HomeBusinessEmployment Laws in India: What Every Employer Should Know

Employment Laws in India: What Every Employer Should Know

Effective July 1st, 2002, the Central Government of India changed certain employment laws in India. The major alterations made are in terms of working hours, salary structures, and provident fund regulations. Needless to say, the laws have reshaped the payouts, social security, and working conditions for employees.

This article is a guide for employers and entrepreneurs to understand the regulations of labor laws in India. 

Limitation of basic pay to 50% of CTC

With the limitation of basic pay to 50% of the Cost to Company (CTC), the gratuity bonus for employees is set to increase. Additionally, the calculation of gratuities based on the salary base, incorporating allowances such as special wages, is expected to increase the overall cost of gratuities for companies.

At the same time that the regulations are improving the Social Security (pension) components of earnings, there could be a decrease in workers’ take-home pay. 

The complex interactions among these rules highlight the complex changes in the economy that companies will probably have to deal with under the new labor laws.

A minimum of 50% of the employees’ CTC as basic pay

The recently implemented wage code in India introduces a significant change in the compensation structure. Employers are now required to allocate a minimum of 50% of the employees’ Cost to Company (CTC) as basic pay. The remaining 50% encompasses various allowances, including overtime and house rent.

Crucially, any allowances or exemptions exceeding 50% of the CTC are deemed additional and are treated as part of the overall salary.

PF contributions

A significant alteration introduced by the new labor laws in India pertains to the ratio of take-home pay to the contributions made by both employers and employees to the Provident Fund (PF). Under these regulations, an employee’s base salary is set at 50% of their gross salary.

This adjustment translates into an increase in both employer and employee contributions to the Provident Fund, leading to a relatively lower take-home pay, particularly impacting those employed in the private sector. 

Overtime payment

Under the new labor regulations, companies in India are now mandated to compensate employees for overtime. Specifically, any work extending beyond 15 minutes after the completion of an 8-hour shift requires additional payment.

Leave policy

The revised leave policy under the new labor laws in India maintains the total annual leave duration while adjusting the accrual rate. Employees will now earn one hour of leave for every 20 days worked, a notable improvement from the previous 45 days requirement. This modification aims to enhance employee benefits.

Moreover, new employees are granted the opportunity to avail leave after 180 days of their employment contract, a reduction from the existing 240 working days threshold. 

Modification in the salary structure

Under the new employment and labor laws in India, a substantial modification in the salary structure is mandated, requiring a minimum of 50% of the gross amount to be allocated as an employee’s base wage. This adjustment translates into increased contributions to EPF accounts and higher gratuity deductions, resulting in a reduction in the take-home pay for the majority of employees.

Daily working hours

In terms of working hours, the new labor laws bring about a significant shift. While the current system adheres to the Factories Act, 1948, at the national level for factories and state-specific Shops and Establishment Acts for office employees, the revised regulations set the daily working hours at 12 and weekly hours at 48. This enables companies and factories to operate for a full week. 

Notably, overtime has seen an increase from 50 to 125 hours per quarter across various sectors, signifying a substantial change in the working hours landscape.

The government has established a clear guideline for the maximum work time in a week, setting it at 48 hours. Employers now have the flexibility to structure this work time across four, five, or six days per week, allowing for varied scheduling options within the specified limit.

The terms and conditions of employment

The terms and conditions of employment play a pivotal role in defining the mutual expectations and obligations between employers and employees. Typically detailed in a written contract of employment, these terms may also be articulated in company handbooks, policy manuals, or job postings. 

Termination of employment

Termination of employment can occur for various reasons, each with distinct implications. The reasons may include voluntary resignation, dismissal for cause and redundancy. 

Maternity and family leave rights 

Maternity and family leave rights are integral components of employment, ensuring support for employees during significant life events. Types of leave may include maternity leave, paternity leave, adoption leave, and carer’s leave.

Data protection and employee privacy

Data protection and employee privacy are critical aspects of contemporary employment, governed by legal obligations and rights. Employers are mandated to safeguard personal data such as names, addresses, contact information, and employment records.

Bottom line:

In this article, we looked at only some of the reformations. To learn more, visit Labour Law Reforms.

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Snigdha Basu
Snigdha Basu
A multifaceted writer, Snigdha Basu is a freelancer and a columnist at Entrepreneurs Today. She also spearheads Chic Life Edition - her own Digital Magazine with sustainable fashion, beauty, and culture at its core. Reach out to Snigdha at [email protected] for inquiries.
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