Dear Members, Hope everyone is in excellent health. My close friend has started a company that is a startup and is approx 3 months old. My friend being a thorough professional follows every rule to the line and has asked me for some HR advice in light of the new wage code 2019.
1) As per the new Act it will be necessary to keep Basic at 50% of total salary. In this event, I had suggested to cap the PF contribution to Rs 15000 of Basic. However, with rapid changes in policies is the right approach to take.
2) As of now I understand that startups are exempt from the Payment of Bonus Act for the first 5 years. Which if correct I had suggested her to keep the Basic salary of all her employees where possible to above Rs 21000. However, the new wage code is silent on the issue where the Basic salary is above 50%. In my friend's case if the Basic salary is kept above Rs 21000 then the basic salary is more than 50% of the total gross salary of the majority of employees. Is this illegal.
3) I also want to understand the concept of the magic number of 20 employees or more to be eligible for PF. If hypothetically there are 30 employees in a company. Now 19 employees are on roll of the company and 11 are shown as contract employees of a third party or as independent consultants. In such a case is there any contravention of any law. Further, will the PF act be applicable as the employees are in 2 different classes i.e one being full-time and the other being contractual or consultants. The consultants will be paid a lump sum amount with no bifurcation.
Kindly advice.
From India, Mumbai
51) As per the new Act it will be necessary to keep Basic at 50% of total salary. In this event, I had suggested to cap the PF contribution to Rs 15000 of Basic. However, with rapid changes in policies is the right approach to take.
2) As of now I understand that startups are exempt from the Payment of Bonus Act for the first 5 years. Which if correct I had suggested her to keep the Basic salary of all her employees where possible to above Rs 21000. However, the new wage code is silent on the issue where the Basic salary is above 50%. In my friend's case if the Basic salary is kept above Rs 21000 then the basic salary is more than 50% of the total gross salary of the majority of employees. Is this illegal.
3) I also want to understand the concept of the magic number of 20 employees or more to be eligible for PF. If hypothetically there are 30 employees in a company. Now 19 employees are on roll of the company and 11 are shown as contract employees of a third party or as independent consultants. In such a case is there any contravention of any law. Further, will the PF act be applicable as the employees are in 2 different classes i.e one being full-time and the other being contractual or consultants. The consultants will be paid a lump sum amount with no bifurcation.
Kindly advice.
From India, Mumbai
Dear Ms.Anuradha,
1) Your proposition is correct in view of the definition of the term "wages" u/s 2(y) of the Code on Wages,2019. Simply put, this definition includes basic pay, dearness allowance and retaining allowance and excludes all other allowances so long as their sum total remains at 50% of the monthly gross amount payable as per the contract of employment.
2) As per sec.26(1) of the COW,2019, the threshold wages per mensem for eligibility of bonus is to be determined by the appropriate Government concerned for the industrial establishment. I have no idea whether the Central Govt or any State Govt has issued any notification so far in this regard. The definition of "wages" u/s 2(88) of the Code on Social Security,2020 is exactly similar to that of the COW,2019. Therefore, it is not practically possible to restructure wages according to different threshold limits, if any fixed for applicability as the purpose behind these statutory benefits are different.
3) The statutory number threshold under any labor law is not magical but based only on the necessity of regulation and convenience of accounting. To get clarity, you may refer to the definitions of the term "employee " occurring in the four Codes comparatively. In my opinion, the term "consultant" which generally refers to those offer their services on a contract-for- service basis is a misnomer under the labor laws. Employee covers regular, part time, fixed term, casual and outsourced employees and with the definitions of Gig Worker and Platform worker, a tangent deviation of outlook is required from the traditional employer-employee relationship. If the compensation is a lump sum, you are going to calculate the benefits on the total only.
From India, Salem
1) Your proposition is correct in view of the definition of the term "wages" u/s 2(y) of the Code on Wages,2019. Simply put, this definition includes basic pay, dearness allowance and retaining allowance and excludes all other allowances so long as their sum total remains at 50% of the monthly gross amount payable as per the contract of employment.
2) As per sec.26(1) of the COW,2019, the threshold wages per mensem for eligibility of bonus is to be determined by the appropriate Government concerned for the industrial establishment. I have no idea whether the Central Govt or any State Govt has issued any notification so far in this regard. The definition of "wages" u/s 2(88) of the Code on Social Security,2020 is exactly similar to that of the COW,2019. Therefore, it is not practically possible to restructure wages according to different threshold limits, if any fixed for applicability as the purpose behind these statutory benefits are different.
3) The statutory number threshold under any labor law is not magical but based only on the necessity of regulation and convenience of accounting. To get clarity, you may refer to the definitions of the term "employee " occurring in the four Codes comparatively. In my opinion, the term "consultant" which generally refers to those offer their services on a contract-for- service basis is a misnomer under the labor laws. Employee covers regular, part time, fixed term, casual and outsourced employees and with the definitions of Gig Worker and Platform worker, a tangent deviation of outlook is required from the traditional employer-employee relationship. If the compensation is a lump sum, you are going to calculate the benefits on the total only.
From India, Salem
Respected Umakanthan Sir
Glad to see your reply on my query.
But the response has further convoluted the opinion I plan to dispense in the true spirit of friendship .
I was able to understand the pt 1& 2 of your reply. On pt 3 I just needed to understand that as of the current scenario if the hypothetical preposition is exercised by a company does it attract penal provisions.
As per my limited understanding of the wording of the respective acts the number of employees upto 20 are exempt from this act.
Further when two different class of workers one directly associated with the company and the other indirectly is associated with an establishment then in such a case CAN THAT establishment be exempt from the respective acts mainly EPF & CLRA till the threshold of 20 employees or contract personal is not breached.
Kindly advice.
Best Wishes and Always a pleasure to receive your noble accurate advice.
Anuradha
From India, Mumbai
Glad to see your reply on my query.
But the response has further convoluted the opinion I plan to dispense in the true spirit of friendship .
I was able to understand the pt 1& 2 of your reply. On pt 3 I just needed to understand that as of the current scenario if the hypothetical preposition is exercised by a company does it attract penal provisions.
As per my limited understanding of the wording of the respective acts the number of employees upto 20 are exempt from this act.
Further when two different class of workers one directly associated with the company and the other indirectly is associated with an establishment then in such a case CAN THAT establishment be exempt from the respective acts mainly EPF & CLRA till the threshold of 20 employees or contract personal is not breached.
Kindly advice.
Best Wishes and Always a pleasure to receive your noble accurate advice.
Anuradha
From India, Mumbai
In the definition of wages under new code nowhere it is mentioned that Basic should be 50% of monthly gross. Rather it has been mentioned that for calculating the wages under this clause, if payments made under the exclusion list is more than 50% of all remuneration calculated under the code, the excess of 50% amount will add back to wages. Therefore, in the new wage structure it should be from "all remuneration calculated under the code " i.e CTC of which 50% will be allowances and obviously 50% will be wage ( Basic & DA ). As component like PF, LTA/LTC, Bonus etc.will be included in the other allowances - those should be subtracted from the other allowances while determining month gross salary. There is no restriction for fixing more basic as per code.
Point no. 2 is perfect.
Point no-3 - As per definition of employee under Social Security Code under proviso 2 it is clearly mentioned how to calculate number of employees as per PF or ESIC. To my opinion the organization will be covered under PF.
New point - coverage under CLRA - the coverage limit has been enhanced to 50 or more as per OSH Code 2020 Chapter XI SEC- 45.
S K Bandyopadhyay ( Howrah, WB)
From India, New Delhi
Point no. 2 is perfect.
Point no-3 - As per definition of employee under Social Security Code under proviso 2 it is clearly mentioned how to calculate number of employees as per PF or ESIC. To my opinion the organization will be covered under PF.
New point - coverage under CLRA - the coverage limit has been enhanced to 50 or more as per OSH Code 2020 Chapter XI SEC- 45.
S K Bandyopadhyay ( Howrah, WB)
From India, New Delhi
Thank you Mr.Bandyopadhyay
However there is a difference in understanding here.
I am aware of the limit of 20 employees for EPF & ESI.
But the objective here is different. Please look at it from a Startup point of view.
A startup has limited resources ,high attrition rate and spikes or drips in terms of people working in the startup.
Consider this example:
Now if Mr. A joins a startup at say a monthly basic salary of Rs 25000. Mr. A is approx 26 yrs old and not worried about retirement as of now but is more interested in what his NET TAKE home will be.
If the startup ends up deducting even at Rs 15000 --12% basic--> his basic salary is reduced (before any tax) due to PF deductions by approx Rs 3700(Employer Employee contribution) or so per month.
At the same time the startup is scaling up but may not grow in the next 18 months to have more than 40 employees.
So it keeps--> let's assume 18 employees on its roll and keeps the remaining 22 people who are engaged in various tasks as either Contract employees or consultants.
ALL THIS IS DONE SO THAT EVERY PERSON ASSOCIATED WITH THE STARTUP HAS MORE NET SALARY OR FEES EVERY MONTH.
Therefore now in order to increase take home salary of Mr. A kindly suggest that if in my first post Pt.3 is exercised is it contravention of any act.
Secondly if there are employees with a BASIC salary of more than Rs 15000 per month and Gross salary of more than Rs 21,000 per month STILL HAS THE COMPANY MANDATORILY TO ENROLL WITH PF. The new code has no reference on that.
Much Appreciate your future and past responses.
Thanks
Anuradha
From India, Mumbai
However there is a difference in understanding here.
I am aware of the limit of 20 employees for EPF & ESI.
But the objective here is different. Please look at it from a Startup point of view.
A startup has limited resources ,high attrition rate and spikes or drips in terms of people working in the startup.
Consider this example:
Now if Mr. A joins a startup at say a monthly basic salary of Rs 25000. Mr. A is approx 26 yrs old and not worried about retirement as of now but is more interested in what his NET TAKE home will be.
If the startup ends up deducting even at Rs 15000 --12% basic--> his basic salary is reduced (before any tax) due to PF deductions by approx Rs 3700(Employer Employee contribution) or so per month.
At the same time the startup is scaling up but may not grow in the next 18 months to have more than 40 employees.
So it keeps--> let's assume 18 employees on its roll and keeps the remaining 22 people who are engaged in various tasks as either Contract employees or consultants.
ALL THIS IS DONE SO THAT EVERY PERSON ASSOCIATED WITH THE STARTUP HAS MORE NET SALARY OR FEES EVERY MONTH.
Therefore now in order to increase take home salary of Mr. A kindly suggest that if in my first post Pt.3 is exercised is it contravention of any act.
Secondly if there are employees with a BASIC salary of more than Rs 15000 per month and Gross salary of more than Rs 21,000 per month STILL HAS THE COMPANY MANDATORILY TO ENROLL WITH PF. The new code has no reference on that.
Much Appreciate your future and past responses.
Thanks
Anuradha
From India, Mumbai
Dear Anuradha,
You have two queries. One take home salary and another coverage. So far as new code is concerned it is obvious to reduce take home salary per month because as per the code in new remuneration structure the Basic actually will be more than 50% of monthly gross. Therefore, there is no scope to increase take home after complying under PF Act.
Regarding coverage I am referring Sec - 2 (26) of Social security code the definition of Employee. Employee includes any person engaged either directly or through contractor. The second proviso of the definition has been guided how to count number of employees for the purpose of coverage. The employees whose wages are more than the wage ceiling as notified by the Govt., shall also be taken into account.
Therefore including contractual or consultant the total number of employees will be more than 20 and will be covered under PF. Being start up company , the company may recruit experience candidate who are covered under PF , cannot be discontinued their membership with a plea by non covering the organisation under PF.
Trust I have clarified your queries. For further clarification you may call me.
Thanks & Regards,
S K Bandyopadhyay ( Howrah, WB)
From India, New Delhi
You have two queries. One take home salary and another coverage. So far as new code is concerned it is obvious to reduce take home salary per month because as per the code in new remuneration structure the Basic actually will be more than 50% of monthly gross. Therefore, there is no scope to increase take home after complying under PF Act.
Regarding coverage I am referring Sec - 2 (26) of Social security code the definition of Employee. Employee includes any person engaged either directly or through contractor. The second proviso of the definition has been guided how to count number of employees for the purpose of coverage. The employees whose wages are more than the wage ceiling as notified by the Govt., shall also be taken into account.
Therefore including contractual or consultant the total number of employees will be more than 20 and will be covered under PF. Being start up company , the company may recruit experience candidate who are covered under PF , cannot be discontinued their membership with a plea by non covering the organisation under PF.
Trust I have clarified your queries. For further clarification you may call me.
Thanks & Regards,
S K Bandyopadhyay ( Howrah, WB)
From India, New Delhi
Dear Ms. Anuradha,
First of all I will suggest not to think or plan on basis of proposed COW, 2019. It is not implemented yet. Plan your policies on basis of existing rules and laws. Pls note my observations:-
1. Being a start up keeping higher Basic is good idea to keep exempted from EPF. But as per last year PF rule (notification), PF is applicable on most components (except HRA). So I will advice to keep Basic little less and maintain total salary (excluding HRA) more than 15 k. So that you can show since initial PF Wages is more than 15 K, hence employee not covered under EPF. But in such case also pls check with some consultant you may be required to take employee consent over some Form / undertaking. Moreover, if employee strength is 20 or more than you have to take EPF Registration. Since all are excluded employees (as you proposed-planning), so need not to make any PF deduction.
2. Startup’s are exempted from Bonus for initial 5 Years if the establishment don’t have allocable surplus or having losses for those years. If the establishment is making profit (after adjustment of previous year’s loss/es) than Bonus is required to be paid as applicable. Moreover the Rs. 21000 capping is applicable for Gross Wages not for Basic Wages. Means if any employee gross wages is more than 21 k, than he/she can be treated as Bonus excluded Employee. Pls check these points with some Labour Lawyer / Consultant.
3. While calculating No. of employees for PF Registration, generally the PF authorities count the Off Roll employees also as part of regular employees. It can be challenged by PF official that to avoid PF Registration you have engaged some Off Roll employees. In case of consultants you have to issue proper Service Agreement, it must be renewed time to time as per work requirements. Moreover such consultants should not provided emoluments which is given to On Roll Employees. Otherwise it will be assumed you have hired them as consultants just to avoid PF liabilities. Moreover, TDS is deducted from such consultants fees / remuneration.
At last I will advice to keep the Basic lower side (gross can be drafted in a way to exclude PF-Bonus liability). Coz you have more than 10 On Roll Employees to which POG Act, 1972 is applicable. The higher Basic will increase Gratuity Cost (which occurs after 5 years of continuous service).
In r/o hiring remaining 22 people pls note don’t hire 20 or more through a single agency, otherwise CL Act, 1970 will be applicable (Pls check in some states it is now 50).
I can’t give any Section Reference, the above points are based on my experience. Hence I am insisting to take one time consultant services to frame proper policies / pattern. This will help you to avoid future burdens from Statutory obligations.
Seniors can throw more inputs on the matter.
From India, Delhi
First of all I will suggest not to think or plan on basis of proposed COW, 2019. It is not implemented yet. Plan your policies on basis of existing rules and laws. Pls note my observations:-
1. Being a start up keeping higher Basic is good idea to keep exempted from EPF. But as per last year PF rule (notification), PF is applicable on most components (except HRA). So I will advice to keep Basic little less and maintain total salary (excluding HRA) more than 15 k. So that you can show since initial PF Wages is more than 15 K, hence employee not covered under EPF. But in such case also pls check with some consultant you may be required to take employee consent over some Form / undertaking. Moreover, if employee strength is 20 or more than you have to take EPF Registration. Since all are excluded employees (as you proposed-planning), so need not to make any PF deduction.
2. Startup’s are exempted from Bonus for initial 5 Years if the establishment don’t have allocable surplus or having losses for those years. If the establishment is making profit (after adjustment of previous year’s loss/es) than Bonus is required to be paid as applicable. Moreover the Rs. 21000 capping is applicable for Gross Wages not for Basic Wages. Means if any employee gross wages is more than 21 k, than he/she can be treated as Bonus excluded Employee. Pls check these points with some Labour Lawyer / Consultant.
3. While calculating No. of employees for PF Registration, generally the PF authorities count the Off Roll employees also as part of regular employees. It can be challenged by PF official that to avoid PF Registration you have engaged some Off Roll employees. In case of consultants you have to issue proper Service Agreement, it must be renewed time to time as per work requirements. Moreover such consultants should not provided emoluments which is given to On Roll Employees. Otherwise it will be assumed you have hired them as consultants just to avoid PF liabilities. Moreover, TDS is deducted from such consultants fees / remuneration.
At last I will advice to keep the Basic lower side (gross can be drafted in a way to exclude PF-Bonus liability). Coz you have more than 10 On Roll Employees to which POG Act, 1972 is applicable. The higher Basic will increase Gratuity Cost (which occurs after 5 years of continuous service).
In r/o hiring remaining 22 people pls note don’t hire 20 or more through a single agency, otherwise CL Act, 1970 will be applicable (Pls check in some states it is now 50).
I can’t give any Section Reference, the above points are based on my experience. Hence I am insisting to take one time consultant services to frame proper policies / pattern. This will help you to avoid future burdens from Statutory obligations.
Seniors can throw more inputs on the matter.
From India, Delhi
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