Recommendation to the Ministry of Labour & Employment on the Definition of Wages under the Labour Codes

1. Aparajitha Corporate Services Private Limited, a company engaged in providing compliance services, through the use of technology to over 2000+ clients, PAN India. We offer knowledge-driven, tech-enabled Labour, Industrial and Financial Compliance Solutions across India. Our domain-specific services are crafted to assist businesses with the necessary licenses, registrations, and compliance management under various domains. Through this letter, we write to re-present our earlier recommendation to address certain ambiguities in the definition of ‘Wages’ under the Labour Codes.
2. Through the Recommendation Letter dated 23^rd October 2024, we made certain recommendations regarding ambiguities in the definition of the term “Wages” under the Code on Wages, 2019 (with the definition of Wages being uniform across all Codes, it is applicable to all the Labour Codes). In response to the said recommendation, we received a communication dated 18^th December 2024 from the Wage Cell of the Ministry of Labour and Employment (referred above), wherein it was clarified that the Code on Wages, 2019 had not been brought into force at that point in time and that the Code on Wages (Central) Rules, 2020 had not yet been notified, and we were further advised to make representations on issues relating to the definition of “Wages” once the relevant provisions of the Code are brought into force.
3. As the Labour Codes have now been brought into force, with effect from 21^st November 2025, and the corresponding Central Rules have been pre-published for public comments and stakeholder consultation, the ambiguities earlier highlighted by us with respect to the definition of the term “Wages” have now become relevant and require consideration.
4. Through our earlier letter, we had recommended certain changes to the definition of the term “Wages” as provided under Section 2(y) of the Code on Wages, 2019. The exclusionary part of the wages definition includes:

• sub-clause (a) – ‘any bonus payable under any law for the time being in force, which does not form part of the remuneration under the terms of employment’
• sub-clause (c) – ‘any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon’
• sub-clause (j) – ‘any gratuity payable on the termination of employment’
• sub-clause (k) – ‘any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment, under any law for the time being in force’

5. With regards to sub-clause (a) – under Chapter IV of the Code on Wages, 2019, every eligible employee is entitled to receive an annual bonus calculated at the rate of eight and one-third per cent (8.33%) of the wages earned during the relevant accounting year, or a minimum amount of INR 100, whichever is higher. To be eligible for payment of bonus, an employee must have worked for at least thirty days in the relevant accounting year. This minimum bonus is payable irrespective of whether allocable surplus is available with the employer. In cases where the allocable surplus with the employer exceeds the amount required for payment of the minimum bonus, the employer is obligated pay bonus in proportion to the wages earned by each employee, subject to a maximum limit of 20% of such wages. In cases where the employer decides to pay a bonus exceeding 8.33%, but the employee has not worked on all working days during the relevant accounting year, the excess portion of the bonus may be proportionately reduced. What we wish to highlight here is that the factors to be considered while determining the payment of bonus is the frequency of when the payment is to be made and how the amount of bonus payable is influenced by several factors which includes the number of days worked by the employee in the relevant accounting year, the allocable surplus available with the employer, and the fact that bonus is payable on an annual basis.

6.  With regards to sub-clause (c) – Provident Fund (“PF”) is a social security benefit that is calculated based on the wages or remuneration earned by an employee on a monthly basis, at the rate prescribed under the Provident Fund scheme currently in force. It is pertinent to note that PF contributions are calculated as a percentage of the wages earned by the employee. For instance, if an employee earns INR 15,000 (Basic pay + Dearness Allowance) per month and the applicable employer contribution rate is 12%, the employer would be required to contribute INR 1,800 (out of which 3.67% goes towards PF and 8.33% goes towards the Pension Scheme). This contribution amount of INR 1,800 is itself determined based on the monthly wage of INR 15,000. As per the definition of “wages,” in the Labour Codes, the PF contribution made by the employer, along with the interest accrued thereon, is required to be treated as an excluded component of wages. Firstly, the employer’s PF contribution is already calculated based on the wages of the employee, which is determined prior to making the contribution. Secondly, the interest accrued on such PF contributions, which is credited by the Employees Provident Fund Organization (8.25% per annum), cannot be ascertained by the employer on a month on month basis, whereas the rate of interest would be announced by the Board of Trustees after the end of the Currency Year.

7. With regards to sub-clause (j) – under Chapter V of the Code on Social Security, 2020, gratuity is a statutory benefit payable to an employee, who has completed five years of continuous service, upon the termination of his or her employment. The requirement of completion of five years of continuous service is not applicable in cases of death, disablement, or termination of employment upon the expiry of a fixed-term contract. However, in cases of regular employment, completion of five years of continuous service is mandatory. It is pertinent to note that gratuity becomes payable only upon the occurrence of an event resulting in the termination of employment. Such events include superannuation, death, disablement, or the expiry of the contract period in the case of fixed-term employment.

8. With regards to sub clause (k) – under Section 70 of the Industrial Relations Code, 2020, where an employee/worker in an industrial establishment is retrenched (meaning termination by the employer for any reason other than disciplinary action, voluntary retirement, superannuation, completion or expiry of a fixed-term contract, or continued ill health) the employer is required to pay retrenchment compensation. Retrenchment compensation is payable at the rate of fifteen days average pay, or such number of days average pay as may be prescribed by the appropriate Government, for every completed year of continuous service in excess of six months. It is important to note that retrenchment compensation is a conditional payment and becomes payable only in cases where retrenchment is effected by the employer. It is not applicable in situations where termination occurs for reasons outside the scope of retrenchment.

9. The concern that we wish to raise through this letter is that the bonus referred to under sub-clause (a) is an annual payment and should not, in the first place, be considered as part of monthly remuneration. Accordingly, it need not be mentioned or considered while calculating the total remuneration (100%) payable to an employee. Additionally, under the Code on Wages, since the maximum permissible periodicity of the wages is on a monthly basis, considering or allowing any component, which exceeds such periodicity might be in contradiction with the law. Also, the various factors which need to be considered at the time of determining the quantum of bonus are annual in nature, such as the number of days that the employee has worked or the profits arrived at by the employer. These factors cannot be anticipated before the end of the accounting year. Therefore, adding any quantum of bonus for calculation of the total monthly remuneration would be irrelevant in law.

10. Further, with respect to sub-clause (c), the employer’s contribution towards the pension scheme or Provident Fund (“PF”) is computed based on the wages payable to the employee. If such employer contributions are considered or added while calculating the 100% remuneration, it would effectively result in a situation where the employer is paying PF contributions on PF contributions. Therefore, considering the PF contribution as a part of the wages on which such calculations are to be made would defeat the purpose and would amount to duplication of PF contributions. This amount further will be deposited to the PF Account and not the salary account of the Employee. Furthermore, the individual cannot have immediate access to this sum and can only avail it at the time of retirement or any other types of cessation. This payment is essentially the contribution of the employer, being employer’s statutory obligation, is not part of payroll process and shall not be reflected in any of the wage records.

11. Similarly, sub-clauses (j) and (k) should not be included for determining total remuneration (100% monthly gross wage) under the definition of wages, as these payments should not be considered or made part of the remuneration of an employee in the first place. These are terminal or retrenchment benefits, which become payable only upon the occurrence of an event during employment or upon cessation of employment. Going by the spirit of the law and the intent behind these payments (which is to provide some form of security to an employee after their retirement or cessation of employment), these payments can only be disbursed upon the happening of such an event and, it should not be considered while calculating the total monthly remuneration of an employee. Therefore, considering or listing these payments/benefits as an exclusionary part of the definition of “wages” is likely to create ambiguity and confusion for employers while determining the quantum of wages payable to employees on a monthly basis. Not all the employees would become entitled to such payment and if these benefits are provided in the wage structure or the 100% monthly remuneration, there is no certainty that these would be given to the employees unless they become eligible for receiving the same.

12. To understand the above better, please refer to the example below, which is an extension of the example provided in the FAQ No. 7 released by the Ministry of Labour and Employment in December 2025 [Attachment 3]:

As per the definition of Wages under the Labour Codes, the maximum allowance that is allowed for calculation of wages is 50% of the total remuneration, which in the example illustrated above would be INR 38,000. There is an excess allowance of INR 2,000 [quantum of sum of the components from clause (a) to (i) is INR 40,000 (minus) 38,000] over the 50% limit.

However, even assuming that the amounts falling under sub-clauses (a) and (c) together constitute INR 5,000 under Component B, the bonus is required to be paid annually and is based on certain factors given out in the law. Further, the components listed under Component C, which are essentially terminal benefits, should not be considered while determining 100% wages. This is because gratuity becomes payable only upon an employee completing five years of continuous service, and retrenchment compensation becomes payable only upon the retrenchment of the employee. In that case the components constituting 100% of the wages/remuneration would vary:

13. Currently, as the definition is, read along with the FAQ given by the Ministry of Labour and Employment, the uncertainty lies in determining the 100% of the total remuneration. Only after it is made clear what all components should be considered for the total monthly remuneration, the exclusion list can be determined. In our humble opinion, sub – clauses (a), (c), (j) and (k) should not be included while computing the 100% total remuneration components, since those are either annual payment, statutory benefits to be paid by the Employer or terminal benefits to be provided to employee. Only sub – clauses (b), (d), (e), (f), (g), (h) and (i) should be made a part of the exclusions list. As sub – clauses (a), (c), (j) and (k) are in the exclusion list, employers might include them while determining the 100% total remuneration and by doing so, the spirit and the intent of the law is being defeated. The payment of obligation for the components under (a), (c), (j) and (k) essentially arise out of a statutory framework, whereas wages should essentially arise out of the terms of employment.

14. Further, whenever the Ministry of Labour and Employment issues clarifications or FAQs to address existing ambiguities, it would be beneficial for employers if a specific clarification is provided on whether any bonus paid to an employee, which is treated as an excluded component under sub-clause (a) of the definition of ‘wages’, is distinct from variable incentives or commissions paid to such employee. Although sub-clause (i) of the definition of ‘wages’ expressly mentions commission as an excluded component, to avoid interpretational ambiguity, the Ministry may consider expressly clarifying this distinction through a suitable circular, notification, or FAQ.

15. Accordingly, and in view of the foregoing, we wish to re-present our earlier recommendations, as set out in Attachment 1, for the kind consideration of the Ministry of Labour and Employment. This is particularly in view of the direct impact of the definition of “Wages” on statutory contributions, employee benefits, wage structuring, and other related aspects that require careful review by employers to ensure compliance with the Labour Codes. Addressing these ambiguities at this stage would provide much needed clarity to employers, reduce interpretational issues, and facilitate a smoother and more uniform implementation of the Code.