India's new labour laws: Key insights for HR and Payroll leaders to prepare and navigate the changes
India’s new labour codes will come into effect at any time impacting businesses widely across industries, including MNCs with cross-border business or commercial interests in India. The new codes promote ease of doing business in India, by fine-tuning the existing labour laws, simplifying processes and enabling organisations to set up and run their businesses more efficiently. The codes aim to simplify the regulatory framework for businesses, and it will require significant change management in the initial stages to incorporate the labour reforms in your organisation.
With over 90% Indian states having published draft rules already, implementation of the new labour codes is imminent. Now is the time to start looking at the changes from statutory and payroll compliance perspective and prepare to navigate them effectively. It is critical that you develop an early understanding of what is changing and develop a strategic approach that will help your company stay compliant and help your employees benefit from the changes.
What is changing? Key takeaways:
In a nutshell, the new laws replace or consolidate 44 existing labour laws into 4 labour codes, which are the Code on Wages, Industrial Relations Code, Social Security Code and the Occupational, Safety, Health and Working Conditions Code.
Let’s start with the new code on wages and what it potentially means to you as an employer.
One of the implications of the new code on wages is its impact on the compensation structure. The new wage definition includes three components – basic pay, dearness and retaining allowance – while excluding special components, like HRA, travel allowance, overtime, gratuity, commission, rewards, bonuses, and employer contributions to retirement benefits. All of the exclusions are subject to a 50% ceiling, beyond which the exceeding amount is considered under wages.
As the basic component rises, so do other components, such as the provident fund, which are calculated as a percentage of the basic pay. All of this essentially translates to higher long-term savings and works to the advantage of employees as they retire.
Other salient aspects of the new code include:
- The introduction of a centrally established “floor wage”
- Inclusion of the unorganised sector – gig workers, contract employees – into the wage definition for the very first time
- Focus on equal remuneration without gender discrimination for work of similar nature
- Wage settlement for exit employees within two working days
The new codes are structured with due focus on key aspects like social security, minimum wages, and so on. For employers, one of the most significant benefits is improved ease of doing business. But while the laws are now available in the public domain, some amount of uncertainty prevails in their interpretation. For example, while the new code on wages seeks to establish a unified definition of what constitutes “wages”, the code also has separate definitions and provisions for “worker” and “employee” potentially introducing ambiguity.
Apart from these, the three other codes – Industrial Relations Code, Social Security Code and the Occupational, Safety, Health and Working Conditions Code – bring their own set of challenges. Considering the extent of the changes, it is wise that you prepare ahead and do some groundwork before the new laws come into effect.
Preparing for the new labour codes: 3 steps to your head-start
Understand the dos and don’ts - The first step towards adapting to this change successfully is understanding it. This involves frequent conversations with your HR and Finance leaders, subject matters experts, and payroll practitioners to study the changes in detail, and how they could affect you in the short- and long-run. Many companies choose to work with industry experts or partners who can provide an authoritative view on the new codes and the expertise to decode its nuances.
Be involved - While you may consider fully outsourcing the implementation of the new codes to a third-party, a hands-off approach has pitfalls. Your involvement is instrumental for successfully assimilating the new compensation structure and its elements quickly and effectively. Technology will be a critical enabler in helping you roll out the changes across your company.
Manage change - The new codes will have a lasting impact on organisational culture. Effective planning and change management are instrumental to overcoming any uncertainty that arise in early stages of deployment. It is important to view the changes with an open mind and encourage your employees to do so. Maintaining a positive and open dialogue always is key.
Facilitating the move
ADP is the partner in your journey to implementing the new labour codes. With a long-standing history in helping companies like yours navigate complex legislative and compliance changes, we have the right expertise, experience, people and technology platforms to help you stay on track throughout implementation of the new Indian labour codes. Our proven track record and expertise in managed services payroll and payroll compliance can help simplify the journey for businesses of all sizes and their employees.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Its purpose is to allow you to commence identifying any potential gaps in your current processes in order to work with your Labour Law advisors with respect to your specific circumstances.