The Code on Wages, 2019: A Step in the Right Direction

By Durgesh K. Rai — 

Construction workers in the state of Kerala, India. Source: AmelieNewYork’s flickr photostream, used under a creative commons license.

The Code on Wages Bill, 2019, was passed recently by both houses of the Indian Parliament and  became an act after it received the presidential assent on August 8, 2019. While most governments avoided labor reforms over the last two decades, it appears that the Modi government, in its second term, has given priority to politically sensitive labor reforms. However, it should be noted that reforms related to wage regulations are considered less contentious in the overall gamut of reforms pertaining to labor regulations. Overall, the Code on Wages, 2019, brings some pertinent changes that are beneficial to both employees and  employers.

Labor is a subject in the Concurrent List under the Indian Constitution. As a consequence, there is a web of Union as well as state governments’ rules and regulations governing various aspects of labor in the country. About 44 laws have been enacted by the Union government. In addition, there are state-specific labor laws enacted and enforced by the state governments. Labor regulations in India are characterized by their archaic and complex nature that not only hampers the interest of employers but employees as well. Due to this, Indian labor laws tend to constrain investment in general and in the manufacturing sector in particular.

To make the labor regulations more friendly to the economy, the Second National Commission on Labour (2002-03) recommended consolidation of labor regulations into broadly five groups: (i) Industrial Relations; (ii) Wages; (iii) Social Security; (iv) Safety and (v) Welfare and Working Conditions. This was to be done by amalgamation, simplification, and rationalization of the existing Central Labour Laws, which was also seconded by the “Working Group on Labour Laws & Other Labour Regulations” in 2011.

In her 2019 Budget speech, Finance Minister Nirmala Sitharaman stated that the government is proposing to streamline the various labor laws into a set of four labor codes. The Code on Wages, 2019 is the first attempt in this direction. It consolidates four existing laws e.g. The Payment of Wages Act, 1936; The Minimum Wages Act, 1948; The Payment of Bonus Act, 1965 and The Equal Remuneration Act, 1976. However, the real question is who is going to benefit from this exercise? How will it affect the interests of workers and the employers and consequently the economy?

The comparison of the provisions of the code with that of four existing laws shows that workers seem to be the primary beneficiary of the proposed code. The most significant change that this new code brings in for workers is the universality of application of the provision for minimum wage. Now, the minimum wages will apply to all employees and workers irrespective of the sectors and the areas they are employed. It is essential to highlight that the current Minimum Wages Act, 1948, covers only the scheduled employments notified by the appropriate governments. However, although universalization of the minimum wage provision to all workers is a positive development, its enforcement is going to be a daunting task, especially in some major sectors like agriculture.

Another major improvement for employees/workers that the code introduces is empowering the Union government to fix the floor wage rate for different geographic areas. The state governments will not be allowed to set the minimum wages below the floor wage rate fixed by the Union. This will bring some uniformity in the level of minimum wages across the regions. It will also prevent the states from race to bottom in terms of fixing the minimum wage rate to attract investment.

On the issue of payment of wages, the code is far progressive than the existing legislation. The Payment of Wages Act, 1936 covers only the employees/workers with a maximum threshold salary (currently INR 24,000 per month; around $330). On the other hand, the coverage of the code is universal, and hence, all employees will get the benefits of provision for timely payment of wages regardless of their level of salary. Also, the code establishes a more transparent system of wage payment.

The code falls short on the coverage of the existing Equal Remuneration Act, 1976, which prohibits gender discrimination on three accounts e.g. recruitment, wages and conditions of work. However, the recently passed legislation stipulates the prevention of gender discrimination only in terms of wages. It is hoped that the gender aspects of recruitment and conditions of work would be covered under other codes that are in the pipeline.

The Code on Wages, 2019, also brings some positive changes for employers. The most important change is that the code is likely to bring down the number of returns, registers, and forms, etc. which will reduce the cost of compliance and improve the ease of doing business in India. Also, there currently exist about a dozen definitions of wage in various labor laws, which is a significant source of litigation and confusion. With the simplified definition of wage in the code, the number of disputes and cost of compliance will go down contributing to reduced cost of doing business in the country. The proposal to appoint an Inspector-cum-Facilitator and web-based inspection system is also a welcome step from the industry point of view.

Overall, the Code on Wages, 2019, brings some pertinent changes for both the employees and the employers. It will also improve the ease of doing business in the country. However, given the massive increase in its coverage, especially concerning minimum wage and payment of wages, the enforcement of the code will be a challenging task.

Dr. Durgesh K. Rai is Fellow at the Indian Council for Research on International Economic Relations (ICRIER), New Delhi. Views expressed here are personal.

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