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 employers 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:
Worker’s skill level
The employer’s capability:
Number of employees
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:
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.
An employer of record 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.