to the employees who qualify as ‘workers’, even when they do not make any profit.
Among other new provisions, establishments are also obliged to pay managerial and supervisory employees’ wages at double their MW for overtime work. This overtime pay scale is well above the recommended International Labour Organisation (ILO) limit of 1.25 times the normal pay (ILO Conventions nos. 1 and 30).
 Other changes include the introduction of a web-based inspection scheme; enhanced penalties; graded penalty for different types of offences; compounding of offences that are not punishable with imprisonment or are punishable with imprisonment and fine; the appointment of inspector-cum-facilitators for advising employers and workers on implementation of the Code and conducting inspection of establishments; increasing the limitation period to three years for filing claims under the Code, defining both ‘worker’ and ‘employee’, with the former being a subset of the latter and persons undertaking either managerial work or supervisory work for wages exceeding Rs 15,000 per month, not qualifying as ‘workers’; and providing a comprehensive definition of ‘wages’.
Assessing the Code
A scrutiny of the Code indicates that higher wages to employees as mandated by the Code will not necessarily guarantee higher productivity and quality of output. In fact, extending legislative coverage of MW and overtime to all employees may adversely impact job creation, especially since smaller and medium-sized enterprises and set-ups in smaller cities will have to struggle to implement the changes made by the Code. Further, since the Code does not impose any limit on the total overtime hours, the employees may deliberately prolong their work to extend beyond the normal working hours to earn the overtime wage. This would be an extra burden on the employers.  Along with that, high penalty levels meant to serve as deterrents against malpractice, high MW to all employees, and the requirement to pay a minimum bonus even when the establishment suffers a loss, is likely to lead to mechanisation of processes instead. This will ultimately cause a fall in employment overall.
The broader aim of the Central government to give Indian enterprises a competitive edge on the world stage through a simplified and lowered cost of compliance, and thereby incentivise the setting up of more enterprises, may very well be overshadowed by the far-reaching overregulation skewed mainly in favour of workers that the Code will create. If India is to retain its international competitiveness, the Code will need to be tweaked to strike a balance between the desire to extend wage protection to all employees and the need to ensure that the existing workforce is not pushed into unemployment.
Minu Dwivedi is a partner of J Sagar Associates, India’s leading law firm. The views are personal.
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