UncategorizedAnalysis of Definition of “Wages”

March 27, 20210

Definition of ‘Wages’ under the Code

Wages have been defined under Section 2y of the Code on Wages,2019.

As per the new definition ‘wages’ includes all the remuneration i.e. by the way of salaries, allowances, or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment (express or implied) were fulfilled, be payable to a person employed in respect of his employment, and it includes the basic pay, dearness allowance and retaining allowance.

However, wages would not include the following: –

  1. Bonus;
  2. The value of any housing accommodation;
  3. Contribution towards pension and provident fund by the employer;
  4. Conveyance allowance and travelling concession;
  5. Sums paid to the employee to defray special expenses;
  6. House rent allowance
  7. Overtime allowance;
  8. Any commission payable to the employee, gratuity, retrenchment compensation, other retirement benefits, and ex-gratia payments (if any).

The Code introduces a special methodology for computation of ‘wages’ and in certain circumstances, various components of wages that were ordinarily understood to be excluded from the definition of ‘wages’ would now be considered as forming part thereof. For instance, components like employer’s contribution towards pension or provident fund, house rent allowance, overtime allowance, conveyance allowance, commission payable to employees, etc. are not conventionally considered as wages.

In the event the payments made to employees under the above identified components exceed 50% of all remuneration payable as wages under the Code, then the excess amount would be deemed as remuneration and shall be considered as wages.



Comparison with the Definition provided under the Subsumed Legislations

The erstwhile labour legislations subsumed under the Code did not cater to the needs of the workers in the present scenario Additionally, the subsumed legislations provided a different definition of wages which resulted in varied interpretation, confusion and unwanted litigations.

The definition of ‘Wages’ under the new Code has provided uniformity which will further help in reducing the confusion and unwarranted disputes. However, as a caution it must be borne in mind that the new definition has evolved from the definitions provided under the erstwhile labour laws.

  1. The Payment of Bonus Act, 1965

The definition of Wages given under the Code is similar to that provided under the Payment of Bonus Act. However, there are certain differences between the components of ‘wages’ under both the Acts.

While the erstwhile Act did not provide for the inclusion of certain excluded heads in case where total is equivalent to 50% of the wages. Further, the old provision included only dearness allowance in the calculation of wages under the Act and excluded any other allowance paid by the employee while the new Code includes retaining allowance in the calculation of wages under the Code.


  1. The Equal Remuneration Act, 1976

The definition of remuneration under the Equal Remuneration Act, 1976 was ambiguous and included basic wage and any additional emoluments whatsoever payable to a person employed in respect of employment or work done.

This in contrast to the definition of wages under the Code, which specifies the components that constitute wages for the purpose of determining equal remuneration to all the genders.


  1. Payment of Wages Act, 1936

The definition of ‘wages’ provided in the old Act was outdated, it included elements such as remuneration payable under any award or settlement between the parties or order of a court or the tribunal, any overtime allowance, commission payable to the employee and retrenchment compensation within the ambit of Wages. This is clearly different from the definition provided under the Code of Wages, 2019 that specifically excludes these elements.

Thus, the introduction of a uniform definition of wages under the Code on Wages, 2019 is a positive development as it would help reduce litigation.”


  1. The Minimum Wages Act, 1948

In comparison with the definition of ‘wages’ provided under the Minimum Wages Act; the Code provides a wider definition with specific exclusions. Further, while the Minimum Wages Act included House Rent Allowance (HRA) in the calculation of ‘wages’, the Code provides HRA under the exclusions from the calculation of wages.


Advantages / Positives

The definition of “wages” provided under the Code creates an impact in the following manner:

  1. Minimum Wages: interpretation

The definition of wages and provisions connected thereto under the erstwhile Minimum Wages Act stipulated that the minimum wages may be split into basic pay, HRA, washing and conveyance allowance, etc. The Provident Fund was to be payable only on basic wages and not on the total minimum wages.


However, vide Circular No. Coord/4(6)2003/ Clarification/Vol II/7394 dated 23-5-2011 issued by Additional Central PF Commissioner (Compliance) stated that the basic wages were the minimum wages and those were not to be further split into various allowances. As per this circular, the PF contributions were to be paid on the minimum wages which were to be considered as ‘basic’ wages under the PF Act.


Further, as per the definition of wages provided under the Code, wages include basic wage, Dearness Allowance and retaining allowance only. Other allowances are not included within the ambit of wages.


Thus, if the employer pays the minimum wage, the same cannot be split into various allowances (except Dearness Allowance) to reduce the liability of PF, ESIC, bonus, gratuity, etc. Thus, the new definition under the Code has helped provide clarity over the issue.


  1. Homogeneous Definition

Previously, there were 12 definitions of wages in the different Labour Laws leading to litigation besides difficulty in implementation. The definition has been simplified and is expected to reduce litigation which further entails a lesser cost of compliance for the employer.


  1. Prevents Camouflaging of Wages

The first proviso to the definition of wages under the Code provides that, for calculating the wages under the said section if payments made by the employer to the employee under clause (a) to (i) exceeds 50% of all the remuneration payable as wages under the Code, such excess amount would also be included as wages.

This aims to ensure that the employer does not reduce his liability of PF, ESIC, gratuity, etc. by camouflaging wages as different kinds of allowances.


Disadvantages / Drawbacks

While a common definition of wages under the Code is a welcome development, the following lacunae in the given definition may lead to confusion and defeat the purpose of the introduction of a new consolidated code:

  1. The first proviso of the Code provides that for calculating the wages under the clause if payments made by the employer to the employee under clause (a) to (i) exceeds 50% of all the remuneration payable as wages under the Code, such excess amount would also be included as wages. While this may be a step towards a positive direction, however, the following sub-clauses under this Section lack clarity and the same may result in various issues: –
  2. Value of any house accommodation, or the supply of light water, medical attendance or other amenity or of any services excluded from the computation of wages by a general or special order of the appropriate Government


Section 2(y) provides that any free or subsidized accommodation provided by the employees, its value (including light, water, medical attendance, or any other amenity or service) would have to be computed at the market rate. These computations are to be done, since if amounts (a) to (i)would exceed 50% of wages, then these will be part of ‘wages.’ These valuations may be problematic since they may cost money and lead to litigation.


  1. Any conveyance allowance or the value of any travelling concession

Conveyance allowance refers to the monthly or periodic allowance given at a flat rate on ad hoc basis. However, it is unclear whether the reimbursement of an employee’s travel expenses for official work on an actual basis would be included within the ambit of conveyance allowance.


2.Any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment

This sub-section can also have multiple interpretations, as the meaning and intention of the legislature in this clause is not very clear. For instance, it is not clearly provided whether the travelling, hotel and other expenses incurred for work of the employer would also be included within the ambit of this clause.


3.Remuneration in kind up to 15% will be part of wages

As per the explanation to the definition of wages under the Labour Code, if the employer gives any remuneration in kind to the employee and the value of such does not exceed 15% of the total wages payable to the employee, it shall be deemed to form part of the wages of such employee.

However, the legislators should have included certain amount in wages as if huge amounts were paid in kind and not in cash, to ensure that the employer does not try to escape their obligations.

Thus, to avoid varied interpretation and unwarranted disputes necessary changes ought to be incorporated by the Legislators.


4.Over-time wages

Under the present definition, any overtime allowance would not be included within the calculation of wages; however, if the total of all sub-clauses exceeds 50% of the PF, basic salary in addition to the Dearness and retention allowance, it would be included in wages. However, this is in contravention to the view under the Payment of Bonus Act that overtime payment was not to be considered as wages.


5.Re-calculation of wages

The provision may result in situations where the wage of an employee would have to be recalculated. For instance, if the sale rent allowance, overtime, commission/ sale incentive would exceed 50% of the monthly salary for a particular month, this would lead to the need for re-computation of wages.

Thus, as per the new definition, the wages of employees would fluctuate and the computation of bonus or payment of wages for overtime work, would also fluctuate and would get affected.

Further, the computation of the non-monetary benefits to calculate wages would also be difficult. Therefore, the quantification of wages under the Code would be technical and would further involve repetitive calculations.

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