Introduction
In India, the Code on Wages, 2019 streamlined the Labour Law system with respect to compliance to a single code for pay instead of having multiple codes of pay (i.e., Minimum Wages Act and other sources), to support and encourage fair pay for all industry sectors by providing a consistent and easily understood manner in which pay will be addressed. By establishing this as the only code for all employees throughout the country, it also creates an easier process for businesses to comply with payroll requirements. Beyond that, this reform has had and will continue to have a profound effect on payroll compliance (including structuring payroll, withholding of taxes, payment timelines and keeping records) and thus will require businesses to devote a significant amount of time and energy to planning and monitoring compliance with this new Code on Wages.
Additionally, as a result of the Code on Wages becoming effective, payroll is now a core function of compliance with the law and no longer just an administrative task associated with the day-to-day operation of the business.
Uniform Definition of Wages and Its Effect on Payroll Structure
The Code's definition of "wages" is standardised - before the Code, different labour codes had different definitions, providing employers with the ability to create salary structures that had little or no relation to basic pay (or a large portion of the components as allowances). The Code limits that ability by stating that HRA, bonuses, commissions and overtime must not exceed 50% of total remuneration for the purposes of determining what constitutes "wages".
As a result, employers need to review and re-evaluate their salary breakups as a result of this change so that their employees have at least 50% of the cost-to-company as basic pay or dearness allowance. In the case of an employer that does not have a basic pay structure of at least 50% of the cost-to-company, the employer's allowances will be automatically reclassified as "wages" and, therefore, subject to increased statutory liability for contribution to the provident fund, gratuity and payment of bonuses.
Expanded Employee Coverage and Payroll Inclusion
The Code on Wages is a major expansion of the scope of wage codes in India, as it applies to all workers employed either in the formal sector (organised) or the informal (unorganised) sectors unless the Code explicitly states that workers are excluded from its coverage. This expanded application may also result in some industries being added to the list of Wage Codes that previously were excluded.
About payroll compliance, this change means that employers will now have to accurately classify their employees (including contract and fixed-term workers). All employees in the eligible categories must receive consistent calculations related to their wages, including compliance with the minimum wage and payments made on time, thereby avoiding the confusion and disputes that can arise.
Minimum Wage Compliance and Payroll Monitoring
The national floor wage established in the Code enhances minimum wage enforcement by setting a standard baseline minimum wage that all States must adhere to, thereby preventing them from establishing minimum wages lower than that wage.
For employers' payroll departments, this means they will have to continue to monitor both State and Central Government wage notifications as they occur. Employers with locations in multiple States must be sure to pay their employees wages that equal or exceed the applicable minimum wage at all times. Failure to do so, regardless of whether it is done intentionally or unintentionally, will result in violations of statutory minimum wage requirements and penalties.
Timely Payment of Wages and Payroll Discipline
Code establishes specific deadlines for payroll and other payment-related activities. All employees (full-time and part-time) receive their monthly wages on or before the date stated. All employees' last wages, any overtime, and any bonuses must be paid by the date stated in their final paychecks after they quit or are terminated from employment (full, final settlement).
With these requirements, payroll teams and departments need to have accurate and automatic processes for processing employee payments. Employers must comply with strict deadlines to pay all wages owed and make any final settlements. If employers fail to make those payments on time or if there are errors in calculating final settlements, they are subject to penalties.
Employers must take care to understand the payroll timelines established by law so that they can ensure compliance with all legal requirements related to their payroll systems. Failure to comply with these requirements can have a significant impact on an employer's liability for bonuses, overtime and statutory contributions.
Impact on Bonus, Overtime and Statutory Contributions
Further, as the definitions of bonuses and overtime are tied to the new definition of wages under the Code, employers may need to increase their total wages paid to employees. This will affect employers' calculation of bonus payments made to employees, their calculation of overtime worked by employees, and the calculation of other employer contributions (e.g., paid time off, sick leave, pension contributions, social security contributions, etc.).
Therefore, payroll teams will need to work with their finance departments to evaluate the costs associated with the increased payout obligations, create new financial provisions for the newly revised payout obligations, and modify their payroll systems.
Gender-Neutral Payroll and Equal Remuneration
Equal remuneration and gender-neutral wage requirements are incorporated into The Code, which places obligations on employers to ensure that there are no wage discrepancies between men and women who do the same or similar work.
This will require that payroll compliance be managed in accordance with transparent wage structures, along with documented records of the same. Typical payroll data is likely to be periodically audited internally to detect and remedy wage differences prior to them being investigated by the regulator.
Digital Records, Inspections and Compliance Audits
Technology-based inspections and digital record keeping are emphasised in The Code. Inspectors will be able to take advantage of electronically maintained wage registers and payroll data when conducting audits on compliance.
As a result of these changes, digital payroll systems will be critical for employers. Inaccurate and/or incomplete payroll records will put employers at significant risk of unfavourable inspection results, penalties and litigation. As a result, employers should ensure that they have maintained accurate, verifiable, and current payroll documentation.
Conclusion
To conclude, the Code of Wages has changed the way payroll compliance is executed in India by providing a uniform wage definition, expanding the definition of employee coverage, and increasing the level of enforcement mechanisms available to enforce compliance. Payroll now encompasses the critical elements of human resources, finance and legal compliance, and employers are required to transition from traditional payroll practices to a payroll compliance-driven methodology. Reviewing salary structures, upgrading payroll systems, and conducting regular compliance checks will be critical to meeting the obligations imposed by the Code on Wages and avoiding regulatory risk.
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