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\nAs per Section 53 of the Code on Social Security, 2020 (CSS Code), every employee with a continuous service of five years is eligible for gratuity at the time of termination, superannuation, retirement, resignation, death, or disablement.
\nHowever, the five-year requirement does not apply in certain cases, including:
\nEspecially in the case of fixed-term employment, the employee is eligible for gratuity after just one year of service.
\nAs per Section 53(2) of the CSS Code, 2020, gratuity has to be calculated by using the Completed Year (Rounding-Off) Basis for all regular/permanent employees. This means that if an employee works more than six months in a year, it will be considered as one full year.
\nHowever, Proviso three of Section 53(2) states that the Pro-Rata Basis is to be used only for:
\nThe formula for calculating gratuity remains consistent across contract labour, permanent workers, and fixed-term employment:
\n$$\\frac{\\text{Last Drawn Salary} \\times 15 \\times \\text{Years of Service}}{26}$$
\nNote: The definition of \"wages\" should be as per the new code, i.e., Section 2(88) of the Code on Social Security. This means that wages shall constitute 50% of the total remuneration.
\nSection 56(3) requires the employer to determine the gratuity payable, irrespective of whether the employee has submitted an application. The employer must:
\nThis obligation applies even if the employee does not apply for gratuity. Furthermore, as per Section 56(2) of the Code on Social Security, an employer must determine gratuity and send a notice even if the employee has not submitted an application.
\nAccording to the Central Rules of the Code on Social Security:
\nHowever, since many states have not yet notified these rules, they are currently not applied or enforceable at the state level.
\n\n
\n\n
\nThis work is licensed under CC BY-NC-SA 4.0
\n\n
\nIn most state Shops and Establishment Acts and as per Section 25 of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), working hours cannot exceed 8 hours per day. In case a worker works more than 8 hours, that time is considered overtime, and the worker is entitled to compensation for it.
\nAs per Section 14 of the Code on Wages, 2019 and Section 27 of the OSH Code, 2020, both prescribe that overtime wages should be twice the normal rate of wages.
\nTherefore:
\n\\(\\text{Overtime Wages} = 2 \\times \\text{Normal Rate of Wages}\\)
\nThe formula to calculate overtime is given under Rule 69 of the OSH Code. It states that a worker working more than 8 hours per day or 48 hours per week is entitled to overtime at twice the rate of normal wages.
\nTo determine the correct wage rate, the following calculations apply:
\nThe rules for rounding overtime hours are as follows:
\n\n\nNote: Wages should be calculated as per the new wage definition in the Code on Wages under Section 2(y).
\n
\\[
\\text{Overtime Wages}
=
2 \\times
\\left(
\\frac{\\text{Monthly Wages}}{26 \\times 8}
\\right)
\\times
\\text{Number of Hours Worked}
\\]
Overtime Wages: ₹0.00 🙌
\n\n\n
\nThis work is licensed under CC BY-NC-SA 4.0
The number of leaves each employee and worker is entitled to depends on the respective state’s Shops and Commercial Establishment Acts and the newly implemented Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code). Crucially, the entitlement differs depending on whether one is classified as an employee or a worker.
Under most state legislation, provisions regarding leaves apply to employees. However, under the OSH Code, these provisions apply specifically to workers. This article discusses the number of leaves entitled to employees and workers, with a specific focus on Karnataka, Maharashtra, and Delhi.
As per Section 32(1) of the OSH Code, a worker is entitled to leave subject to whether they have worked for 180 days in a calendar year. Once this criterion is satisfied, every worker is entitled to:
As per Section 32(1)(iii), the 180-day eligibility requirement is satisfied even if the worker was on lay-off, maternity leave, or annual leave (trade holiday) during that period. However, the worker will not accrue leave at the rate of 1 day for every 20 days of work for the period spent on lay-off, maternity leave, or annual leave. This is because leave is only accrued based on work actually done; therefore, no leave accrues when the worker is absent from work.
Furthermore, if a worker joins after 1st January, they must work for ¼th of the remainder days to be eligible instead of completing 180 days in that calendar year. Additionally, Section 32(1)(iv) prohibits the implementation of a “sandwich leave” policy. In other words, employers cannot count intervening weekly offs or holidays as leave when an employee avails leave before and after such days.
As per Section 32(1)(vi), if a worker is discharged, dismissed, or quits employment, they are entitled to wages in lieu of all remaining leaves accrued prior to the cessation of employment, even if the eligibility criteria were not fully satisfied. This means that if there are 20 days of leave remaining, the worker can encash them. All such payments must be made by the employer within two working days after the employment ends.
In cases of superannuation or death, the nominee is entitled to the same benefit (wages in lieu of remaining leaves), and the employer shall pay this within two months.
Leave encashment refers to wages in lieu of unused leave. As per Section 32(1)(vii), any leaves not taken by a worker during a year will be carried forward for the succeeding year, provided the total number of carry-forward leaves does not exceed 30 days.
As per Sections 32(1)(viii) and (ix), a worker has the right to encash their leaves on demand at the end of the calendar year. If the accumulated leave exceeds more than 30 days, the employer shall encash them. However, this 30-day carry-forward limit might be increased if the state’s Shops and Establishment Act provides for a higher threshold.
As per Section 120 of the OSH Code, its provisions have an overriding effect; however, where a worker is entitled to more favourable benefits under any other law, award, agreement, or contract of service, the worker shall continue to receive those more favourable benefits. Therefore, one must always follow the law that is most favourable to workers.
The legislation governing leaves in Karnataka is the Karnataka Shops and Commercial Establishment Act, 1961. This Act governs leaves for employees; consequently, it also applies to workers.
As per Section 15(3), every employee is entitled to 12 days of leave in a year on grounds of sickness, accident, or any other reason. Furthermore, as per Section 15(1):
As per Section 15(4), where an employee is discharged or dismissed during the course of the year, they are entitled to earned leave accrued for the period worked, even if the employee has not completed the number of days specified under Section 15(1) for earning leave (i.e., 1 day’s leave for every 20 days of work performed).
As per Section 15(7), the statutory accumulation limit for carry-forward leaves is 45 days for adult employees. However, if an employee applied for leave but the employer refused it, such unavailed leave may be carried forward without any limit. Although the OSH Code mandates a carry-forward limit of 30 days, as per Section 120 of the OSH Code, the more beneficial right prevails for workers. Hence, in Karnataka, even under the state Act, 45 days of leaves shall be carried forward, and any excess should be encashed by the employer.
Workers can also demand leave encashment at the end of the calendar year as per the OSH Code.
The legislation governing leave entitlements in Maharashtra is the Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017. The provisions relating to leaves are contained in Section 18 and apply to workers employed in establishments covered under the Act.
As per Section 18(2), every worker is entitled to 8 days of casual leave with wages in every calendar year. Such leave is credited on a quarterly basis and lapses if it remains unavailed at the end of the calendar year.
Further, under Section 18(3), a worker who has worked for 240 days or more during a calendar year is entitled in the subsequent calendar year to earned leave at the rate of 1 day for every 20 days of work performed during the previous calendar year.
The proviso to Section 18(6) provides that where a worker entitled to leave (other than casual and festival leave) is discharged before being allowed to avail such leave, or where they resign, retire, die, or suffer permanent disability after having their leave refused, the employer is required to pay full wages for the period of leave due to them.
As per Section 18(5), a worker is permitted to accumulate earned leave up to a maximum of 45 days. Further, where the employer refuses to sanction leave applied for at least fifteen days in advance, the worker is entitled to encash the leave in excess of 45 days under Section 18(6).
Although the OSH Code prescribes a carry-forward limit of thirty days, Section 120 of the OSH Code saves more favourable benefits available under any other law. Accordingly, the more beneficial provision under the Maharashtra S & E Act permitting accumulation of up to forty-five days continues to apply to workers. Consequently, workers in Maharashtra may carry forward earned leave up to 45 days, and any leave in excess thereof, where encashment becomes applicable under the Act, must be paid by the employer.
Workers can also demand leave encashment at the end of the calendar year as per the OSH Code.
The legislation governing leave entitlements in Delhi is the Delhi Shops and Establishments Act, 1954. The provisions relating to leaves are contained in Sections 22 and 23 of the Act and apply to employees employed in establishments covered under the Act.
As per Section 22(1)(a), every employee is entitled to privilege leave of not less than 15 days after every 12 months of continuous employment. Further, under Section 22(1)(b), every employee is entitled to sickness or casual leave of not less than 12 days in every year.
As per Section 22(2), where an employee who is entitled to privilege leave is discharged by the employer before being allowed to avail such leave, or where the employee resigns after having applied for and been refused the leave, the employer is required to pay full wages for the period of leave due to them.
As per Section 22(1A)(i), unavailed privilege leave may be carried forward and accumulated. However, the total accumulation cannot exceed three times the privilege leave to which the employee is entitled after every twelve months of employment. Since an employee is entitled to 15 days of privilege leave after twelve months of continuous employment, the maximum statutory accumulation permitted is 45 days.
Casual and sickness leave, on the other hand, cannot be accumulated and lapse if not availed, as provided under Section 22(1A)(ii). The Delhi S & E Act does not provide a general right to annual leave encashment while an employee continues in service. Leave encashment is statutorily mandated only upon separation from employment in the circumstances specified under Section 22(2).
Accordingly, unlike the OSH Code, employees covered under the Delhi S & E Act cannot demand encashment of accumulated privilege leave at the end of the calendar year merely because it exceeds the statutory accumulation limit.
However, since the OSH Code is more favourable than the Delhi S & E Act (as the former allows encashment of excess leaves), workers in Delhi may carry forward privilege leave up to 45 days, and any accumulated leave in excess thereof would be required to be encashed by the employer in terms of the OSH Code. The workers can also demand leave encashment at the end of the calendar year because, as per Section 120 of the OSH Code, the more beneficial right prevails for workers.
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Wages are now defined as all remuneration whether in the form of salary, allowances or otherwise expressed in the form of terms of employment payable to the person employed with respect to the work done and includes Basic Pay + Dearness Allowance + Retaining Allowance.
As per this rule the wages should constitute 50% of the total remuneration paid to employees. If the total remuneration is more than 50% of the wages then the excess should be added back to wages. Any benefits like PF, gratuity and bonus etc. will consider this added back wages as actual wages for the purpose of any calculation.
There are certain exclusions which are listed from Sec. 2(y)(a) to (i) of the Code on Wages, 2019. These components will not constitute under wages but if these components exclude more than 50% of wages then they will be included in the wages. These exclusions are listed down the exclusion from the act:
However there is some ambiguity with respect to certain remuneration/payments which are paid to worker. Whether that would be considered as wages, or excluded remuneration on which 50% rule should be applied, or will come outside the scope with no 50% rule applicability.
Uniform Allowance is ordinarily excluded from wages under Section 2(y)(e). However, if the total value of all excluded salary components exceeds 50% of the employee’s total remuneration, the excess amount will be added back and treated as wages in accordance with Section 2(y) of the Code on Wages, 2019.
Fuel Allowance is excluded from wages under Section 2(y)(d) of the Code on Wages, 2019. However, where the aggregate value of all excluded components exceeds 50% of the employee’s total remuneration, the excess amount must be added back and treated as wages in accordance with the first proviso to Section 2(y).
Conveyance Allowance is excluded from wages under Section 2(y)(d) of the Code on Wages, 2019. However, any excess amount arising from the application of the 50% rule will be treated as wages.
Statutory Bonus is excluded from wages under Section 2(y)(a) of the Code on Wages, 2019, unless it is part of terms of contract/employment. However, any excess amount arising from the application of the 50% rule will be treated as wages.
Travel Allowance is excluded from wages under Section 2(y)(d) of the Code on Wages, 2019.. Any excess amount resulting from the application of the 50% rule shall be treated as wages.
As clarified by the Ministry of Labour and Employment in FAQ No. 3 issued under the Code on Wages, 2019, performance-based incentives and variable components of remuneration do not form part of wages. Accordingly, where the Monthly Incentive is performance-linked or constitutes a variable component of remuneration, it would not form part of wages and 50% rule will not be applied on them. It is to be noted that if such incentive is part of terms of contract/employment it can be included in the definition of wages.
As clarified by the Ministry of Labour and Employment in FAQ No. 3 issued under the Code on Wages, 2019, performance-based incentives and variable components of remuneration do not form part of wages. Accordingly, where the Quarterly Incentive is linked to performance, achievement of targets, productivity, or other performance parameters and constitutes a variable component of remuneration, it would not form part of wages and 50% rule will not be applied on them. It is to be noted that if such incentive is part of terms of contract/employment it can be included in the definition of wages.
Overtime Payment is excluded from wages under Section 2(y)(h) of the Code on Wages, 2019. However, it must be considered for the purpose of applying the 50% wage rule, and any excess amount arising from the operation of the 50% rule shall be treated as wages.
Night Shift Allowance will not form part of wages u/s 2(y) of code on wages. If it is variable, then 50% rule will not be applied. But if it is regular it falls within Sec.2(y)(i) of code on wages and 50% rule will be applied.
Ex-gratia payments made on the termination of employment are excluded from wages under Section 2(y)(k) of the Code on Wages, 2019. Hence, 50% rule will not be applied.
Leave Encashment does not constitute wages under the Code on Wages, 2019, as As clarified by the Ministry of Labour and Employment in FAQ 5, it is a payment made in respect of accumulated leave entitlement and not remuneration payable for work performed during the course of employment. Hence 50% rule will not be applied.
Joining Bonus is not specifically classified under Section 2(y) of the Code on Wages, 2019. It is generally treated as an incentive paid to attract employees at the time of joining and is not linked to actual work performed, and therefore is excluded from wages. Hence joining bonus being one-time payment, 50% rule will not be applied.
Shift Allowance forms part of wages under Section 2(y) of the Code on Wages, 2019, as it constitutes remuneration arising from employment and is not covered by any of the statutory exclusions from the definition of wages. It is considered as retaining allowance.
As clarified by the Ministry of Labour and Employment in FAQ No. 3 issued under the Code on Wages, 2019, performance-based incentives and variable components of remuneration do not form part of wages. Accordingly, Performance Bonus, where paid as a performance-linked and variable incentive, would not ordinarily form part of wages. Hence, 50% rule will not be applied.
As clarified by the Ministry of Labour and Employment in FAQ No. 3 issued under the Code on Wages, 2019, performance-based incentives and variable components of remuneration do not form part of wages. Accordingly, Training Period Incentive, where paid as a performance-linked and variable incentive, would not ordinarily form part of wages. Hence, 50% rule will not be applied.
Weekoff Payment forms part of wages under Section 2(y) of the Code on Wages, 2019, to the extent it constitutes remuneration for services rendered by the employee.
Adhoc Bonus, being a discretionary and non-recurring bonus payment that does not form part of the employee’s regular remuneration, would not ordinarily form part of wages. Hence, 50% rule will not be applied.
Referral Bonus would not form part of wages under the Code on Wages, 2019, as it is an incentive linked to a referral event and not remuneration payable for services rendered in the ordinary course of employment. Hence, 50% rule will not be applied.
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With effect from 21 November 2025, the Government of India has operationalised the four Labour Codes, replacing 29 legacy labour laws.
\nStatutory Change (Section 2(y))
Under the new legislation, wages are now defined strictly as:
The 50% Rule:
Allowances cannot exceed 50% of the Cost to Company (CTC). Consequently, basic pay must be aligned such that it constitutes at least 50% of the CTC. The following items are excluded from this 50% cap:
Compliance Impact:
If current wages fall below 50% of the CTC, automatic reclassification is required. This realignment will increase liabilities in the following areas:
All dues must be paid within two working days following:
\nEvery male and female employee must receive equal wages for the same amount or nature of work.
\nMinimum wage rates will be notified by the appropriate government authority. Employers are mandated to pay these minimum wages without exception.
\nThe overtime rate shall not be less than twice the normal rate of wages.
\nImportant Note:
All benefits, including Provident Fund, Gratuity, and Bonus, will be calculated based on this new definition of wages. Furthermore, even fixed-term employees are eligible for gratuity on a pro rata basis under Section 56 of the Code on Social Security, 2020.
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