Employee welfare is a key agenda for organizations worldwide. In India, the Government has been actively working to update labor regulations to align them with the current market. One significant step in this direction is the Social Security Code 2020.
Coverage Expansion is a key feature of the Social Security Code 2020, designed to enhance employee welfare further.
Here’s what you need to know about this feature:
What Does Coverage Expansion Mean for Gratuity Payouts?
The expanded coverage now includes the unorganized sector, fixed-term employees, contractors, inter-state migrant workers, and others. Additionally, the code stipulates that the basic wage must constitute at least 50% of the Cost to Company (CTC). This is a shift from the previous practice where the basic wage ranged between 25% to 50% of the CTC. This change will directly affect statutory payments such as Gratuity and Provident Fund.
Since gratuity is based on the basic wage, an increase in the basic wage will lead to an increase in gratuity payouts.
What Does This Mean for Employers?
The increase in gratuity liability will be recorded in the Income Statement. Higher retirement payouts will result in increased financial liability and place a greater burden on working capital.
The new code also requires employers to pay wages within two days of an employee’s removal or resignation. This necessitates expedited exit formalities and strict adherence to timelines.
Employers will need to implement cultural and operational changes in HR processes. Administrative procedures must be overhauled to ensure timely settlement of dues.
Manage Liability with a Gratuity Fund
Establishing a gratuity fund can help employers manage the increased costs and gratuity payouts. Additionally, a gratuity fund offers tax benefits, mitigates liquidity risk from unexpected large benefit payments, and protects working capital from disturbances caused by gratuity payouts.
Additional Proactive Measures for Employers:
- Analyze and Restructure Salary Components: Review and adjust salary components for all employees. Ratios such as basic wage to gross compensation and variable pay to CTC need reform to reduce financial liability.The below graph shows the split of average variable pay as a share of CTC across different industries as of 2018.
- Consult Actuarial Experts: Evaluate the potential rise in liability and determine appropriate actions. Restructuring salary components may lead to a higher-than-expected increase in basic wage, causing actuarial losses.
- Implement IT Systems and HR Procedures: Adopt suitable IT systems, HR procedures, and administrative protocols to comply with the changes introduced by the Social Security Code 2020.
These proactive steps will help employers not only comply with the new code but also manage employee benefits and welfare more effectively.