Coverage Expansion for Employee Welfare

Employee welfare is a key agenda for organizations worldwide. In India too, the Government has been actively working towards revamping the labor regulations to make them more relevant to the current market. The code of Social Security 2020 is one such attempt by the government to make strides in this direction.

Coverage Expansion is one key feature of the Social Security Code 2020 that intends to boost employee welfare further.

Here is all that you need to know to understand this feature better:

What does coverage expansion mean for Gratuity Payouts?

The newly expanded coverage has now extended the benefit to the unorganized sector, fixed-term employees, contractors, inter-state migrant workers etc.

Moreover, the code implies that the basic wage must be at least 50% of the CTC. This stands in contrast to the earlier practice of basic wage falling anywhere between 25-50% of the CTC and will have direct impact on statutory payments such as Gratuity and Provident Fund.

As gratuity is a function of basic wage, an increase in basic wage will result in an increase in gratuity.

* https://m.economictimes.com/news/economy/policy/labour-ministry-to-launch-national-database-for-unorganised-workers-on-august-26/articleshow/85596375.cms

What it means for the employers?

• The increase in gratuity liability will be charged to the Income Statement. Higher retiral payouts will lead to increased financial liability and an overall burden on the working capital.

• The new code also mentions that employers need to pay the wages within two days of removal or resignation of the employee. This will require employers to expedite exit formalities within strict timelines.

• Need for cultural and operational changes in the HR processes. Employers will have to overhaul administrative procedures to ensure timely settlement of dues.

Manage liability with a Gratuity Fund

Setting up a gratuity fund will help employers combat this increased cost and manage the gratuity payouts. In addition, a gratuity fund will provide tax benefit to the employers, mitigate liquidity risk of unexpected large benefit payments, and protect the working capital from any disturbances that may be caused due to gratuity payouts.

Some additional proactive measure that employers will have to take for successful transition into the new system are:

• Analyse and restructure the salary components of all employees. Ratios of basic wage to gross compensation, variable pay to CTC etc. will have to be reformed to reduce the financial liability.

Below graph shows the split of average variable pay as a share of CTC across different industries as of 2018.

** https://www.statista.com/statistics/805221/india-variable-pay-in-relation-to-ctc-for-organizations-by-sector/

• Consult actuarial experts to evaluate the magnitude of rise in liability and determine the suitable course of action because restructuring of salary components may result in a higher-than-expected increase in basic wage, causing actuarial losses.

• Implement suitable IT systems, HR procedures and administrative protocols to ensure compliance with the changes brought by the Code on Social Security, 2020.

These proactive steps will help an employer to not only adhere to the new code but will help manage employee benefits and welfare better.