Section 1: Introduction
The Code On Social Security, 2020 has been passed by both houses of the Parliament and received
Presidential assent on September 28, 2020 and Notified in the Official Gazette dated 29-Sep-2020.
The Code On Social Security, 2020 has been enacted to amend and consolidate the laws relating to
social security with the goal to extend social security to all employees and workers either in the
organised or unorganised or any other sectors.
The Code on Social Security, 2020 consolidates a number of existing laws, but also outlines a Social
Security framework across the country and empowers the Government to introduce social security
programs in the future for many additional types of employees and workers.
The Employees’ Compensation Law, 1923
The Employees’ State Insurance Act, 1948
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
The Maternity Benefit Act, 1961
The Payment of Gratuity Act, 1972
The Cine-Workers Welfare Fund Act, 1981
The Building and Other Construction Workers’ Welfare Cess Act, 1996
The Unorganised Workers Social Security Act, 2008
Section 2: Key Changes
1. Change in the Definition of Wages
2. Removal of vesting period for fixed term employees
3. Change in vesting criteria for Journalists
2.1 Definition of Wages
As per the section 2, sub section 88, definition of wages requires that Wages must be at least 50% of the total Compensation. The exact definition of the Wages is given below.
(88) “wages” means 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, and includes, —
(a) basic pay;
(b) dearness allowance; and
(c) retaining allowance, if any,
but does not include—
(a) 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;
(b) the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
(c) any contribution paid by the employer to any pension or provident fund, and the interest which
may have accrued thereon;
(d) any conveyance allowance or the value of any travelling concession;
(e) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
(f) house rent allowance;
(g) remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
(h) any overtime allowance;
(i) any commission payable to the employee;
(j) any gratuity payable on the termination of employment;
(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:
Provided that for calculating the wages under this clause, if payments made by the employer to the employee under sub-clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent. so, notified, shall be deemed as remuneration and shall be
accordingly added in wages under this clause:
Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in sub-clauses (d), (f), (g) and (h) shall be taken for computation of wage.
• Gratuity benefits (Post employment Benefit) are currently linked to Basic + D.A. salary which would now be based on wages definition in the social security code and must be at least 50% of the Gross salary. Employees may be entitled to an increased benefit to comply with new social security code, subject to the ceiling of INR 2,000,000. The extent of the impact will also depend on whether a company has no monetary ceiling, or has a separate scheme in place.
• In the same way as mentioned for gratuity actuarial liability, leave liability will be affected provided that leave calculation are based on basic + DA salary (and not gross salary).
• Higher the expected increase in salary will result in actuarial loss and increase in liability, shall be charged to Income Statement or Other Comprehensive Income (OCI) depending upon the applicable account standard.
• In AS 15 R Accounting standard, the actuarial loss shall be recognized immediately in income statement.
• In IAS 19 and Ind AS 19 Accounting standards, the actuarial loss shall be recognized immediately in income statement and in other comprehensive income (OCI) in case of PostEmployment Benefits and Other Long-Term Benefits respectively.
As per Payment of Gratuity Act, 1972, gratuity is payable on retirement, resignation & death. There is
a vesting period of 5 years in case of retirement & resignation which means benefit becomes payable
when an employee completes 5 years.
However as per The Code On Social Security 2020, in case of Fixed Term Employment, gratuity payouts will be made upon the expiry of the fixed term, irrespective of completion of 5 years of service.
As per section 34 of the Code of Social Security 2020, “fixed term employment” means the engagement of an employee on the basis of a written contract of employment for a fixed period:
Provided that—
(a) his hours of work, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature; and
(b) he shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment;
Impact on Actuarial Valuation of the removal of vesting period for Fixed Term Employment:
• The gratuity liability is expected to increase for the companies who offer Fixed Term
employment.
• The increase in gratuity liability shall be recognized as Past Service Cost and charged to Income Statement, either immediately or over a time period (depending upon the applicable accounting standard)
• In AS 15 R Accounting standard, the Past Service Cost shall be recognized immediately in
income statement.
• In IAS 19 and Ind AS 19 Accounting standards, the Past Service Cost shall be recognized
immediately in income statement.
2.3 Change in vesting criteria for Journalists
The Vesting criteria for journalists has changed to three years from five years.
As per para 53 (I) in Chapter V, Gratuity shall be payable to an employee on the termination of his
employment after he has rendered continuous service for not less than five years, —
(a) on his superannuation; or
(b) on his retirement or resignation; or
(c) on his death or disablement due to accident or disease; or
(d) on termination of his contract period under fixed term employment; or
(e) on happening of any such event as may be notified by the Central Government:
Provided that in case of working journalist as defined in clause (f) of section 2 of the Working Journalists and Other Newspaper Employees (Condition of Service) and Miscellaneous Provisions Act, 1955, the expression “five years” occurring in this sub-section shall be deemed to be three years:
Impact on Actuarial Valuation due to change in vesting period for Journalists:
• The gratuity liability will be increase for the companies in News and Media Industry.
• The increase in gratuity liability shall be recognized as Past Service Cost and charged to
Income Statement, either immediately or over a time period (depending upon the applicable accounting).
• In AS 15 R Accounting standard, the Past Service Cost shall be recognized immediately in income statement.
• In IAS 19 and Ind AS 19 Accounting standards, the Past Service Cost shall be recognized immediately in income statement.
Disclaimer: This above note is based on knowledge sharing information. The information should not be relied upon as advice on your specific circumstances. Neither Mithras Consultants nor any person connected with it accepts any liability arising from the use of this document. The above note is not providing any recommendations and any legal advice. The Company should consult a labour law
consultant/lawyer for any legal advice relating to the implementation of The Code On Social Security.
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