Expanded Definition of Wages Under the Code on Wages 2019: Key Inclusions, Exclusions & Employer Obligations

Introduction

The definition of wages has undergone a transformative change with the enactment of the Code on Wages Act, 2019. This landmark legislation, which received presidential assent on August 8, 2019, consolidates and replaces four pre-existing labour laws: the Payment of Wages Act 1936, the Minimum Wages Act 1948, the Payment of Bonus Act 1965, and the Equal Remuneration Act 1976 [1]. The unified definition of wages introduced under this Code represents a paradigm shift in how employers must structure compensation packages and calculate statutory benefits for their employees.

Understanding the Legislative Framework

The Code on Wages Act 2019 extends to the whole of India and applies to all employees across organized and unorganized sectors. The legislation was introduced in Lok Sabha on July 23, 2019, by the Minister of Labour, and subsequently received approval from both houses of Parliament before presidential assent [2]. This consolidation aims to simplify compliance, reduce litigation, and ensure uniformity in wage-related matters across different employment categories. Prior to this enactment, employers faced significant challenges interpreting multiple definitions of wages under different statutes, which led to protracted disputes and inconsistent application of labour laws.

The Legal Definition of Wages Under the Code on Wages 2019

Section 2(y) of the Code on Wages Act 2019 defines wages as “all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment.” This definition adopts a tripartite structure comprising inclusions, exclusions, and conditional inclusions, providing clarity on what constitutes wages for various statutory purposes.

Components Included in Wages

The Code explicitly includes three primary components within the definition of wages. First, basic pay forms the foundational element of wage computation. Second, dearness allowance, which compensates employees for inflation and cost of living variations, is categorically included. Third, retaining allowance, where applicable, is included in the definition of wages. These three components together form the core wage structure upon which various statutory benefits and contributions are calculated [3].

The Supreme Court has historically recognized the importance of clearly delineating wage components. In the landmark case of Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union (1955), the apex court examined the relationship between wages and bonus, establishing that bonus is a payment made in addition to wages and generally represents a cash incentive given conditionally on certain standards of attendance and efficiency being attained [4]. This precedent continues to influence how courts interpret wage-related disputes under the new Code.

Statutory Exclusions from Wages

The Code on Wages Act 2019 specifically excludes eleven categories of payments from the definition of wages. These exclusions are critical for employers to understand as they directly impact payroll structuring and statutory compliance. The first exclusion covers any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment. This ensures that statutory bonuses are not counted twice in wage calculations.

The second exclusion pertains to the value of house accommodation or the supply of light, water, medical attendance, or other amenities or services excluded from wage computation by a general or special order of the appropriate government. Third, any contribution paid by the employer to any pension or provident fund, along with the interest that may have accrued thereon, is excluded. This recognizes that such contributions represent future benefits rather than current wages.

Conveyance allowance or the value of any travelling concession constitutes the fourth exclusion. Fifth, any sum paid to the employed person to defray special expenses entailed on them by the nature of their employment is excluded. House rent allowance forms the sixth exclusion, acknowledging that this allowance serves a specific purpose distinct from regular wages. The seventh exclusion covers remuneration payable under any award or settlement between the parties or order of a court or tribunal.

Overtime allowance constitutes the eighth exclusion, recognizing that payments for work beyond normal working hours are compensatory rather than regular wages. The ninth exclusion covers any commission payable to the employee. Gratuity payable on the termination of employment forms the tenth exclusion. Finally, the eleventh exclusion encompasses any retrenchment compensation or other retirement benefit payable to the employee, or any ex gratia payment made to them on the termination of employment [1].

The Fifty Percent Cap: A Game-Changing Provision

The most significant innovation in the Code on Wages Act 2019 is the introduction of a cap on exclusions. The first proviso to Section 2(y) stipulates that if payments made by the employer to the employee under the exclusion categories exceed one-half, or such other percentage as may be notified by the Central Government, of all remuneration, then the amount exceeding such threshold shall be deemed as remuneration and shall be accordingly added to wages. This provision fundamentally alters compensation structuring in India.

This fifty percent rule means that employers must ensure that basic pay, dearness allowance, and retaining allowance together constitute at least fifty percent of the total remuneration. If allowances and other exclusions exceed fifty percent of the total compensation, the excess amount automatically becomes part of wages for all statutory purposes. This has direct implications for provident fund contributions, gratuity calculations, bonus computations, and employer social security obligations [5].

The rationale behind this provision is to prevent employers from reducing basic wages and inflating allowances to minimize their statutory liabilities. By ensuring that core wage components remain substantial, the legislation aims to increase contributions towards social security benefits and retirement benefits, which are typically calculated based on basic wages rather than total compensation.

Conditional Inclusions for Specific Purposes

The second proviso to Section 2(y) creates conditional inclusions for specific statutory purposes. For the purpose of equal wages to all genders and for the purpose of payment of wages, four categories of emoluments that are otherwise excluded shall be taken into account: conveyance allowance or value of travelling concession, house rent allowance, remuneration payable under any award or settlement, and overtime allowance [1]. This ensures gender pay equity calculations reflect a more complete picture of compensation.

Regulatory Framework and Compliance Requirements

The Code on Wages Act 2019 establishes a robust regulatory framework for wage fixation and payment. Section 6 empowers the appropriate government to fix minimum rates of wages for employees, which can be determined on a time work basis or piece work basis. The Central Government is mandated under Section 9 to fix a floor wage taking into account minimum living standards, and state governments cannot fix minimum wages below this floor wage [6].

Section 17 prescribes strict timelines for wage payment. For employees engaged on a daily basis, wages must be paid at the end of the shift. For weekly engagement, payment must be made on the last working day of the week. Fortnightly wages must be paid before the end of the second day after the end of the fortnight. For monthly wages, payment must be made before the expiry of the seventh day of the succeeding month. Where an employee has been removed, dismissed, retrenched, resigned, or become unemployed due to closure, wages must be paid within two working days [1].

Impact on Statutory Contributions and Benefits

The expanded definition of wages under the Code significantly impacts employer contributions to various statutory funds. Provident fund contributions, which are calculated as a percentage of basic wages and dearness allowance, will increase when previously excluded allowances are brought within the wage definition due to the fifty percent cap. Similarly, gratuity calculations, which depend on last drawn wages, will see upward revisions for employees whose wage structures violate the exclusion cap.

Bonus calculations under Chapter IV of the Code are also affected by the wage definition. Section 26 provides for payment of annual minimum bonus calculated at the rate of eight and one-third percent of wages earned by the employee or one hundred rupees, whichever is higher. The allocable surplus for bonus distribution is determined based on wages as defined in the Code. Therefore, the inclusion of additional components within wages directly increases the quantum of bonus payable to employees [7].

Judicial Interpretation and Precedents

The courts have consistently emphasized the need for clear wage definitions to prevent exploitation and ensure fair compensation. In Baroda Borough Municipality v. Its Workmen (1956), the Supreme Court held that different activities of an establishment constitute one integrated whole, and distinctions between earning and spending departments for wage purposes would create unrest and discontent among employees. This principle of integration and uniformity underlies the unified wage definition in the Code on Wages Act 2019 [8].

Practical Implications for Employers

Employers must undertake a thorough review of their existing compensation structures to ensure compliance with the Code on Wages Act 2019. This involves recalculating the ratio of basic pay and dearness allowance to total remuneration. Many organizations that traditionally maintained basic pay at thirty to forty percent of total compensation must now restructure packages to meet the fifty percent threshold. This restructuring may result in increased take-home pay for some employees but reduced take-home pay for others, depending on how allowances are reclassified.

The impact extends beyond immediate payroll adjustments. Employers must update employment contracts, appointment letters, and salary structures to reflect the new definitions. Human resource management systems and payroll software require reconfiguration to accurately compute wages under the new framework. Additionally, employers must ensure that historical wage structures do not create liabilities for past non-compliance, although the savings clause in Section 69 provides some protection for actions taken under repealed legislation [1].

Enforcement Mechanisms and Penalties

The Code on Wages Act 2019 establishes stringent enforcement mechanisms through Inspector-cum-Facilitators appointed under Section 51. These officials possess powers to inspect establishments, examine employees, require information, and search and seize relevant documents. Section 54 prescribes penalties for non-compliance, with employers paying less than amounts due facing fines up to fifty thousand rupees. Repeated violations attract imprisonment for up to three months or fines up to one lakh rupees, or both [9].

Section 45 provides employees with a mechanism to file claims for wage-related dues before designated authorities. These authorities must endeavor to decide claims within three months and can order compensation up to ten times the claim amount in appropriate cases. This creates significant financial risk for non-compliant employers and underscores the importance of proactive compliance measures.

Conclusion

The Code on Wages Act 2019 represents a watershed moment in Indian labour law reform. The expanded and unified definition of wages under the Code on Wages 2019, with its clear inclusions, exclusions, and the critical fifty percent cap on exclusions, fundamentally transforms how employers must approach compensation structuring. While the legislation aims to enhance employee welfare and increase social security coverage, it places substantial compliance burdens on employers who must navigate the transition from legacy systems to the new framework. Organizations that proactively assess their wage structures, engage in transparent communication with employees, and implement robust compliance mechanisms will be better positioned to navigate this regulatory evolution. As the implementation of this Code progresses and judicial interpretations emerge, both employers and employees must remain vigilant to ensure that the legislative objectives of fair wages, social security, and industrial harmony are achieved in practice.

References

[1] Government of India. (2019). The Code on Wages, 2019 (No. 29 of 2019). Ministry of Law and Justice. https://labour.gov.in/sites/default/files/the_code_on_wages_2019_no._29_of_2019.pdf

[2] PRS Legislative Research. (2019). The Code on Wages, 2019. https://prsindia.org/billtrack/the-code-on-wages-2019

[3] Zoho Payroll. (2023). Decoding the code on wages, 2019. Zoho Payroll Academy. https://www.zoho.com/in/payroll/academy/taxes-and-compliance/labour-code-on-wages.html

[4] Muir Mills Co., Ltd. v. Suti Mills Mazdoor Union, Kanpur, AIR 1955 SC 170. Indian Kanoon. https://indiankanoon.org/doc/1681654/

[5] Corrida Legal. (2025). Code on Wages, 2019, Impact on Basic Pay: Essential Changes for Payroll Compliance in India. https://corridalegal.com/code-on-wages-2019-impact-on-basic-pay-essential-changes-for-payroll-compliance-in-india/

[6] Lexology. (2020). Code on Wages, 2019 – An overview. https://www.lexology.com/library/detail.aspx?g=79ea3e17-a1bb-446a-bb9d-65916c93efed

[7] Mondaq. (2022). Decoding Definition Of ‘WAGES’ As Per The New Wage Code – India. https://www.mondaq.com/india/employee-rights-labour-relations/1211054/decoding-definition-of-wages-as-per-the-new-wage-code-india

[8] Baroda Borough Municipality v. Its Workmen, AIR 1957 SC 65. Indian Kanoon. https://indiankanoon.org/doc/1685938/

[9] Wikipedia. (2025). Code on Wages, 2019. https://en.wikipedia.org/wiki/Code_on_Wages,_2019