Re-Engineering Wage Jurisprudence in India: A Doctrinal Analysis of Section 2(y) of the Code on Wages, 2019

on

Re-Engineering Wage Jurisprudence in India: A Doctrinal Analysis of Section 2(y) of the Code on Wages, 2019

Author: Rahul Kunwar
https://www.youtube.com/@compliancemonk

Keywords: Wages, Labour Law, Section 2(y), Wage Codification, Social Security, Salary Structuring, 50% Rule

I don't know how to begin with, but i know i have to end this... for the new beginning in the era Indian  Labour Law to Labour Codes. 
 
The enactment of the Code on Wages, 2019 represents a crucial step in India’s labour law consolidation project. Central to this statutory scheme is Section 2(y), which defines “wages.” 

This definition forms the computational foundation for various monetary entitlements under the Code, including minimum wages, overtime, bonus, and wage payments. 

This article examines the statutory text, structure, legislative intent, and doctrinal implications of Section 2(y), along with jurisprudential analogies and policy consequences. 

Special emphasis is placed on the 50% Rule, a statutory anti-avoidance mechanism aimed at resolving long-standing disputes arising from allowance-heavy salary structures. 

Through analytical commentary and comparative reasoning, the article aims to deepen scholarly and practitioner understanding of this pivotal provision.

Abstract of the Act... 

The Code on Wages 2019 Section 2(y) "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,— 
(i) basic pay; 
(ii) dearness allowance; and 
(iii) 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 tothe employee or any ex gratia payment made to him on the termination of employment: 

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under 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 clauses (d), (f), (g) and (h) shall be taken for computation of wage. 

Explanation.––Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee;


I. Introduction

Historically, wage determination in India has been governed by a fragmented array of statutes, each employing its own definition of “wages,” resulting in substantial interpretative ambiguity and litigation. The Code on Wages, 2019 attempts to harmonise this landscape by providing a unified definition of “wages” in Section 2(y).1 This definition is foundational: it directly influences statutory compliance relating to minimum wages (Chapter II),2 payment of wages (Chapter III),3 and bonus entitlement (Chapter IV).4

Section 2(y) is, arguably, the most consequential definitional clause in the Code, and its doctrinal implications merit rigorous scholarly analysis.

II. Statutory Structure of Section 2(y)

Section 2(y) is methodically structured into four substantive layers:

  1. A broadly phrased inclusive main clause

  2. Specific inclusions—Basic Pay, Dearness Allowance, Retaining Allowance

  3. Enumerated exclusions (clauses a–k)

  4. The corrective “50% Rule” in the first proviso

  5. The second proviso for equal remuneration and wage payment

  6. An Explanation incorporating remuneration in kind (15% cap)

This layered design indicates deliberate legislative architecture aimed at balancing flexibility with enforceability.

III. The Broad Inclusive Clause



The general clause includes “all remuneration… expressed in terms of money… payable in respect of employment”—a formulation that courts have historically construed widely in labour jurisprudence. The Supreme Court, while interpreting predecessor statutes, consistently held that payments arising from employment, whether named as allowances or otherwise, qualify as wages unless expressly excluded.5

This principle aligns with the beneficial nature of labour legislation, a canon that requires courts to adopt employee-protective interpretations.

IV. Specific Inclusions: The Wage Nucleus

Section 2(y) explicitly includes:

  • Basic Pay

  • Dearness Allowance (DA)

  • Retaining Allowance

These represent the core of wage computation. Parliament’s choice to limit the specific inclusions to these three components reflects its intention to create a uniform national wage nucleus, preventing employers from relegating primary remuneration into flexible allowances.

Retaining Allowance, traditionally a feature of seasonal industries, receives statutory recognition, strengthening income continuity for workers.

V. Enumerated Exclusions (Clauses a–k)



The exclusions encompass bonus not forming part of contractual remuneration, housing and amenities, employer PF/pension contributions, conveyance allowances, special expense reimbursements, HRA, court-mandated payments, overtime, commissions, gratuity, retrenchment compensation, and other terminal payments.

These exclusions share conceptual traits: they are contingent, non-core, or terminal in nature, thereby not representing the regular earning potential of the employee.

Courts have long held that exclusions must be construed strictly, while wage definitions must be read expansively in favour of employees.6

VI. The First Proviso: The 50% Rule as a Statutory Anti-Evasion Device

The first proviso to Section 2(y) is arguably the most innovative element of the definition. It states that if the sum of excluded items under clauses (a) to (i) exceeds 50% of total remuneration, the excess shall be deemed wages.

A. Rationale

This provision targets the widespread industry practice of artificially lowering Basic Pay and shifting remuneration into allowances—thereby reducing employer liabilities relating to PF, ESI, Gratuity, Bonus, and Overtime.

B. Effect of the Proviso

  1. It operates automatically, leaving no discretion to employer or employee.

  2. It creates a statutory minimum floor for wage calculation.

  3. It embodies the judicial principle that substance prevails over form.

In Manipal Academy of Higher Education v. PF Commissioner, the Supreme Court condemned artificial salary splitting and held that PF contribution must be computed on real wages, not contrived structures.7 Section 2(y) effectively codifies this jurisprudence.

VII. The Second Proviso: Ensuring Equality and Fairness

The second proviso mandates inclusion of certain excluded items (HRA, conveyance allowance, overtime, settlement amounts) for the limited purpose of:

  • Equal remuneration under Section 3

  • Payment of wages under Chapter III

This ensures that employers cannot mask wage discrimination by manipulating allowance structures. It strengthens constitutional commitments to gender equality under Articles 14 and 15.

VIII. Explanation: Remuneration in Kind

The Explanation allows remuneration in kind—common in agricultural, construction, and hospitality sectors—to be counted as wages up to 15% of total wages.

This provides flexibility for employers while preventing disproportionate wage inflation through non-monetary components.

IX. Legislative Intent and Doctrinal Reading

Applying Heydon’s Rule, the mischief targeted by Parliament includes:

  1. Fragmented wage definitions in older statutes

  2. Ambiguous salary structures

  3. Wage-splitting to reduce statutory liabilities

  4. Discrimination in wage payments disguised through allowances

  5. Recurrent litigation over what constitutes “wages”

The remedy: a comprehensive, uniform, and enforceable definition that integrates corrective mechanisms (50% rule) and equality-based principles (second proviso).

X. Practical Implications

A. For Employers

  • Salary structures must be redesigned

  • PF and gratuity contributions likely to increase

  • Wage registers and records require re-formatting

  • Contract labour cost will rise

  • Non-compliance may trigger claims under Section 45

B. For Employees

  • Enhanced social security

  • Larger gratuity and PF corpus

  • Reduced discriminatory wage practices

  • Clearer wage entitlement for bonus and overtime

C. For Adjudicating Authorities

  • A structured interpretative framework

  • Reduced definitional ambiguity

  • Stronger statutory basis to invalidate sham salary structures

XI. Conclusion

Section 2(y) is a foundational provision that re-defines the wage jurisprudence of India. Its deliberate structure, corrective mechanisms, and harmonising effect across wage-related statutes mark a decisive shift towards transparency, uniformity, and social protection. The 50% Rule, in particular, represents a legislative innovation that transforms wage compliance into a substantive rather than formalistic exercise.

For legal practitioners, Section 2(y) provides both a tool and a test—its correct interpretation is essential for adjudicating wage disputes, drafting compliant employment contracts, and advising corporate clients on lawful compensation structures.

Footnotes

Code on Wages, 2019, s. 2(y).
Chapter II – Minimum Wages.
Chapter III – Payment of Wages.
Chapter IV – Payment of Bonus.
Mackinnon Mackenzie and Co. Ltd. v. Audrey D’Costa, AIR 1987 SC 1281.
Bridge & Roof Co. Ltd. v. Union of India, (1963) Supp 1 SCR 978.
Manipal Academy of Higher Education v. RPFC, (2008) 5 SCC 428.
Code on Wages, 2019, s. 45 (Claims).
The Code on Wages 2019

Comments

Post a Comment