Wages Structuring u/s 2(y) of the Code on Wages, 2019

Definition of Wages

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.

50% Rule on Wages

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:

• (a) any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
• (b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
• (c) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
• (d) any conveyance allowance or the value of any travelling concession;
• (e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
• (f) house rent allowance;
• (g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
• (h) any overtime allowance;
• (i) any commission payable to the employee.

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

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

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 Allowances

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

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

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.

Monthly Incentive

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.

Quarterly Incentive

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

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 Allowances

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

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

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

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

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.

Performance Bonus

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.

Training Period Incentive

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

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

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

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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