By Arya Tripathy and Rishi Sehgal on January 7, 2021
The Code on Social Security, 2020 (“Code”) received Presidential assent on September 28, 2020, and is aimed to be implemented next year. Upon implementation, it will replace 9 social security legislations.[1] The underlying objective is to consolidate all social security laws with a view to provide social security to all employees and workers, either in organised or unorganised sectors. It contains 14 chapters with 164 sections and 6 schedules.[2] The Code mostly subsumes provisions and mechanisms provided under these 9 laws such as headcount thresholds, manner of computation of provident fund (PF) contributions, payment of gratuity, maternity leave entitlements, obligations for hiring inter-state migrant and building and construction workers, compensation events for work injuries, etc. However, it introduces some new concepts and requirements that could impact costs associated with employee benefits and require a deep dive into existing HR policies and compliances. This post aims at providing an overview of the Code and some of the notable changes.
1. Application: Different chapters of the Code will apply differently to organisations depending on its nature and headcount. This is similar to the approach under the existing regime. First Schedule details the application criteria in the following manner: (i) Chapter III dealing with PF shall apply to establishments with 20 or more employees, (ii) Chapter IV relating to employees’ state insurance shall apply to establishment with 10 or more employees, (iii) Chapter V pertaining to gratuity will apply to all factories and every establishment which employs 10 or more employees, (iv) Chapter VI dealing with maternity benefit will apply to every establishment employing 10 or more employees, and (v) Chapter VII concerning employee’s compensation shall apply to those entities that are not covered under employees’ state insurance. Thus, there are no changes in this regard.
2. Wages: Under the existing framework, multiple definitions of wages exist. For example, Employees’ Compensation Act defines wages as any privilege or benefit capable of being estimated in money, except travelling allowance or concession, contribution paid towards pension or PF, or sum paid towards special expenses. The Employees’ Provident Fund Act (EPF Act) defines basic wages as all sums paid to an employee, excluding cash value of food concession, allowances (like DA, house rent, overtime), bonus or commission, or any presents made by the employer. Further, the Supreme Court in a 2017 judgment (The Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir and Ors.) clarified that basic wages under PF shall include all fixed payments and only variable allowances are excluded. The Code introduces a uniform definition of wages for all social security aspects.
Under the Code, “wages” will mean all remuneration payable in cash or kind including basic pay, DA, and retaining allowance (if any), but exclude the following 11 components – bonus, value of house-accommodation or utilities or medical amenities payable through special government order, contribution to PF or pension fund, HRA, conveyance/travel allowance, overtime, commission, gratuity, payment towards special expenses, any amount paid under award or settlement, retrenchment compensation or any retirement or ex-gratia payment made upon termination under any law. Further, the Code states that the aforementioned exclusions (except gratuity and termination pay) and any payment in kind cannot exceed 50% and 15% of the total remuneration respectively. Where it does, the excess will be deemed as part of wages. This definition is similar to what is provided under the other 3 labour codes i.e., Wages, Industrial Relations and Occupational Safety, Health & Working Conditions. Accordingly, employers will be obligated to ensure that for purposes of social security as well as other employment laws, basic pay + DA + retainer allowance (if any) is at least 50% of the monthly pay. This will also mean that amounts contributed or paid towards PF, gratuity, maternity benefit, compensation for work injuries, state insurance compensation and gratuity payments may require revisions for organisations who currently structure their salaries in such manner that fixed pay is less than 50% of the gross pay.
3. Employee: The Code provides a wider scope for “employee” to include any one employed on wages, directly or indirectly through a contractor to do any skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical, clerical or any other work, but excludes an apprentice. This definition is common in all the other labour codes. The underlying objective for including a wide scope is to ensure that all kinds of employees in organised as well as unorganised sectors are provided with social security benefits. However, the Code retains the monthly remuneration criteria for determining employee coverage as applicable under EPF Act and Employees’ State Insurance Act i.e., INR 15,000 and INR 21,000 per month respectively. To this effect, it states that appropriate government (which will be mostly concerned state government (SG) for private establishments) shall prescribe monthly wages for coverage under PF and state insurance related provisions. Thus, it is likely that only certain employees who satisfy the prescribed remuneration criteria will be entitled to the social security benefits.
4. Platform and gig workers: The Code seeks to extend social security benefits to platform and gig workers who operate outside conventional employment structures such as Uber drivers. It defines gig workers as persons who earn from activities outside of traditional employer-employee relationship. Platform workers include individuals using online aggregator platforms to access other organizations/individuals in order to solve specific problems, or to provide specific services in exchange for payment. The Code authorizes the central government (CG) to devise social security schemes for life and disability cover, health, maternity benefits, old age protection, accident insurance, creche, etc. and contemplates floating a separate fund for the said purposes. It also states that the contributions to the fund would be made by central and state governments, aggregators and corporate social responsibility funds. With respect to aggregators, the Code stipulates them to contribute @ 1- 2% of their annual turnover, provided that the amount does not exceed 5% of the annual amount paid or payable to workers.
5. Employees’ provident fund: The provisions concerning PF are provided in Chapter III. The rates have been revised and certain employer organizations have been provided with more flexibility to seek exemption from PF schemes. Currently, employers and employees are required to contribute @12% of basic wages on a monthly basis. The Code reduces the rate to 10%, provided that CG may notify establishments who will have to contribute @12%. Further, it states that employees can contribute beyond 10% at their discretion, but in such cases, employer shall not be obligated to match up. The Code enables CG to formulate provident fund, pension and deposit-linked schemes, but it is extremely likely that the existing ones will be adopted under the new Code, although with changes as required factoring the new rates. Furthermore, it allows organisations with 100 or more employees to make an application jointly with the employees to open and maintain separate provident fund accounts different from the ones created under the schemes, subject to such requirements as may be prescribed under rules.
6. Employees’ state insurance: Chapter IV of the Code deals with employees’ state insurance. It provides for creation of a employees’ state insurance fund to which contributions shall be made by the employers and employees at prescribed rates. It is very likely that the existing ESI fund shall be adopted under the Code, and the current contribution rates of 0.7% by employee and 3.25% by employer will be maintained. Further, the fund can now receive contributions in form of grants, donations, CSR funds, and gifts from any government body. Similar to the existing regime, the fund shall be used for providing medical, accident and other benefits to insured employees, establishment and maintenance of hospitals, payment of salaries, allowances, gratuities, etc. to corporation employees, and such other purposes as may be notified. Furthermore, the Code states that where the employer fails to make contributions, the corporation can pay upfront and later recover it from the employer. Overall, there are no major changes.
7. Gratuity: Chapter V of the Code deals with payment of gratuity. The Code retains the existing requirements i.e., gratuity is payable to employees who have completed 5 years of continuous service, which shall be paid @15 days wages for every completed year of service. However, the Code recognizes the concept of fixed term employment i.e., where an employee is engaged under a contract for a specified duration. Accordingly, it mandates employers to make gratuity payments to fixed term employees even where the term is less than 5 years on a pro-rata basis. Further, under the existing law, gratuity scheme is opened with Life Insurance Corporation, but the Code now allows employers to take up such schemes form any insurer regulated by the Insurance Regulatory & Development Authority of India.
8. Maternity benefit: Chapter VI of Code pertains to maternity benefit. The main features of the existing regime have been retained under the Code. Pregnant woman employee shall not work in any establishment during 6 weeks immediately preceding her due date, and shall be entitled to maternity leave of 26 weeks, of which not more than 8 weeks shall precede the due date. The woman employee shall be eligible to receive maternity benefit at the rate of average daily wage for actual period of absence, paid a medical of bonus in lieu of pre and post-natal care provided by employer, and allowed with 2 nursing breaks. It also states that every establishment which has 50 employees must provide creche facilities within such distance as may be prescribed by CG, either separately or availing such common facility services provided by any government or private body. This clarifies the existing practice followed by employers to comply with creche requirements as was introduced through 2017 amendment to Maternity Benefit Act.
9. Power to defer or reduce: The Code states that CG may by order defer or reduce employer and employee contribution obligation towards PF and state insurance for a period of up to 3 months at a time in the event of pandemic, endemic or national disaster. This seems to be motivated by the economic hardships that organisations have and are encountering due to COVID-19 pandemic. Inclusion of this provision will allow government to suspend contributions, which it could not have done otherwise without facing significant challenges and potential judicial review.
10. Priority payments: The Code expressly captures that money due towards PF and state insurance would be a charge on assets of establishment and paid in priority as per Insolvency & Bankruptcy Code (IBC). The list of preferential payments as prescribed under IBC do not specifically recognise this, although it provides that once bankruptcy proceeding related payments are paid out, proceeds should be used to pay worker dues for period of 24 months preceding bankruptcy commencement date, followed by payment of dues to non-workmen for the period of 12 months preceding the bankruptcy commencement date. In the past, there have been disputes as to whether contributions to social security funds will be part of employee dues, and the Code seems to clarify this position.
11. Limitation period: Presently, there is no limitation period on when can provident fund office and state insurance corporation can initiate proceedings against employers for recovery of outstanding contributions. Consequently, proceedings are initiated for historic periods without any limitation. The Code provides relief to employers by providing for a limitation period of 5 years for such proceedings.
12. Career centres: The Code has replaced the existing employment exchanges under Employment Exchanges Compulsory Notification of Vacancy Act with career centres. Career centres will refer to any office or portal established and maintained in such manner as prescribed by CG for providing career services including registration, collection and dissemination of information and other services to persons seeking employment and potential employers. CG has been vested with the power to notify establishments that must mandatorily notify vacancies to career centres, although there is no compulsory requirement to hire candidate from the career centre. This may mean that even private organisations providing recruitment services can be covered as career centres, and it will be important to wait for more clarification as may be provided under the rules.
13. Maintenance of records: The Code requires employers to maintain records and registers, electronically or in physical form containing particular and details with respect to employees, muster roll, wages, number of days and hours worked, leave and overtime details, number of dangerous occurrences, vacancies available and such other particulars as may be prescribed by the appropriate government. Further, it also mandates employer to display extracts of the Code as may be prescribed at work place and issue wage slips to employees in electronic or physical form. It also contemplates filing of returns in electronic form or otherwise with such officer or authority at such frequency as may be provided in the rules.
14. Inspector-cum-Facilitators: The Code provides for appointment of Inspector-cum-Facilitators who shall have the power to inspect establishments, search and seize records, and also be responsible for providing advice to employers and employees concerning the Code.
15. Offences: The Code provides for enhanced penalties for various offences such as failure to make contributions, provide maternity benefit, payment of gratuity, maintain records and other non-compliances. Specific to failure to make contributions under the Code, employer can be penalised with imprisonment up to 3 years and fine up to INR 100,000. For other offences, penalty amounts can be up to INR 50,000 or imprisonment between 6 months to a year, or both. However, no proceeding can be initiated unless the employer has been provided with an opportunity to rectify the alleged breach. Further, the Code allows for compounding of offences that are punishable with fine only or with imprisonment up to one year.
Conclusion: Specifics are left to rule making by SG and CG in certain cases, and it will be key for organisations to wait for the final central rules, as well as those that will be notified by states. The Code does not have enough clarity on how the provisions will be implemented, how SGs will adopt the new law, and if done without suitable transition period can cause hardships for businesses. While there are talks that the Code will be effective from April 2021, there could be some time gap by the time SGs adopt the Code. Nonethless, it will be prudent for organisations to start preparing to transition into the new regime with minimal disruptions.
[1] The 9 laws are Employee’s Compensation, Employees’ State Insurance, Employees’ Provident Fund and Miscellaneous Provisions, Employees Exchange (Compulsory Notification of Vacancies), Maternity Benefit, Payment of Gratuity, Cine Workers Welfare Fund, Building and Other Construction Workers Cess, and Unorganized Workers’ Social Security acts.
[2] Central government released the draft central rules for public consultation. However, the final version of draft rules is not available in public domain