Employment LawUnderstanding the Code on Wages: Key Points for Employers and Employees

Introduction

In India, wage-related laws have historically been complex and varied across sectors, which often created confusion for both employers and employees. To address this, the Government of India introduced the Code on Wages, 2019, a landmark legislation consolidating and harmonizing four major labour laws related to wages, bonuses, minimum wages, and equal remuneration into one unified framework. This blog offers a practical overview of what this means for employers and employees in 2025.

Understanding the Code on Wages

The Code on Wages applies universally to all workers, irrespective of whether they belong to the organized or unorganized sectors, and covers salaried employees, wage earners, contract workers, part-time, and full-time staff. It replaces four labor laws,  the Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, and Equal Remuneration Act , with a single, cohesive framework.

The new legislation’s foremost objectives are to ensure the timely payment of wages, guarantee minimum wage protection to all workers, and establish a uniform wage definition, thus minimizing legal complexities and disputes.

Revised Definition of Wages and Salary Structure

One of the most important changes is the redefinition of “wages.” According to the Code:

• Basic salary, Dearness Allowance (DA), and Retaining Allowance together must account for at least 50% of total wages.
• Components such as House Rent Allowance (HRA), bonuses, overtime payments, and certain allowances beyond this 50% threshold are excluded for wage computation but may apply in specific contexts like social security.
• Provident Fund (PF), gratuity, and Employee State Insurance (ESI) contributions are calculated based on this redefined wage.

Consider an employee whose total Cost to Company (CTC) is Rs.50,000 per month. Previously, their basic salary might have been 40% of the total salary, which would be Rs.20,000, with the remaining Rs.30,000 consisting of various allowances such as house rent allowance (HRA), special allowances, and bonuses. Under the new Code on Wages, the basic salary, along with certain allowances like dearness allowance (DA) and retaining allowance, must constitute at least 50% of the total wage. This means the basic salary would increase to Rs.25,000 out of the Rs.50,000 CTC, thereby reducing other allowances to Rs.25,000 to keep within the legal framework.

Because provident fund (PF) and gratuity contributions are calculated mainly on the basic salary, this increase means higher deductions from the salary for these benefits. For example, the employer’s and employee’s PF contributions (usually 12% each) will be calculated on Rs.25,000 rather than Rs.20,000, raising these statutory payments and the long-term financial security benefits. Although this adjustment may reduce the immediate take-home salary, which employees might notice, it ultimately benefits them with increased retirement savings and gratuity.

Employers, on the other hand, need to carefully restructure their payroll systems to comply with this 50% basic pay requirement. They should communicate these changes clearly to employees to explain why the net salary might decrease even if the overall CTC remains the same. This restructuring also ensures better compliance with the law and reduces the risk of wage-related disputes or penalties.

Minimum Wage and Equal Remuneration

The Code introduces a national floor minimum wage set by the central government, which states can adjust regionally based on living costs and skill levels. This ensures an equitable safety net for workers across sectors, especially those in unorganized employment.

In India, wages are typically calculated on a 26-day work month basis (assuming one weekly off in a 30-day month). For example, if the minimum monthly wage is Rs.13,000, the daily wage is computed by dividing Rs.13,000 by 26, resulting in approximately Rs.500 per day. Thus, if an employee works 24 days in a month, the minimum wages payable would be Rs.500 multiplied by 24, equaling Rs.12,000. This ensures that workers are compensated fairly for actual working days, respecting weekly rest days.

Phased Implementation of the Code on Wages and Labour Reforms

The rollout of the new Labour Codes, including the Code on Wages, is planned in a phased manner to allow businesses sufficient time for compliance:

• Large Enterprises with 500 or more employees must comply immediately upon enforcement starting FY26.
• Medium Enterprises with 100 to 500 employees have an additional transition period post the initial phase.
• Small Enterprises with fewer than 100 employees are granted up to two years for full adoption, allowing them to adapt gradually.

This phased strategy aims to ease the transition burden, especially for MSMEs, while promoting uniform adoption nationwide. Most states have already aligned draft rules with central guidelines as of early 2025, with a few completing the process soon.

Benefits Beyond Compliance

With standardized wage definitions, guaranteed timely payments, and inclusive policies for gig and contract workers, the Code on Wages paves the way for enhanced worker welfare. It mandates equal remuneration for men and women, strengthens social security contributions, and ensures gratuity benefits for fixed-term employees with over one year of continuous service.

AMLEGALS Remarks

The Code on Wages represents a landmark reform in India’s labor laws, successfully consolidating multiple wage-related legislations into a unified framework that simplifies compliance and strengthens worker protections. It ensures timely payment of wages, establishes a uniform definition of wages, guarantees a national minimum wage floor, and promotes equal pay for equal work without gender discrimination.

While employers face the challenge of restructuring salary components and managing higher statutory contributions, these changes reduce ambiguity and legal risks around wage payments. For employees, the Code enhances long-term financial security through higher provident fund and gratuity benefits, even if immediate take-home pay is slightly affected.

The phased implementation allows businesses of varying sizes to adapt within reasonable timelines, encouraging smooth transitions and state-level cooperation. Overall, the Code on Wages fosters a fairer, more transparent labour market that balances the interests of employers and employees, paving the way for improved social security and wage equity across India.

Both employers and employees should actively familiarize themselves with the Code’s provisions to ensure compliance and safeguard rights in this evolving landscape.

– Team AMLEGALS 

For any further queries or feedback, feel free to reach out to laksha.bhavnani@amlegals.com or hiteashi.desai@amlegals.com