Articles 24th Apr 2024

Impact of the New ‘Wage’ Definition in the Labour Codes: Changes, Ambiguities, and Compliance Measures


PV Ramana Murthy Head– Employment and Labor Laws | Mumbai
Retika Yadav Senior Associate | Mumbai

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  • India is currently governed by a plethora of labour legislations. Labour is a concurrent matter in the Constitution, which means both the Central Government as well as the State Governments can formulate laws and make rules. It has long been recognized that many of the current labor laws are outdated, necessitating a comprehensive overhaul. The Government of India in 2019 and 2020 has taken a step to amend and consolidate 29 of the current labour laws into four new “codes”. These include: –

    • The Code on Wages, 2019 (Wage Code)
    • The Industrial Relations Code, 2020
    • The Code on Social Security, 2020
    • The Occupational Safety, Health, and Working Conditions Code, 2020

    One of the most notable reforms introduced by the new Labour Codes is the revised definition of ‘wages.’

    Our article aims to explore the challenges posed by this new definition, including potential financial and compliance burdens on employers, as well as the measures necessary to effectively implement the new codes regarding this issue.

  • Consolidated definition of the term ‘Wages’

    Currently, the definition of the term ‘wages’ is different in different labour law legislations such as Factories Act, 1948, Industrial Disputes Act, 1947, Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 Act, and Payment of Wages, 1936 etc. Many a time, this posed a challenge to the employers and the courts in India while interpreting the same.

    The new Wage Code, 2019 introduced a definition of ‘wages’ with specified inclusions and exclusions, which has been considered in all the other three labour codes, which subsequently got formulated in the year 2020.

    To enhance understanding of the definition of wages, it can be divided into four distinct parts as follows:

    • Inclusions: The first part is what is included in the definition of ‘wages’. As per this, wages include all remuneration paid by employers by way of salary and allowances, which essentially means all salary components—whether paid as allowances or reimbursements or provided as benefits to employees are included in the definition of wages. However, the definition specifically mentions the inclusion of basic pay, dearness allowance and retaining allowance, if any.
    • Exclusions: The second part of the definition deals with specific exclusions from the definition of ‘wages’. The definition excludes components such as bonus payable under any law for the time being in force, value of house accommodation or supply of light, water or medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the Government, pension, or provident fund contribution (inclusive of interest accrued), conveyance allowance or the value of travel concession, commission payable to the employees, house rent allowance, overtime allowance, remuneration payable under any award or settlement, gratuity or retrenchment compensation, the sum paid to defray special expenses entailed by the nature of employment.

    The way one needs to look at the definition at this juncture is that all remuneration, expressed in terms of money or capable of being so expressed would form part of wages, unless they are specifically excluded from the definition as shown above.

    • Threshold limit for the Excluded Components: Further, the definition also sets a limit on the excluded components, stipulating that they cannot exceed 50% of the total wages. This means that if the combined total of all allowances surpasses 50% of the total wage, any amount exceeding this threshold will be considered as ‘wages’ for the purpose of calculating various contributions, including social security measures like PF, ESI, etc.
    • Inclusion of Remuneration in kind: The explanation to the definition of ‘wages’ also provides that in the event of an employee being given any remuneration in kind by the employer, the value of such remuneration in kind not exceeding 15% (fifteen percent) of the total wages, shall be deemed to form part of the wages payable to such employee. For example, if an employer is providing free food in the canteen for the workers, giving Sodexo coupons for completing a job, sending workers on a paid vacation, all these would be considered as ‘wages’ to the extent of 15% of their cost to the total wages.

    The intention of the legislature, while drafting the definition of ‘wages’ seems to eliminate any kind of wrong practices to undervalue the contributions to the social security funds or other amounts calculated and paid to the employees.  It needs to be noted in this context that the Hon’ble Supreme Court in its landmark judgment in the Regional Provident Fund Commissioner v. Vivekananda Vidyamandir (Civil Appeal No. 6221 of 2011 held that “employers are required to make contributions under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 on certain allowances that comprise an employee’s salary. Specifically, the Apex Court held that special allowances paid by an employer to its employees should be considered as part of Basic Wages for the purpose of computation of PF Contributions, unless they are variable, linked to incentives, or specially paid to those who avail of the opportunity”.

    Many employers, subsequent to the above judgment of the Hon’ble Supreme Court, made the changes to the way they calculate the social security contributions for PF, taking into account such of the allowances, as enumerated by the Supreme Court. The intent of the legislature also seems to bring in the principles laid down by the Supreme Court in the above judgment into the definition of ‘wages under the new Wage Code,’.

    However, there are a few ambiguities that need to be ironed out by the authorities before the implementation date is notified by the Central Government.

  • Ambiguity around the definition

    While the introduction of a common definition of wages under the Code is a positive step forward,  certain gaps in the definition raise concerns and could potentially undermine the intended purpose of standardizing the definition of ‘wages’ across the four labour codes. The following discussion makes this point clearer.

    • Inconsistent definition:

    As discussed above, the definition of wage in the Wage Code, in the first part, specifically includes basic pay, dearness allowance and retaining pay but does not specifically include certain components and allowances that are regularly paid by employers, i.e., HRA, and conveyance allowance without providing any rational explanation for their exclusion. However, the proviso to the definition, while speaking about equal wages to all genders includes the following four components – conveyance allowance, house rent allowance, any amount paid due to an award passed or settlement between the parties, and overtime for the purpose of computation of wages.

    The above causes inconsistency in terms of interpretation of the definition and might give rise to litigation. The proviso, which says these additional components need to be considered ‘for the purpose of equal wages to all genders and for the purpose of payment of wages’, while at the same time, specifically excluding some of those components from the ‘wages’ in the first place creates a dissonance in the minds of interpreters.

    The way ELP advises its clients on the definition of ‘wages’ is as follows:

    • The employers need to keep a maximum of 50% of the total remuneration in the included components of wages. Keeping more than 50% will make the take home pay lower to the employees due to higher social security contributions.
    • Employers need to keep in mind the tax benefits under the Income Tax Act, 1961 and structure the wage accordingly.
    • Employers may think about creating a flexible wage structure, without deviating from their compliances to ensure better take-home and better tax benefits to the employees.
    • HR and legal teams need to work with labour law specialists and create wage/salary structures that are efficient in terms of costs and compliance.
    • Lack of Clarity:

    The definition of wage in the Wage Code, as stated in Section 2(y), does not provide enough clarity on some of the exclusions.

    For example, the definition excludes “any bonus payable under any law not forming part of the remuneration”. Which means, a bonus paid not under any law needs to be included. That means manufacturing incentives which are paid not under the law would not come under the exclusions. On the other hand, “any commission payable to an employee” is specifically excluded. Does it mean that the sales commission paid to sales employees for achieving the sales targets need to be excluded, while the manufacturing incentive paid to manufacturing employees need to be included? We need to bear in mind that the Hon’ble Supreme Court in its judgment quoted above, excluded variable remuneration linked to incentives from the purview of basic wages.

    One of the most important things is to get clarity on the representations made by the employers to the authorities regarding the ambiguity in the wage definition. A common effort is needed in this direction by the employers’ federations. ELP is putting its efforts into working with some of the associations to bring in more clarity into these aspects.

    We hope you have found this information useful. For any queries/clarifications please write to us at  or write to our authors:

    PV Murthy, Consultant, Email –
    Retika Yadav, Senior Associate – Email –

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.