Basic pay rule changed: Can employers deduct more for EPF, pension shortfalls? Lawyer explains

"No automatic retrospective deduction is mandated by the labour codes for past employment periods. The changes appear to apply prospectively from the date of the notification under the new wage definition," said Alay Razvi, Managing Partner, Accord Juris.

"While the law allows for the definition of wages to be applied going forward, the practical and legal complexity of recovering short-fall contributions for past periods (for which salary structures were lawful under the then-applicable definition) makes universal retrospective recovery unlikely without specific rule-making or transition guidelines," Razvi added.

He further said that any attempt to deduct retrospectively should be carefully evaluated for legal and labour law risks, and ideally undertaken only after legal advice or regulatory clarification.

Will basic salary increase for all employees?

No. It will depend on the employers on a case-by-case basis. Many companies are already offering 50% of the total remuneration as basic salary, so they do not don't need to make any change in basic salary even after the labour codes are fully implemented.

The labour codes have clarified that under the standardised definition of “wages”, the amount of wages used for calculating statutory benefits such as gratuity, pension and social security will include basic pay, dearness allowance and retaining allowance, and further “50% of the total remuneration (or such percentage as may be notified)” will be added back into wages. 

"The base figure used for calculating deductions like provident fund (PF) and gratuity could increase for both permanent and fixed-term employees, as the definition applies broadly. However, it does not automatically mean the employer must increase the 'basic salary' component paid to employees. Rather, the recalculated wage figure becomes the basis for statutory calculations. So yes, in effect the deduction base goes up, but actual pay-structure changes depend on employer implementation," said Razvi.  

Can new labour codes result in a lower net take-home salary?

Yes, the new labour codes could result in a lower net take-home salary in some cases. The actual change or no change in the take-home pay will depend on how the employer restructures the salary.

"While a higher wage base means higher statutory contributions, if the employer passes the full increased deduction burden onto the employee without adjusting gross pay upwards, the net pay after deductions will reduce. Also, if allowances previously excluded from the ‘wages’ base are now included (because of the 50% add-back rule), more of the salary will be treated as “wage” and subject to statutory deductions, reducing take-home," said Razvi.

"That said, employers may absorb some of the increase or restructure allowances/non-wage components to mitigate the impact. It therefore depends on company policy and contractual salary structure," he added.