The large talent pool and effects of globalization in India make it an ideal
market for companies looking to expand their international footprint. However,
India’s labor laws have historically been fragmented, which can make it
confusing for companies who need to hire local workers as part of their
expansion.
With labor rules and regulations differing by state—and even industry—it has
notoriously been hard for companies to understand regulations and stay
compliant. But in 2019, the major labor codes were overhauled and amalgamated
into four overarching codes that cover a range of topics—one of which governs
employee wages.
The four labor codes
In 2019, the Ministry of Labour and Employment sought to streamline labor
codes across the country. To simplify everything, it created four broad
codes , which then
subsumed the various legacy codes. These include:
- The Code of Wages – Governs compensation, worker benefits, minimum wage , and other compensatory-related topics
- Industrial Relation Code – Sets rules on issues like unions, strikes, hiring and employee termination
- Occupational Safety, Health, and Working Code – Focuses on creating a standardized workplace with safe working conditions
- Code on Social Security – Covers the various employee benefits workers are entitled to
Related: A guide to employee benefits policy in India
But we’ll focus on the first pillar, the Code of Wages, as it impacts how
employers compensate workers. One thing to note, however, is that according to
Indian law, there’s a legal distinction between an employee and a worker. The
laws outlined further below primarily apply to employees. They are defined
as :
- Employee – “Any person (other than an apprentice) employed on wages by an establishment to do any skilled, semi-skilled, or unskilled, manual operational, supervisory, managerial, administrative, technical or clerical work for hire or reward.”
- Worker – “Any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.”
The Code of Wages
So, what are the major elements that employe rs need to know about when it
comes to the Code of Wages? They include:
1. Anti-gender discrimination
When it comes to hiring and paying employees, no employer is allowed to
discriminate on the grounds of gender. For jobs that have the same work or
work of a similar nature, men and women must be paid equally.
Employers are also expected to establish an Internal Complaints Committee
(ICC) that will look into cases of sexual harassment, gender discrimination,
or general workplace harassment.
The only exception to this is in certain industries where a specific type of
work is prohibited or restricted for women under existing labor laws. For
example, the construction industry is a sector where these rules are less
stringently applied due to the physical and laborious nature inherent to the
job.
2. Minimum wages
According to the Wage Codes, states and union territories have the legal right
to establish minimum wages in their jurisdiction. However, the central
government didn’t seed the power to set a national minimum wage—they simply
have yet to establish a nationally applicable minimum wage . That said, they
have set a national floor-level minimum wage of 178 INR per day or 4,628 INR
per month.
Depending on the state, the minimum wage varies based on several factors,
including:
- The occupation
- Worker’s skill level
- The employer’s capability:
- Revenue
- Number of employees
- Capacity
- Duration of employment
This minimum wage is divided into two parts:
- Basic minimum wage – This is the price floor for wages —it ranges from 372 INR per day to 853 INR per day and from 9,672 INR per month to 22,178 INR per month.
- Dearness allowance – Also known as a variable dearness allowance, this acts as a cost-of-living adjustment that’s intrinsically tied to fluctuations in the consumer price index.
3. Payment of wages
Indian labor laws stipulate that employees must be paid in a timely manner.
Specifically, workers within the factories, railways, and industrial
industries need to be paid at least once per month, and in a consistent
manner. Employers have the option to pay their employees by any one of several
means, including:
- Paper currency
- Coin currency
- Checks
- Direct deposit to a bank account
- Other electronic methods
Should an employee be dismissed, removed, or retrenched, or if they resign,
employers are required to pay out their wages within two business days.
4. Working hours and overtime
The central government has the power to fix the number of hours in a given
workday. According to these rules, an employee can’t be forced to work more
than 48 hours a week without being paid overtime. For most industries,
employers are required to compensate employees with double wages when overtime
accrues.
Workers are not legally allowed to work for more than 10.5 hours a day —nor
can they be forced to work for more than five hours without receiving a
30-minute rest break. They also cannot work for more than 10 days in a row
without a day off.
Similarly, employees will typically earn a rest day for every seven days of
work. In most sectors, they’re also entitled to one vacation day for every 20
days worked. And finally, most employees are guaranteed both paid and unpaid
holiday time. That said, the compensation amount and specific days off depend
on the industry and geographic location.
The unique compensation structure in India
For foreign companies seeking to establish an operation within India, you
don’t just have to consider the potential differences in labor laws, there’s
also the matter of the compensation system and structure. Hiring in India can
be a challenge because of just how unique the “typical” compensation package
is.
When it comes to hiring, you need to be able to clearly explain what the
salary structure will look like in order to prevent employee confusion and
avoid delays caused by back and forth with HR and payroll. You also want to
create a compensation package that will attract top talent and keep them happy
and engaged.
As you do establish a salary structure, one of your first steps will be to
calculate the cost to the company (CTC)—otherwise known as the net amount your
business would invest in an employee. It includes:
- Monthly salary components such as basic salary, reimbursements and allowances
- Annual salary components such as variable pay, gratuity and annual bonuses
Depending on your geographic location, industry and sector, this could look
quite different from one employee to another. However, there are some common
elements that define the typical compensation structure. They include:
1. Fixed compensation
Also known as gross salary, this functions similarly to base salary in another
country. The point of this is to set a salary range that maximizes employee
tax advantages while minimizing employer tax liabilities.
This category can be further divided into two salary buckets:
- Basic pay – This usually accounts for 40%–50% of fixed compensation. Additionally, as a part of basic pay, employers contribute to both the Employer Provident Fund and employee Gratuity.
- Fixed allowance – Employers often also provide rewards packages that employees can claim as income tax exemptions. They may include:
- House rent allowance – Can be claimed as an income tax exemption. This also accounts for approximately 50% of fixed employee compensation in a metro city or 40% in a non-metro city if the employee is renting.
- Leave travel allowance – A sum paid to cover domestic travel expenses (typically doesn’t include food or accommodations).
- Conveyance allowance – Helps cover the expense of commuting to and from work.
- Dearness allowance – Accounts for rising costs due to inflation.
- Medical allowance – A reimbursement for medical expenses.
- Meal allowance – May be tax-free with vouchers.
2. Fixed comp +
In addition to fixed allowances, there are larger compensatory benefits that
may be included as a part of the pay structure. These include:
- A work car that the employee can enjoy for work and personal uses.
- Retirals, which includes their severance payment as well as the Employee Provident Fund contributions.
An employer may also offer variables, additional benefits and stocks as part
of the employee compensation package.
3. Salary deductions
Another common cause for confusion is that employers also may have to deduct
categories from the employee’s salary before they can be paid. Common
deductions include:
- Provident Fund – Both the employer and employee must contribute 12% of the basic salary to this fund if the organization has 20 + employees.
- Employees’ state insurance corporation – This is also required for organizations with 20+ employees. Employers must contribute 4.75% of employee’s gross salary, whilst the employees themselves must contribute 1.75% .
- Labour Welfare Fund – All employees are required to pay into this, although the amount varies on a state-by-state basis.
Eliminate the risk of hiring noncompliance
Indian labor laws have undergone massive changes in recent years. The changes leave foreign and even domestic companies scrambling to adjust their
compensation packages and hiring practices in India, so that they can stay compliant.
GEO can help eliminate the confusion and keep you apprised of any changes, so that
you don’t have to risk paying any hefty fines or penalties due to ongoing code
changes.
Schedule a free consultation
Meet with one of our payroll experts to discuss your current business challenges and how our solutions can help.