04 September 2017

Code on Wages, 2017 – An Analysis

The labour law domain in India is a reaffirmation of India’s colonial past and industrial revolution. While current labour legislations have been significantly tailored to suit the unique conditions of the Indian industry and labour force, they are nevertheless still largely influenced by issues of a bygone era. Adding to this, even the legislations which were drafted afresh after independence were done many decades ago, and though they have been subject to multiple amendments, there is now a pressing need to replace them altogether with laws which reflect India’s real story today – the India which is growing at more than 7% annually [see end note 1] and has a labour force of more than 500 million [see end note2].

The Constitution of India lists labour related subjects under the Concurrent List [see end note 3].This means that both the Centre and the States are equally competent and permitted to enact labour legislations, keeping in mind the federal structure of the country. As a result, there are, at present, more than 45 major central legislations and more than 100 labour related state legislations operating in India, many times on overlapping matters. The multiplicity of these laws and their compliance burden has often been cited by domestic industries and foreign investors as an obstacle to investment [see end note 4]. Therefore, with an objective to soothe investor confidence, as well as to “simplify, rationalise, and amalgamate the existing labour laws” [see end note 5], the incumbent government in its annual budget presentation this year announced merging of 44 labour laws into 4 codes on (i) wages; (ii) industrial relations; (iii) social security and welfare; and (iv) safety and working conditions [see end note 6].

This article analyses the issues surrounding one of these Codes – the Code on Wages, 2017 (“Wage Code” or “Code”) – which was cleared by the Union Cabinet as a bill in July 2017, and is now pending in Lok Sabha to be passed as an Act.


Understanding the Code

The objective of the Wage Code is to consolidate 4 existing labour laws relating to wages – (i) the Minimum Wages Act, 1948; (ii) the Payment of Wages Act, 1936; (iii) the Payment of Bonus Act, 1965; and (iii) the Equal Remuneration Act, 1976 – into one integrated code. Evidently, all these legislations govern various aspects of the same subject, i.e., wages, and therefore to combine and cover all these aspects in one law, the Wage Code is proposed to be enacted. This exercise implements the proposal of the Second Indian National Labour Commission, which suggested rationalisation of labour laws in India way back in 2002 [see end note 7].

The Code is divided into separate chapters dealing with minimum wages, payment of wages, and provisions relating to bonus. Provisions relating to equal remuneration have been incorporated in different chapters, wherever necessary. There are then separate provisions and chapters concerning advisory boards, dues and claims, offences and penalties, as well as those relating to establishment and powers of various governmental and quasi-judicial authorities to monitor and implement the Code.

The most obvious and useful feature of the Code is rationalisation of various definitions contained in the 4 present legislations, which were, till now, subject to varied interpretations even though they regulated the same subject matter. For example, giving a singular definition of “wages” in the Code will allow consistent interpretation of the term, which was hitherto defined in modified forms in different legislations, sometimes even as “salary" [see end note 8] or “remuneration" [see end note 9].

Another important feature of the Code is the introduction of a universal minimum wage. Under the Minimum Wages Act, 1948, State Governments have the mandate to fix minimum rate of wages for employees employed in a scheduled employment [see end note 10]. On the contrary, the Wage Code proposes that Central Government will fix a universal minimum wage for all employees, irrespective of the type of employment or establishment they work in. Currently, this universal monthly minimum wage is proposed at Rs. 18,000 [see end note 11]. Once the Wage Code is enacted, States will have the liberty to increase this amount, applicable for their State, though they cannot propose a reduction.

The Wage Code also seeks to:

  • Allow payment of wages through electronic means (bank transfer) in addition to payment by cash and cheque. This incorporates the changes made to the Payment of Wages Act, 1936 by the Payment of Wages (Amendment) Bill, 2017 and is a possible effect of government’s drive of demonetisation and less-cash society;
  • Consolidate the compliance requirements – employers under the Wage Code would be required to maintain a single register for the record of employees, wages, bonus, muster roll etc. This would ease the requirement for employers to maintain separate records under different legislations. Though the Code does not prescribe the form and manner of maintenance of this register, it is possible that the register could also be maintained electronically; [see end note 12]
  • Establish a common authority for claims – the Wage Code requires the State Governments to establish one or more authorities to handle claims under the Code like payment of wages, incorrect deductions, non-payment of wages, un-equal remuneration, non-payment of bonus, etc. These authorities will have powers to issue orders against employers for compensation, as well as issue orders for recovery of dues. The State Governments will also be required to establish appellate authorities to such authorities;
  • Give a new role to “facilitators” – the existing legislations provide for labour “inspectors” to conduct inquiry and investigation of an employer to ensure compliance. The new Code will replace this role with that of facilitators, who will, in addition to the powers of inspectors, be assigned the role of supplying information and advice to employers and workers on effective means of complying with the provisions of the Code;   
  • Re-emphasise the role of women and employment opportunities for women, a subject which will have to be statutorily deliberated by the Central and the State Advisory Boards under the Code;
  • Expand the definition of “industrial dispute” than to the one provided under the Industrial Disputes Act, 1947. 


India’s benefit or loss?

Undoubtedly, the consolidated Code will offer compliance benefits. An entity complying with 4 different legislations containing somewhat similar and overlapping subjects and maintaining records and compliance in 4 different forms, would certainly breathe a sigh of relief. On the same footing would be a foreign investor looking at India as a potential destination for lucrative return on investment with cheap and abundant labour. All the features of the Code noted above are bound to enhance investor confidence and allow ease of doing business in India.

For employees and workers [see end note 13], it’s an advantageous situation as well. The Code offers broadly the same extent of protection of labour rights and protection of workers in relation to their wages, as the existing legislations do. At the same time, it extends the applicability and benefits of the existing legislations as well. Not only do existing employees earning less than Rs. 18,000 a month get a guaranteed payment of this amount every month, but all those employees in the organised and unorganised sector, who did not fall within the ambit of current legislations merely by reason of their industry or establishment not being mentioned in the Schedule, will get covered by protection of the Code. This will help improve standard of living across India. Recent news articles [see end note 14] state that this universal minimum wage could benefit approximately 40 million employees (4 crore employees).

The Code is not, however, all beneficial for employers and employees. The earlier draft version of the Code, which was circulated in 2015 for comments from industry and trade unions, received scathing remarks on the lacuna and poor drafting [see end note 15]. Most of those provisions from the draft have been carried into the Code without much change. Some of the reasons why the industry, trade unions, and even labour rights’ organisations are unhappy with the Code are:

  •  Imposing a universal minimum wage on all States in India does not take into consideration the diverse demography, topography and living standards across India, as well as the development and prosperity of different States. While Rs. 18,000 a month may be easy for an employer in Maharashtra to pay, the same may not be possible in Uttarakhand or Tripura. Various news articles have reported that the industry reaction to the proposed minimum wage is fairly negative and it is feared that the Code may impact hiring [see end note 16].The Supreme Court in the case of Hydro (Engineers) P. Ltd. v. Workmen [see end note 17] had held that minimum wages should be defined by needs-based criteria that extend beyond physical needs. This should include nutrition, clothing and housing needs, fuel, lighting, family expenses, etc. All these factors are, undoubtedly, different in different States in India.
  • Universal minimum wage will also affect the wage competition between States. States often allow lower wages than their neighbouring States to attract investment to their State. This in turn has helped States grow and promote a spirit of competition, fostering more investment. This will, to a great extent, be eliminated under the Code.
  • The added wage burden may push industries to automate at a faster pace.
  • Provisions of the Equal Remuneration Act, 1976 are scantily referred to in the Code. The Equal Remuneration Act, 1976 has, in essence, been confined to Sections 3 and 4 of the Code. Further, when the draft code was released in 2015, the equal remuneration provisions gave recognition to the third gender and provided that no discrimination should be made between men, women and transgenders. The third gender, however, does not find reference in the Code.
  • The Code also does not include any measures to prohibit discrimination in employment on the basis of caste, religion or social origin, something which is much required in a country like India.
  •  Unlike the provisions of the Minimum Wages Act, 1948 and the Payment of Bonus Act, 1965, the Code decriminalises the penalty provisions at first instance. Thus, where an employer pays less to an employee than the minimum wage, at first instance, the employer will only be penalized by a fine of Rs. 50,000 under the Code. On the contrary, under the existing legislations, imprisonment term is prescribed for such offences.

These, along with other issues like diluting the scope of overtime pay, replacement of judicial appellate authority with an authority which may or may not be judicial, limiting the scope of trade unions and employees to question the balance-sheet or the profit and loss account of the employer (for the purposes of payment of bonus), etc., are some issues which may hinder the effective implementation of the Code.


What next?

As noted above, the Code is yet to become an Act and thereby come into operation. It is pending in Lok Sabha and then has to undergo the process of scrutiny and approval of the Rajya Sabha. It is likely that some of the issues noted above relating to misalignment between the current legislations and the Code may be resolved, though it is unlikely that other issues like easing the hiring fears of industries or addressing the issue of universal minimum wage mismatch with India’s diverse topography, etc., will find a mention. We will get to know of this in the winter session of the Parliament.

Nevertheless, the Code is a positive move to ease the process of doing business in India. It also lives up to the statement made by the Union Finance Minister in his 2017 budget speech where he said the government is “keen on fostering a conducive labour environment wherein labour rights are protected and harmonious labour relations lead to higher productivity”. It is reported that along with the Wage Code, the government may soon introduce the code relating to industrial relations as well as the social security and welfare, the latter of which is already available in draft form on Ministry of Labour’s website for comments. It is about time that India takes a step in the direction of revamping its labour laws and attunes them to India’s present growth story. 

 [The author is Principal Associate in Corporate law Practice, Lakshmikumaran & Sridharan (U.K.) LLP, London]


[i] www.imf.org - For India, data and forecasts are presented on a fiscal year basis and GDP from 2011 onward is based on GDP at market prices with FY2011/12 as a base year.
[iii] Entry 22, 23 and 24 of the Concurrent List – Seventh Schedule, Constitution of India.
[v] Excerpts from speech of Finance Minister in Lok Sabha while presenting Union Budget 2017.
[vi] Ibid.
[vii] The Second Indian National Labour Commission was constituted almost after a gap of 72 years after the first National Labour Commission in 1929.
[viii] See Section 2(21) of the Payment of Bonus Act, 1965.
[ix] See Section 2(g) of Equal Remuneration Act, 1976.
[x] Section 3 of the Minimum Wages Act, 1948.
[xi] Currently the Payment of Bonus Act, 1985 is applicable only to workers earning wages below INR 21,000 per month. Similarly, the Payment of Wages Act, 1936 applies to workers earning monthly wages of INR 18,000 (S.1(6)).
[xii] The draft Labour Code on Wages which was released in 2015 for comments from industry and trade unions prescribed that this register should be maintained in an electronic format. It is possible that the same may be adopted in the Code.
[xiii] The Code contains reference to both – “employees” and “workers”.
[xv] https://www.bloombergquint.com/union-budget-india/2017/02/01/budget-2017-finance-minister-proposes-simpler-labour-laws. “India’s Labour Law Changes: Towards advancing principles of rights, inclusion and employment security”, 2015 report published by Society for Labour and Development, Citizen’s Rights Collective and ActionAid India.
[xvii] Hydro (Engineers) P. Ltd. v. Workmen, AIR 1969 SC 182.


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