How ‘Code on Social Security 2020’ affects employees, employers; new code brings stringent penalties too


code of social security, labour code 2020, employment, unemploymentUnder the Code of Social Security 2020, while the definition of wages is broadly similar to the EPF Act, a new concept of deemed wages has been introduced.

Pratika Shankar

The Code of Social Security, 2020 (CSS) which replaces 9 central laws dealing with social benefits for employees (including provident fund (EPF), insurance (ESIC), maternity, payment of gratuity etc.) received the President’s assent last Monday. The Ministry of Labour and Employment plans to publish the rules and implement all the codes by the end of 2020. While clarity on certain aspects under the CSS (such as rates of employees’ contributions, schemes for extending social benefits to the unorganised sector etc.) will only be available once the rules are issued, it is critical for employers and employees to assess the potential impact of the revised legal framework on their existing wage structure, gratuity payments and other social benefits. This article analyses some of the practical implications of the CSS on various stakeholders across all sections of the labour and industry spectrum.

How has the coverage of social security increased under CSS?

CSS for the first time recognises the need to provided social security benefits such as including life
insurance and disability insurance, health and maternity benefits, provident fund and skill upgradation to workers in the unorganised sectors who form a significant part of the workforce but are not covered by any of the existing welfare schemes. CSS mandates the Central Government and the State Governments to form social security schemes for:

  •  home-based workers, who provide services from their homes or any premises other than the workplace of their employers;
  • self-employed workers, who are not employed by an employer, but engage in any occupation in the unorganised sector subject to monthly earning or hold cultivable land;
  • wage workers, who are employed in the unorganised sector, directly by an employer or through any contractor, and include temporary or casual workers, migrant workers or workers employed by households including domestic workers;
  • gig workers, who are outside the traditional employer-employee relationship, such as freelancers; and
  • platform workers, who access other organisations or individuals using online platforms and earn money by providing them with specific services.

What is the impact of CSS on existing wage structures of employees?

It is common for employee compensation to be structured such that a significant part of the total compensation was payable as ‘allowances’ (such as bonuses, conveyance allowance, house rent allowance in some cases etc.) which were not included within the meaning of ‘wages’ that formed the basis of contributions for various social benefits such as EPF, ESIC etc. Taking advantage of this definition, employers and the employees make relatively smaller contributions towards these schemes.

Under the CSS, while the definition of wages is broadly similar to the EPF Act, a new concept of deemed wages has been introduced. It means that if an employee receives more than 50% of the total remuneration in the form of allowances and other amounts that are not included within the definition of wages, then the excess amount would be deemed to be wages for the purposes of contributions towards EPF. While higher contributions would be beneficial from a social security perspective, as an immediate consequence, it would increase the financial burden on the employer and also reduce the cash in the hands of the employees. However, this could be mitigated if the Central Government prescribes a lower rate of contribution for employees, as part of the rules framed
under the CSS.

How does CSS benefit fixed-term contractual employees?

Under the existing Payment of Gratuity Act, 1972, only those employees are entitled to gratuity who provide continuous service for at least 5 years. However, CSS extends gratuity entitlement to fixed term employees as well. Such employees would be paid gratuity based on the term of their employment contracts on a pro-rata basis, even if the contract period is less than 5 years.

This move is in sync with the changing dynamics of the Indian workforce, since duration of jobs have reduced in general and a large section of workers are now hired on a contractual basis. Further, it also allays the concern raised by trade unions, that certain employers retrenched employees before the completion of 5 years, only to avoid making gratuity payment.

How would career centres proposed under CSS help the job seekers?

CSS proposes setting up of career centres to replace the existing employment exchanges. These centres would not only collect and furnish information relating to employers and persons seeking employment but also provide vocational guidance, career counselling and guidance to start self-employment. Further, the Employment Exchanges Act applied only to establishments employing 25 or more persons, but under the CSS, all establishments (subject to certain exceptions) would have to notify vacancies their job vacancies to the career centre, thereby providing wider coverage of potential job opportunities to job seekers.

This move is in line with the Government’s increased focus on career counselling as a key activity to enable aspiring Indian youth to pursue the right career choice according to their aptitude so that they join the workforce with better skills for enhancing growth and development. If implemented effectively, the career centres could act as platforms to bridge the gap between government and private job providing ecosystem, job seeker and the skill development ecosystem.

What would be the impact of CSS on defaulting employers?

CSS imposes enhanced and stringent penalties for employers who fail to pay their mandated contributions under social security schemes. For instance, any failure by an employer to pay contributions mandated under the CSS would attract imprisonment for a minimum period of 1 year (extendable up to 3 years), and a fine of INR 100,000. For employers who do not provide the prescribed maternity benefits to their employers, could face imprisonment for period of 1 year and a fine of INR 50,000. For repeat offenders under CSS, minimum imprisonment of 2 years (extendable up to 5 years) and a fine of INR 300,000 has been prescribed.

It is expected that the enhanced penalties under CSS would act as a deterrent going forward. Having said that, in practice, the enforcement of existing social security laws has been very poor and non-compliance is rampant across all industry sectors, and this issue would need to be addressed by the Government while implementing the revised legal framework.

Pratika Shankar is a corporate lawyer and Managing Associate at Talwar Thakore & Associates (TT&A). Views expressed are the author’s personal. 

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