Layoffs, Contracts and Lawyers: Connecting the Dots

In recent weeks, there has been a lot of news about startups laying off employees. Edtech companies like UnAcademy and Vedantu, used car sales companies like Cars 24 and E-commerce players like Meesho have all reportedly laid off people. As many as 8000 people have been laid off in the first four months of 2022. The irony is that this is happening even as the startup ecosystem raised more than US$10 Billion in capital during the Jan-March 2022 quarter. IVCA-EY data indicates that in April 2022, the capital raised was around US$1.6 Billion- less than half the sum in the corresponding period in 2021. Last year saw a record number of Indian unicorns emerge.

It is not that there is a sudden scarcity of risk capital. What is happening is that VC funds and other investors are taking a long hard look at business models and valuations. Cash burn rates and unit economics, which were always important elements of valuation, have become front and centre again, after a prolonged period of time that saw some investors take their eyes off the ball as they frenetically looked for ventures to invest in. This long bull run for startups also encouraged many executives to throw their hats into the ring; they relied on their personal expertise and experience to attract investors.

There are also external factors whose unfortunate confluence in the last couple of months has contributed to this situation and exacerbated the stressors. The Ukraine invasion has undoubtedly impacted energy prices; the lockdown of large Chinese cities including Shanghai and Beijing has further disrupted global supply chains that were already affected due to the pandemic. These have thrown unit economics out of gear. Inflation rates around the world have soared- in some countries, the prevailing inflation is at the highest level in over a decade or even longer. In response, central banks around the world have raised interest rates; in India too, the RBI raised interest rates more than anticipated and ahead of when such action was expected. Further increases in interest rates are expected, as central banks seek to suck out the money supply to cool inflation. This means that in the short term, growth expectations will need to be moderated. This affects valuations (something that is also visible in how stock prices of listed companies are fluctuating).

Investors and company managements are therefore looking for ways to cut costs. Rationalizing the workforce is one way to achieve this goal. During a euphoric phase, businesses tend to hire more than they need, often at higher compensation levels than are sustainable. Many companies that have laid off their people continue to advertise extensively on national television. Logically, cutting down on TVCs and using lower-cost digital marketing will be another cost-cutting lever. As the market tightens, business plans will need to be revised. Growth will moderate, and high valuations will get harder to defend. The lack of clarity surrounding when various events will be resolved adds to the uncertainty around when an economic rebound will occur and what the new operating environment will look like. Indeed, Y Combinator, the highly successful Silicon Valley accelerator has advised founders of the companies in its portfolio to “plan for the worst” and focus all efforts in the next month on extending their runway. They are advising ventures to ensure survival even if fresh funds cannot be raised for 24 months.

Sometimes, there are contractual constraints on implementing cost-cutting actions. While some of these clauses may be legitimate and the result of deliberate negotiations between the parties, I have also seen “cut-paste” clauses in contracts; these are taken directly from other contracts downloaded from the internet or obtained in other ways. Many entrepreneurs succumb to taking this shortcut because it saves them the lawyer’s fees for drafting customized contracts. While some money can be saved, doing so creates risk because the business context in which a contract is drafted varies- and blindly lifting clauses can render the entire contract meaningless, hard to implement or leave entities open to expensive litigation.

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. Lawyers and Business Advisors who understand business- especially in the world of startups- can guide entrepreneurs so that they don’t pay a high price later, since a stitch in time saves nine!

Image Credits: Photo by aymane jdidi from Pixabay 

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. 


Legal Framework for the Workforce of the Future

Every economic collapse paves the way to a transformative legacy, the pandemic is no exception. Globally, since 2020, the fluctuating and deliberate government-imposed lockdowns have forced the replacement of traditional work operations with automated labour platforms, virtual collaborations and digitized workforce interfaces[1]. According to International Labor Organization (ILO), the work from home arrangement has become an unexpected experiment that has managed to break the traditional barriers of working life and technology.

As the ‘new normal’ fixes its roots into the traditional office space, it is imperative to structure a regulatory legal framework that governs the ‘workforce of the future.’ Considering 96% of the organizations have successfully switched to work-from-home set-ups domestically since 2020, it is time for India to incorporate the new work culture into its legislative framework, in alignment with countries worldwide[2].

This article deliberates upon the exigency and structure of new work from the home regulatory regime, by mapping the work from home policies across the globe and analyzing the gaps in the present labour laws in the country that demand a more sincere reflection in the backdrop of the ‘new normal.’

Need of Comprehensive Legal Framework for Work from Home in India


          Fig: The economist[3]                                                              Fig: Statista[4]

The above two graphs illustrate two different statistics of work from home; graph 1 shows WFH working hours of employees per week in western countries, while graph 2 shows a survey of Indian millennials on lifestyle and work during a pandemic.

As per Graph 1, Britain has the highest percentage of work from home per week, with approximately 40% of the employees’ working-from-home for 5 or more days per week from 9 AM to 5 PM. In stark contrast, the Indian survey shows that work from home increased the office workload of 81% of employees which indicates that Indian employees are utilizing more energy than an average British employee. 

Additionally, 55% of Indian employees claim they do not enjoy work from home and 57% of employees say that work from home has pulled their career back. From these statistics, it appears that the issues outlined hereabove are the specific product of a lack of legislative or contractual conventions surrounding the treatment of employees participating through the Work From Home Model[5], and they indicate the urgent need to implement a compulsory legal framework in India governing work-from-home regime to prevent exploitation and loss of valuable human resource in the country, especially in the very important the service sector.

In this light, the Government of India has proposed to formalize work from home facilities for the service sector, leaving the manufacturing sector beyond the legislative scope. The parameters of the regulation are yet to be ascertained[6].  

Lacunas of the Extant Labour Codes in Dealing with the Work From Home Arrangement


  1. The draft Model Standing Orders for Service Sector 2020 – The policy is under the discretion of companies for implementation subject to the appointment of an employee. However, this is a very loosely framed guideline to build a sustainable framework for work from home. There needs to be a strong regulatory framework that recognises the need to work from home, protects the interest of the employees and the employers and deliver resolutions accordingly. However, the draft Model Standing Orders may get complicated with the individual state labour laws.
  2. Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code) – The OSH Code defines the working place of employees as “establishment” refers to the physical working place of employees[7]. The OSH does not recognize work from home as the working place of the employee.[8] This puts relevant questions of safety and health of workers working outside a physical establishment of a company. As work from home becomes the new norm, the term “establishment” shall have to be broadened to normalize and adapt for the workforce of the future. Further, the OSH Code needs to ascertain strict compliance to working hours and leave policy, including making the employer liable to pay double wages for any work done beyond working hours/shifts/during leaves, also, security to employer’s data, equipment, confidential information, reverse engineering, data theft, etc., along with strict provisions curbing moonlighting by employees may be included to protect the interest of all parties concerned in a work from home scenario.       
  3. Code on Social Security, 2020 (CSS) – under the CSS few key definitions of terms that are present significantly digress from the international definitions of ILO[9], for example –“home-based work”, “remote work”, “telework”, “work at home”, “information and communications technology” etc. Categorizing and defining such terms in a unified manner is crucial for policymaking and regulating. For instance, the ILO definition of “work at home” overlaps with “home-based work” defined under CSS, but both terms have different meanings, and they collectively exclude “work from home”. The definition of “establishment”, “employment injury”, and other related provisions may be aligned with the concept of work from home to provide security to the employees in a work from the home setup.
  4. Code on Wages, 2019 (CoW)[10] – Companies has cut the pay of their employees since the economic downturn, particularly during and after the second wave. Several other factors[11] affected the evaluation of wages and allowances of employees working from home. Therefore, it is important to amend the exclusive legal framework for WFH so that employees get the promised salaries, and companies are under the express liability to pay their employees with a contractual obligation.

Additionally, to ensure that the laws pertaining to work from home are effective and efficient, it is pertinent that issues specific to work from home set up, such as the ones detailed below, are thoroughly studied and understood, before framing the regulatory framework:

  • Measurement of the time of work and conduct of work by the employee in a remote environment – The approach legislature takes with respect to the same and how the same may be incorporated into the wage structure.
  • Measures to protect employees from injury, damages, losses, etc., in a work from home set up –  Requirement on employers to provide the necessary equipment, connectivity, seating arrangement, periodic risk assessment, etc.
  • Maintenance of equipment provided to employee in pursuit of work from home, and regulation of use thereof, with consideration to allied privacy concerns.
  • The manner in which misconduct and harassment of various degrees will be evaluated in the remote environment and the application of existing legislation to such scenario.
  • Maintenance of confidentiality, exclusivity and contained environment of the employees during working hours in such remote environment, including restriction on moonlighting, data theft, confidentiality breach, reverse engineering, etc.

With the above concerns in mind, it would be pertinent to explore instances in which comparative jurisdictions where such concerns were addressed.

A Comparative Overview on Formulated and Implemented “Work from Home” Laws Across the World


In the recent pandemic “work from home” emerged as a pragmatic approach for employers of most sectors across the world making work feasible for individuals primarily involved in white-collar jobs. However, it did bring major challenges and inconsistencies for employees who were made to work after office hours were overburdened and sometimes exploited. Observing the changing workplace scenario, governments were proactive in finding solutions to make employees dependable and employers accountable.

Spain: Spain legislated on remote work in September 2020. Remote work must be voluntary and reversible, and formalized in a written agreement without prejudice to general employment legislation or existing collective bargaining agreements. The law clarifies whom it applies to, i.e., those under an employment contract, and who have rendered “remote work” for a minimum period of three months, for at least 30% of an employee’s working day, or an equivalent percentage based on the contract. It also differentiates between “telework” and “work from home”. Companies are to provide resources, equipment and consumables necessary to perform and maintain work remotely. Further, employees have a right to payment and compensation for expenses on equipment, the right to privacy and data protection, and a right to digital disconnection, amongst others. At the same time, the law empowers employers to ensure that remote employees fulfil their duties well.

Finland: Finland has provided flexible working opportunities for years. This is partly because of legislation, allowing employees the right to adjust their working hours for maximum flexibility, since the mid-1990s. The Finnish Working Time Act, 2019 was recently amended[12] to introduce key changes towards creating adaptive working arrangements on flexible work hours, flexible working arrangements and the introduction of ‘working time accounts’. The Act has several features affording flexibility. Employers and employees may agree to flexible working hour arrangements, subject to regular working time not exceeding 40 hours and adjustment of excess hours worked. The Act also permits individual flexible work arrangements where employees decide on placement and performance at least half of the working time, setting out a number of aspects such an arrangement must cover (such as days on which working hours may be allocated, weekly rest periods and fixed working hours). The Act enables agreements on working time accounts, where working hours, earned time-off and monetary benefits can be exchanged for time off. Agreements on working time accounts must cover certain elements.

The United Kingdom: Flexible Working Arrangements (FWAs) were allowed via a process of proposal and negotiation in 2002, to assist employees with care-taking responsibilities in requesting FWAs. The UK’s approach to flexible work is predicated on three main pillars viz. qualifying employees proposing changes in relation to hours, time and location of work; an employer’s duty to consider such application in a “reasonable manner” with refusal only on pre-specified grounds (such as additional costs and inability to re-organise work amongst existing employees); and escalation to employment tribunals by employees, in limited circumstances. The UK’s approach is considered “light-touch regulation”, and is based on a foundation of dialogue and negotiation between employers and employees. Australia and New Zealand have also adopted similar legislation.

The European Union: The European Union (EU) has a “Work-Life Balance Directive” adopted in 2019, which provides FWAs for parents and caregivers.

Singapore: Singapore has an interesting alternative to the rights-based approach to FWAs adopted in the UK. Through a set of voluntary “Tripartite Standard on Flexible Work Arrangements” formulated in consultation with multiple stakeholders, employers can adopt practices that assist employees better managing work-life needs, while enhancing productivity. Such employers are employers of choice, and can use a logo-mark in recruitment and marketing.

Re-evaluation of Laws Necessary to Accommodate the New Work Culture


In a nutshell, the present labour and employment laws in India are incapable of addressing the concerns of work-from-home regime. Hence, re-evaluation of the present laws is important to amalgamate the “Work From Home” model into legislation to ensure welfare of the employees, workers and other relevant stakeholders. The above discussed international legislations aim to sustain a healthy and safe working environment for the employees within and outside the “establishment”. Finland and Singapore’s legislation provides flexible working hours and arrangements. The UK approach of “light touch regulation” is also innovative and promotes healthy relations between employees and employers. Taking que from the regulatory frameworks of countries across the world, India should aim to formalize “Work From Home” policies that benefit the employees while balancing the burden on employers. Worker and employee rights should be the central focus of development in the country, in order to fully reap the gains of this transformative legacy!

The present labour and employment laws of India are incapable of addressing the concerns of the work-from-home regime. Hence, re-evaluation of the present laws is important to amalgamate the WFH model into legislation to ensure the welfare of the employees, workers and other relevant stakeholders.


Occupational Safety, Health And Working Conditions Code, 2020

The Occupational Safety, Health and Working Conditions Code, 2020 (“OSHWC Code”) which consolidates the various legislations pertaining to working conditions of various types of industries was passed by the Lok Sabha on 22nd September 2020, the Rajya Sabha on 23rd September 2020 and received Presidential Assent on 28th September 2020

The amalgamated and consolidated legislations are:


  1. The Factories Act, 1948
  2. The Contract Labour (Regulation and Abolition) Act, 1970
  3. The Mines Act, 1952
  4. The Dock Workers (Safety, Health and Welfare) Act, 1986
  5. The Building & Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1979
  6. The Plantations Labour Act, 1951
  7. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
  8. The Working Journalist and other Newspaper Employees (Conditions of Service and Miscellaneous Provisions) Act, 1955
  9. The Working Journalist (Fixation of rates of wages) Act, 1961
  10. The Cine Workers and Cinema Theatre Workers Act, 1961
  11. The Motor Transport Workers Act, 1961
  12. The Sales Promotion Employees (Conditions of Service) Act, 1976
  13. The Beedi and Cigar Workers (Conditions of Employment) Act, 1966


Salient Features of the OSHWC Code


This section points out some of the key provisions in the OSHWC Code with a focus on the aspects which are different from applicable law.


  1. OSHWC Code has introduced a single registration for all establishments with 10 or more workers. Given that the OSHWC Code applies to a variety of different industries and types of establishments, the applicability for various sections varies accordingly as enumerated in the next point.


  1. The following are the amendments to thresholds which determine the applicability of relevant provisions of the OSHWC Code:
  • Factories with power – 10 to 20 workers
  • Factories without power – 20 to 40 workers
  • Contract Labour Section – 20 to 50 workers
  • Creche facility – 30 to 50 workers
  • Welfare Officer – 500 to 250 workers
  • Canteen – 250 to 100 workers


  1. Women can now work between 7 pm and 6 am in various establishments provided consent is obtained and safety measures are in place. Further, where previously prohibited, women are now allowed to work in all establishments including ones which are involved in hazardous activities.


  1. It has been made mandatory for all workers to have written terms of employment issued in an Appointment Letter.


  1. Free health needs to be provided by the employer annually for all workers over an age specified.


  1. Inter-state migrant workers to be provided for by employer/contractor, including statutory benefits. Further employers also have to cover travel fares for such workers as an allowance annually.


  1. Constitution of National Occupational Safety and Health Advisory Board to oversee and regulate safety norms, including requiring participatory/representative committees to be created to evaluate safety norms.


  1. Working hours, leave, overtime, welfare provisions have been made largely uniform across most Codes which makes the provisions uniform across most establishments.


  1. An employer is required to maintain a register which includes most of the following information: work performed by the employees, number of hours of work that constitute normal working hours in a day, weekly scheduled rest day, wages paid and receipts provided thereof, leave, leave with wages, overtime work, attendance, and dangerous occurrences and employment of adolescents.


  1. Government to formulate schemes for third party audit by professional experts.


OSHWC Code Implications


The OSHWC Code has certainly simplified the regulatory process. However, most of the aspects specifically needing regulations have been delegated to the State Government or the Board, so it needs to be seen what further legal provisions will likely be introduced in the rules.

Image Credits: Photo by Christopher Burns on Unsplash

The OSHWC Code has certainly simplified the regulatory process. However, most of the aspects specifically needing regulations have been delegated to the State Government or the Board, so it needs to be seen what further legal provisions will likely be introduced in the rules.


A New Era of Labour Laws Beginning With The Code of Wages, 2019


Over the last few years, there have been talks by the government to reform the existing labour laws, which are mostly archaic, to make them compatible with current issues and needs of the labour market. In the Union Budget 2019, the Government has pushed ahead with such reforms and proposed to streamline over 44 central laws and over 100 State laws pertaining to labour into 4 major Labour Codes, with the objective of increasing the ‘ease of doing business’ and ‘Make in India’ initiatives. The Government hopes that by standardizing definitions, registrations, and filings, there would be less conflict and fewer reasons for disputes.

The proposed Labour Codes are as follows:


  1. Code of Wages – The Code of Wages is set to combine and subsume the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976.


  1. Code of Industrial Relations – The Code of Industrial Relations seeks to replace the Industrial Disputes Act, 1947, the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946.


  1. Labour Code on Social Security – Labour Code on Social Security is intended to create a comprehensive social security system to provide retirement, health, old-age, disability, unemployment and maternity benefits to a vast majority of the population.


  1. Small Factories (Regulation of Employment and Conditions of Services) Bill – This Bill had initially been proposed to exempt small factories with less than 40 employees from the applicability of 14 labour legislations. However, this bill is most likely to be shelved on account of issues pertaining to rights of employees.


Further, the Government has allocated INR 11,184.09 crores to the Ministry of Labour and Employment which is a significant boost in comparison to the average budget allocation to the Ministry over the past 5 years.


Code of Wages, 2019


The first in the series of Codes to be approved by the Parliament is the Code of Wages, 2019[i] (“Code of Wages”). The Code of Wages (initially proposed in 2015), which amalgamates and subsumes 4 major legislations, namely the Payment of Wages Act, 1936[ii], the Minimum Wages Act, 1948[iii], the Payment of Bonus Act, 1965[iv] and the Equal Remuneration Act, 1976[v], was passed by the Lok Sabha on 30th July, 2019 and the Rajya Sabha on 2nd August, 2019 and has received the President’s assent on 8th August, 2019 and published in the Official Gazette for general information.


The Code of Wages, while not changing the provisions of the law themselves substantially has certainly reduced the ambiguity and multiplicity of definitions and compliances as well as broadened the scope of the beneficiaries under the existing laws thus providing benefits to around 50 crore employees. The Code comprises 9 chapters, with minimum wages, payment of wages, equal remuneration and bonus being covered under different chapters.




Salient Features of the Code of Wages


This section points out some of the key provisions in the Code of Wages which are different from the existing laws or a welcome clarification of the same.


  1. Applicability and Beneficiaries – The Code of Wages is applicable to all establishments regardless of industry. Further, all employees are eligible to be paid minimum wages and paid salary in a timely fashion. This is a vast difference from the existing law, where Minimum Wages Act, 1948 was applicable to only scheduled employments which were approximately 1750 in number and Payment of Wages Act, 1936 which was applicable only to those employees earning INR 24,000 or less per month.


  1. Uniform Definition of Wages – One of the most vexing aspects for employers over the years has been the multitude, 12 at present, of definitions for the term ‘wages’. This has led to difficulty in the setting of salary structures as well as determining various payments, contributions and deductions to be made. The current definition of wages provides more clarity on inclusions and exclusions specifically with respect to allowances. Wages now include all remuneration except for certain specific allowances such as conveyance, HRA, overtime, commission, bonus and the consistent social security contributions and gratuity. This definition makes the long paid special allowance a part of wages. Further, the Code of Wages also mandates that the excluded components cannot exceed 50% of the total salary paid. Any exclusions in excess of 50% shall be treated as wages. It will be interesting to see whether this definition remains consistent under the other proposed Labour Codes.


  1. Distinction between ‘Employee’ and ‘Worker’ – The Code of Wages makes a distinction between ‘Employee’ and ‘Worker’ with the definition of Employee covering all persons employed, except for apprentices, while ‘Worker’ is defined as similar to the existing ‘workman’ under the Industrial Disputes Act, 1947. Worker is essentially all employees except for those employees in a managerial or administrative capacity or employees in a supervisory capacity earning more than INR 15,000 a month. The Code of Wages references ‘Worker’ mostly in the context of minimum wages.


Although the definition encompasses all kinds of workers across industry sectors, uncertainties still remain regarding whether the Code would bring within its purview people working in gig-economy, where there is no fixed place of employment and flexible timings. The apex court has held, in Officer-In-Charge, Sub-Regional Provident Fund Office v Godavari Garments (2019)[vi], that women who worked from home doing piece work would be considered “employees” of the company which had engaged them to do so, for the purposes of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act), even if there was no direct contract of employment between the two. If the same is applied to the Code, it would definitely lead to uncertainties regarding the applicability of provisions in accordance with the nature of the job and lead to unnecessary litigations.


  1. Determining Minimum Wages – As it was under the existing laws, both the Central Government and the State Governments have the right to set the applicable minimum wages for central and state establishments.


  • The Code of Wages proposes for the Central Government to set a national minimum wage or floor wage, which may change based on regions. Any State Governments fixing their minimum wages shall ensure that the wages are equal to or greater than the floor wage. This would bring some uniformity in the minimum wages across the country and would make all states almost equally attractive from the point of view of labour cost for investment as well as reduce distress migration. However, the floor wage concept might diminish the minimum wage as it only states the lowest possible end of the spectrum and some states might opt to stick to it.


  • State Governments while determining the minimum wages shall use only 2 factors – (a) skill level of the employees, namely unskilled, semi-skilled, skilled or highly skilled, and (b) the geographical location. In addition, the arduousness or the danger level of the work may also be considered for the setting of minimum wages.


  • The Code of Wages mandates that the minimum wages be revised once every 5 years.


  • The Code does not provide any formula for fixation of minimum wages. For calculation of minimum wages, the 15th Indian Labour Conference (ILC) had adopted per capita food intake of at least 2,700 calories for a worker’s family comprising three units (2 adults and 2 children) for the calculation of minimum wages which has also been approved by the Supreme Court. A similar formula would have found more acceptability.


  1. Digitization – Payment through electronic and digital means have been introduced as a valid payment mode under the Code of Wages.


  1. Overtime – Overtime is fixed at twice the daily rate of wages for any work beyond the prescribed hours. This is similar to the position under various State laws. However, there is no provision for any compensatory off.


  1. Appellate Authority – Code of Wages provides for an appellate authority between the claims’ authority and judicial forums for speedier dispute resolution.


  1. Inspections – An Inspector-cum-Facilitator shall be appointed by the appropriate governments and the Code of Wages allows for a more structured inspection scheme which shall also include web-based inspections and request for information / documents through electronic means.


  1. Documentation – The Code of Wages requires employers to maintain a register containing the details of the persons employed, muster roll, wages and other prescribed information. Employers are also required to display a notice containing the abstract of the Code of Wages, wage rates, wage period, payment dates/days and contact details of the jurisdictional Inspector cum Facilitator.


  1. Penalties – Under the previous law the penalties for non-compliance were quite paltry and further was uniform regardless of the offence. The Code of Wages has imposed greater penalties as well as proportioned the said penalties pertaining to the degree of non-compliance. The Code of Wages prescribes the following penalties:


  • A maximum fine of INR 50,000 for non-payment of any applicable amounts. Simple Imprisonment of up to 3 months and a maximum fine of INR 1,00,000 for subsequent offences committed within a span of 5 years.


  • A maximum fine of INR 20,000 for other non-compliances. Simple Imprisonment of up to 1 month and a maximum fine of INR 40,000 for subsequent offences committed within a span of 5 years.


  • A maximum fine of INR 10,000 for incorrect maintenance of records.


Companies are also to be given an opportunity to rectify any non-compliances before prosecution at the discretion of the Inspector-cum-Facilitator. There is also an option for compounding of offences in the first instance.


  1. Limitation Period – The limitation period for claims by workers has been increased to 3 years, thus offering workers more time to exercise their statutory rights.


  1. Discrimination – While the Equal Remuneration Act, 1976, prohibited discrimination in wages, recruitment, promotion, training, and transfer for workers performing the same work and required the constitution of a board to promote employment opportunities for women, the Code of Wages prohibits gender-based discrimination only in terms of wages and recruitment. However, the gender-neutral approach has broadened the scope to a certain extent.


  1. Bonus – The Payment of Bonus Act, 1965 was applicable only to workers earning wages up to INR 21,000 per month. However, this statutory threshold has not been incorporated in the Wages Code, leaving it up to the discretion of the appropriate government to prescribe the wage ceiling for eligibility of payment of bonus. Further, conviction for sexual harassment has been added as a ground for disqualification from payment of bonus.


Most other provisions are the same as under existing laws.


Implications of the Code of Wages


As stated earlier, the substantive law itself has not seen much amendment under the Code of Wages and for the most part, companies will not see a vast difference in the actual provisions. The Code of Wages is mostly a consolidation of existing laws rather than a true reform of labour laws. However, it is a huge boon in terms of removing the multiplicity of definitions as well as authorities which would improve the ease of compliance and maintenance of records and filings.


Further, one of greatest advantages of the Code of Wages is that the benefits contemplated under the legislation is now available to a much larger portion of the workforce with very few categories of employees excluded from the scope. The introduction of a national minimum wage may also help reduce differences between States and skillsets and provide a basic standard of living for all employees across the country.


The lack of change in substantive law may be seen as a lost opportunity since the legislature has not truly taken the effort to analyse the need to retain archaic provisions.


Specific rules and notifications under the Code of Wages are also awaited before more insight can be gathered on whether the codification will actually improve the ease of compliance and doing business.

The substantive law itself has not seen much amendment under the Code of Wages and for the most part, companies will not see a vast difference in the actual provisions. The Code of Wages is mostly a consolidation of existing laws rather than a true reform of labour laws. However, it is a huge boon in terms of removing the multiplicity of definitions as well as authorities which would improve the ease of compliance and maintenance of records and filings.


Impact of Supreme Court ruling pertaining to calculation of Provident Fund contribution on Allowances

The Hon’ble Supreme Court, in a recent judgement, answered the question of whether “special allowances” would fall within the expression “basic wages” for Provident Fund (PF) contribution in the affirmative. Interpreting the provisions of Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“PF Act”) as a beneficial social welfare legislation, the Court affirmed the PF authorities’ factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

In essence, the Court reiterated the principle laid down in prior rulings that where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages and employers had to expressly prove the special treatment in the special allowance for it to be kept out of the purview of calculations for PF purposes.



The PF Act is a social security legislation enacted to help ensure that both employees and employers contributed towards a superannuation fund for the purpose of retirement benefits. Per the PF Act, all employees are required to contribute 12% of their basic wages, dearness allowance, cash value of any food concession and retaining allowance, if any with the employer contributing a matching 12%.


Basic Wages under Section 2(b)(ii) read with Section 6 of the PF Act is defined as “all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of employment and which are paid or payable in cash to him, but does not include:

  • the cash value of any food concession;
  • any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowances payable to the employee in respect of his employment or of work done in such employment;
  • any presents made by the employer.

The phrase “or any other similar allowance” has not specifically been defined in the PF Act or related schemes and has thus been a subject of litigation for several decades. Over the year, companies have been structuring the salary paid to employees to include various allowances, including special allowance. However, in all instances per the understanding of the PF Act, employers have only been paying contribution on Basic Salary, Dearness Allowance and Retaining Allowance or such equivalent components. The PF authorities have usually contended that ‘special allowances’ should be included for the purpose of calculation of contribution. The Hight Courts in India have taken varying views on the subject matter pertaining to contribution on allowances which had resulted in various appeals pending before the Supreme Court of India.


Supreme Court Decision on 28th February, 2019[1]

Various appeals[2] were preferred before the Supreme Court questioning whether various types of allowances such as special allowance, travel allowance, HRA, food allowance, etc. were to be construed as ‘basic wages’ for the purpose of calculation of contribution. The petitioners/employers had used the argument that the term ‘basic wages’ had certain specific exceptions and only such payment that had been earned by the employee in accordance with the terms of the employment was to be included for calculation of provident fund. The PF authorities, on the other hand used the principle of ‘universality’, stating that only incentive payments linked to output could be excluded from the calculation of provident fund.


The Hon’ble Supreme Court dismissed the appeals by the employers (except the appeal by the RPFC in the Vivekananda Vidyamandir case) and concluded, relying on the principle of universality, that all payments which were made to all employees or categories/classes of employees without discrimination and which are not specifically ‘variable’ in nature and fact or linked to certain incentive for greater output, would be construed as ‘basic wages’ and thus provident fund contribution was to be made on them. For an amount to be construed as variable in nature it would need to be demonstrated that the said amounts were payable on account of employees contributing beyond any normal work that would usually be expected of them; or that it would be payable to employees only if they availed certain opportunities.


The Supreme Court relied on some of its previous decisions for its conclusions, namely:

  • Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction.[3]
  • Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term ‘basic wages’.[4]
  • Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. Conversely, any payment by way of a special incentive or work is not basic wages.[5]
  • That the Act was a piece of beneficial social welfare legislation and must be interpreted as such.”[6]

Impact of Supreme Court Decision

The principles laid out by the Supreme Court, although not new, are a welcome clarification on the position of allowances with respect to the calculation of provident fund contribution. From an employee perspective, employees’ net take home salary is also likely to be impacted by the decision.


However, the possibility of the decision having a retrospective effect might exasperate employers. This is on account of the fact that the judgement interprets an existing provision in the law and does not create any new provisions. The retrospective effect may require employer to cover the shortfall in contribution for the past year but additionally pay interest and damages as well.


It may also be noted that the Supreme Court decision to include allowances as part of basic wages has primary financial implications in connection to those domestic employees whose salary (on which PF contributions were being paid i.e. basic salary and dearness allowance) is less than INR 15,000 per month, as well as all international workers.


Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.


The matter is also currently sub judice with the management of Surya Roshni Ltd. having filed a review petition before the Supreme Court. It also remains to be seen if the EPFO would take a more lenient stance and allow employers to rectify past non-compliances without incurring the additional cost of interest and damages.



[1] In connection with Civil Appeal no. 6221/2011, 3965-66/2013, 3969-70/2013, 3967-68/2013 and Transfer Case no. 19/2019 (arising out of TP(C) no. 1273/2013)

[2] Appeals considered jointly: (i) The Regional Provident Fund Commissioner (“RPFC”), West Bengal v/s Vivekananda Vidyamandir and Others (Kolkata High Court); (ii) Surya Roshni Ltd. vs. Employees Provident Fund and others (Madhya Pradesh High Court); (iii) U-Flex Ltd v/s EPF and another; (iv) Montage Enterprises Pvt. Ltd. v/s EPF and another (Madhya Pradesh High Court); (v) The Management of Saint-Gobain Glass India Limited v/s The RPFC, EPFO (Madras High Court).

[3] (i) Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR 978

[4] Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC 985

[5] Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428

[6] The Daily Partap vs. The Regional Provident Fund Commissioner, Punjab, Haryana, Himachal Pradesh and Union Territory, Chandigarh, (1998) 8 SCC 90

Image Credits: Image by Shutterbug75 from Pixabay 

Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.