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India Expected to Partially Roll Out the Labor Reform, Intending to Ease Labor Regulations

Last week, at his address at the national conference, Prime Minister Modi underscored the need for implementing the four labour codes together as quickly as possible. The labor reform will likely to be implemented in phases and start with changes on wage and social security.

With the intention of less restrictive labor regulation, improving working conditions of workers and ease of compliance for employers through use of technology, the Indian government has codified 29 national labor statutes into four labor codes. However, the effective time has been postponed from this May.

“The codes will ensure the empowerment of workers via minimum wages, job security, social security and health security”, Mr. Modi commented. At the conference, senior government officials indicated that there is consensus among stakeholders support a staggered implementation. Most states have prepared draft rules for Code on Wages and The Code of Social Security, which are likely to be implemented first.  

Particularly, the new Code on Wages will have a significant impact on how companies calculate gratuity and pay their employees. Once the new law is implemented, companies must ensure that 50% of employees' total salary is basic pay and the remaining 50% comprises employee allowances, house rent, and overtime. And if the company pays any additional allowances or exemptions that exceed 50%, it will be treated as remuneration.

Gratuity is a sum of money that employers pay their employees as a sign of gratitude for their five or more years of service. The basis for the calculation of gratitude is the last drawn salary and year of service provided by the employee. Even though the change will impact employees’ take-home money, it could increase the gratuity bonus that is to be paid to employees as the bonus will be calculated on a large salary base that comprises basic pay and allowances. It’s very likely that the new law will grandfather gratuity calculation practice in the past.

Outlook: Due to its large and young population, lower wages, and relatively diverse industries, India has been a popular candidate for replacing China as a manufacturing powerhouse in the global supply chain.  The government is moving in the direction of providing business with more flexibility by implementing the new labor laws.

Published on: August 31, 2022

Authors: Dilpreet Singh

Topics: India

Dilpreet Singh

Chief Advisor, India, HR Policy Association

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