After the implementation of the Labour Codes, the central compliance concern has been the statutory meaning of “wages”. The pivot is the 50% add-back rule: ‘wages’ mean total remuneration payable for work performed, minus only the specified exclusions in the definition; however, if the excluded components together exceed 50% of total remuneration, the excess is deemed to be wages and is added back.
Legacy salary structures that are allowance-heavy, especially those built around broad heads such as “special allowance” or “other allowance”, are vulnerable for a simple reason: the statute does not treat every allowance as an exclusion. In many establishments, such heads are merely balancing figures used to complete CTC after fixing basic, HRA and other standard components. They are not reimbursements, nor are they necessarily linked to any identifiable special expense incurred for employment. Where such allowance heads cannot be placed, in substance, within the statutory exclusions, they are liable to be treated as part of wages; and even where an employer seeks to place them in the exclusion bucket, the 50% add-back can pull them back into wages once the exclusion threshold is breached. The consequence is foreseeable: the statutory wage base expands, increasing PF/ESI and other wage-linked liabilities.
This has led employers to consider wage restructuring so that salary architecture aligns with the statutory wage definition and the add-back mechanism does not inflate the wage base. The question, however, is whether Section 124 of the Code on Social Security, 2020 (SS Code) operates as a legal bar to such restructuring.
No express bar on restructuring, but Section 124 creates a clear restraint
It may be noted at the outset that there is no express statutory bar on an employer restructuring salary component to align with the statutory definition of wages, particularly where total remuneration is not reduced. However, any restructuring must be undertaken with caution and should not, by reason only of statutory contribution liability, result in any reduction in wages or in the total quantum of benefits to which the employee was entitled before such restructuring.
This restraint is expressly contained in Section 124 of the SS Code, and the section reads as follows:
“124. Employer not to reduce wages, etc.- No employer in relation to an establishment to which this Code or any scheme framed there under applies shall, by reason only of his liability for the payment of any contribution under this Code, or any charges there under reduce whether directly or indirectly, the wages of any employee to whom the provisions of this Code or any scheme framed there under applies or the total quantum of benefits to which such employee is entitled under the terms of his employment, express or implied.”
The controlling words are “by reason only”. Section 124 does not prohibit restructuring per se; it prohibits restructuring that has the effect of reducing wages or benefits because of the employer’s contribution liability.
PF impact: below-ceiling vis-a-vis above-ceiling employees
It may be imperative to note that if restructuring leads to a reduction in PF contributions compared to what would have been payable under the Labour Codes as per the existing structure, then such a reduction may fall foul of Section 124 of the SS Code, particularly where it can be demonstrated that the reduction is “by reason only” of contribution liability.
That said, this concern is materially relevant for employees whose earnings are within the statutory wage ceiling (Rs. 15,000 for the purpose of statutory PF contribution) and who are statutorily covered under the PF Scheme. In the case of employees having wages above the statutory ceiling, the employer may, if it so chooses, cap the PF contribution at the statutory ceiling or at such higher amount as may be mutually agreed between the employer and the employee or continue with an existing contribution methodology.
This position is supported by the principle laid down by the Hon’ble Supreme Court in Marathwada Gramin Bank Karamchari Sangh at an a & Anr. v. Management of Marathwada Gramin Bank & Ors. (2011) 9 SCC 620, wherein, while interpreting Section 12 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Court recognised that an employer is entitled to extend provident fund benefits strictly in accordance with the rates prescribed under the statute, even if such benefits are lower than those previously extended provided the terms of employment/contract clearly stipulate that statutory benefits are to be extended in accordance with applicable law. Hence, in this judgment the apex court was of the opinion that reduction of EPF contribution would not violate the EPF Act. Section 12 of the EPF Act, 1952 is analogous in spirit to Section 124 of the SS Code.
ESI impact: statutory change vs restructuring-driven reduction
With respect to the ESI, the statutory base for computation of contribution has been changed from “gross wages” to “wages”. As a result, ESI contribution may reduce purely on account of the change in statutory computation method. A reduction arising solely due to statutory recalibration should ordinarily not be treated as a contravention of Section 124, because the reduction is attributable to law, not to an employer-driven reduction “by reason only” of contribution liability.
However, in cases where inclusions exceed exclusions, restructuring undertaken to cap wages at 50% may lead to a further reduction in ESI contributions than what would have been payable under the Labour Codes as per the existing structure. Such a reduction, being attributable to restructuring rather than statutory change, may be viewed as offending the mandate of Section 124.
Gratuity: distinct footing
Provisions analogous to Section 124 existed under Section 12 of the EPF Act and Section 72 of the ESI Act. However, the Payment of Gratuity Act, 1972, did not contain an equivalent anti-reduction clause pegged to “contribution liability”. Gratuity is a terminal benefit, not a periodic contribution. Therefore, while Section 124 restricts reduction in wages/benefits by reason of statutory contribution liability, gratuity stands on a different footing. Hence, any restructuring that may contain the prospective increase in gratuity liability would not fall foul of section 124 of the SS code.
Conclusion
On a proper construction, Section 124 does not bar wage restructuring. It bars a specific mischief: reduction of wages or the total quantum of employment benefits by reason only of the employer’s statutory contribution liability. Therefore, restructuring undertaken as a compliance-alignment exercise without reducing total remuneration and without diluting enforceable benefit entitlements (express or implied)is generally sustainable.
Hence, wage restructuring for employees whose wages are above the PF ceiling, where PF is capped at the statutory ceiling or contributed on a higher amount by mutual arrangement, would ordinarily not offend Section 124; the same approach generally applies to gratuity as a terminal benefit. However, greater caution is required for employees whose wages fall within the PF ceiling, particularly where PF is being paid up to the ceiling or on a lower base, since post-codes restructuring should not keep PF below the ceiling base if the wage definition would otherwise expand the payable base. Any restructuring that contravenes this principle will fall foul of Section 124. Likewise, for ESI-covered employees, restructuring should not depress the contribution outcome below what would have been payable under the Codes on the existing structure; reductions attributable to restructuring (and not statutory recalibration) may be viewed as non-compliant.
