The Code on Social Security 2020: Addressing the Key Changes and Their Impact

Sheena Ogra , Anirudh Agarwal

January 30, 2023

The Code on Social Security 2020: Addressing the Key Changes and Their Impact

To reform the archaic labour and employment law legislations pertaining to social security, the Central Government has enacted the Code on Social Security, 2020 (“Code”) with an aim to extend the social security benefits to maximum workforce working in either the organized or the unorganized sectors. 

The Code has repealed the following 9 (nine) major labour law legislations: (i) The Employee's Compensation Act, 1923; (ii) The Employees' State Insurance Act, 1948; (iii) The Employees' Provident Funds and Miscellaneous Provisions Act, 1952; (iv) The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959; (v) The Maternity Benefit Act, 1961; (vi) The Payment of Gratuity Act, 1972; (vii) The Cine-Workers Welfare Fund Act, 1981; (viii) The Building and Other Construction Workers' Welfare Cess Act, 1996; and (ix) The Unorganized Workers' Social Security Act, 2008.

This article provides a comparative analysis of the key changes introduced under the Code except these acts i.e., The Cine-Workers Welfare Fund Act, 1981 and The Building and Other Construction Workers' Welfare Cess Act, 1996, with the current labour law framework and its impact on the employment ecosystem of India. 

Contrast between the Extant Framework and the Prospective Framework

1. Registration of establishment

  • Extant Framework: Currently, the registration of an establishment is required across all the previous labour and employment legislations. 
  • Prospective Framework: Every establishment to which the Code applies has to register themselves via the Shram Suvidha Portal. An establishment which is registered under the current labour law legislations need not register themselves again however, such establishments will be required to update the registration particulars on the Shram Suvidha Portal under the Code. 

2. Appeal to the Industrial Tribunal under the Employees’ Provident Fund: Time limit and Fees

  • Extant Framework: Currently, the time limit of 6 (six) months is prescribed for the Tribunal to decide the appeal from the date of its registration and the fees for filing an appeal to Tribunal is INR 2000 (Indian Rupees Two Thousand). For an appeal to be raised by an employer before the Tribunal, the percentage of deposition of sum which is due on part of the employer is 75% (seventy five percent). 
  • Prospective Framework: Under the Code, the Tribunal needs to decide the appeal within 1 (one) year from the date the appeal has been preferred and the fees for filing an appeal to tribunal has been raised from INR 2000 (Indian Rupees Two Thousand) to INR 5000 (Five Thousand) respectively. The percentage of deposition of sum which is due on part of the employer has been reduced from 75% (seventy five percent) to 25% (twenty-five percent). 

3. Limitation Period

  • Extant Framework: Currently, there is no time period prescribed for initiating the proceedings in terms of determining any dues from an employer and dispute regarding the applicability to an establishment under the Employees’ Provident Fund (“EPF”) and the Employees State Insurance Corporation (“ESIC”). 
  • Prospective Framework: A limitation period of 5 (five) years has been prescribed under the Code to initiate proceedings in terms of determining any dues from an employer and dispute regarding the applicability to an establishment under the EPF and the ESIC.

4. Prior opportunity before prosecution

  • Extant Framework: Currently, no such prior opportunity is provided to the employer to correct a non-compliance in terms of the EPF and the ESIC or any other labour law legislations. 
  • Prospective Framework: Under the Code, the employer has been provided a prior opportunity to correct a non-compliance in terms of the EPF and the ESIC or any other provisions stipulated under the Code within a specified time-period before any prosecution is initiated against the employer. However, no such opportunity will be provided, if an employer violates the same provisional requirements more than once within 3 (three) years from the date of the first violation.  

5. Fixed Term Employment

  • Extant Framework: Currently, the definition of the term ‘fixed term employment’ has not been defined in the labour law legislations.   
  • Prospective Framework: Under the Code, the definition of the term ‘fixed term employment’ has been introduced which means the engagement of an employee on the basis of a written contract of employment for a fixed period. Furthermore, the hours of work, wages, allowances, and other benefits shall not be less than that of a permanent employee and such benefits shall be proportionate to the period of service rendered by such employee. 

6. Gratuity 

  • Extant Framework: Currently, gratuity is not payable to an employee who is employed on fixed term employment on pro rata basis or upon termination of the contract period under the fixed term employment. Further, the time period for making an application by the claimant employee, nominee or legal heir to the competent authority for issuing a direction is 90 (ninety) days to in disputes pertaining to amount of gratuity, admissibility of claim, person entitled to receive gratuity, etc. Moreover, the Central Government has specified that the amount of gratuity payable to an employee under the Payment of Gratuity Act, 1972, shall not exceed 20 (twenty) lakh rupees. 
  • Prospective Framework: Under the Code, Gratuity is payable to an employee upon termination of the contract period under the fixed term employment or on happening of any such event notified by the Central Government. Further, completion of continuous service of 5 (five) years is not necessary wherein fixed term employment has expired or on happening of any such event notified by the Central Government. Furthermore, employee employed on fixed term employment will also be eligible for gratuity on pro rata basis given by the employer. An employee on fixed term employment is eligible for gratuity, if he renders service under the contract for a period of 1 (one) year and he shall be paid gratuity at the rate of 15 (fifteen) days’ wages, based on the rate of wages last drawn by him, for every completed year of service or part thereof in excess of 6 (six) months. Under the Code, the time period for making an application by the claimant employee, nominee or legal heir to the competent authority for issuing a direction has been increased from 90 (ninety) days to 180 (one hundred and eighty) days in disputes pertaining to amount of gratuity, admissibility of claim, person entitled to receive gratuity, etc. Further, the threshold of the amount of gratuity payable to an employee has not been notified by the Central Government yet, under the Code. 

7. Consolidated definition of the term ‘Wages’

  • Extant Framework: Currently, the definition of the term ‘wages’ is different in different labour law legislations. 
  • Prospective Framework: Under the Code, a single, uniform definition for ‘wages’ with specified inclusions and exclusions has been introduced across all the 4 (four) codes. As per the Code, the term ‘wages’ means all remuneration paid in way of salary and allowances and includes ‘basic pay’, ‘dearness allowance’ and ‘retaining allowance’ (if any). It excludes components such as bonus, value of house accommodation or electricity, water or medical attendance, provident fund contribution, conveyance allowance, house rent allowance, overtime allowance etc. It is significant to note that a proviso has been inserted under the definition of ‘wages’ to construe that the excluded components cannot exceed one half, or such other percent as notified by the Central Government, of all the remuneration payable to the employee. In the event, such amount exceeds one half, or such percent as prescribed by the Central Government, the same shall be considered as ‘wages’. Another proviso has been added in the definition to provide that in the event, an employee is given any remuneration in kind by the employer, the value of such remuneration in kind not exceeding 15% (fifteen percent) of the total wages, shall be deemed to form part of the wages payable to such employee. 

8. Social security for unorganised workers, gig workers and platform workers

  • Extant Framework: Currently, the Central Government has formulated welfare schemes in relation to the unorganised workers in matters pertaining to life and disability cover, health and maternity benefits, old age protection, etc. Furthermore, for registration purposes, every unorganised worker shall have completed 14 (fourteen) years of age. 
  • Prospective Framework: Under the Code, every unorganised worker, gig worker or platform worker who has completed 16 (sixteen) years of age has to be registered, with Aadhar, on self-declaration basis in the form on the Shram Suvidha Portal. Provided that such worker has been engaged as gig worker or platform worker, for not less than 90 (ninety) days during the preceding 12 (twelve) months. Further, the Central Government will be formulating suitable welfare schemes for gig workers and platform workers on matters pertaining to life and disability cover, accident insurance, health and maternity benefits, old age protection, creche, etc. 

Furthermore, education is introduced as one of the suitable welfare schemes for unorganized workers to be framed by the Central Government. Moreover, a social security fund has been established by the Central Government for social security and welfare of the unorganised workers, gig workers and platform workers wherein, aggregators have to contribute to the fund ranging from 1 % (one percent) to 2% (two percent) of the annual turnover of every such aggregator. For ease of reference, the term ‘aggregator’ means a digital intermediary or a marketplace for a buyer or user of a service to connect with the seller or the service provider. 

9. Voluntary Coverage of EPF and ESIC

  • Extant Framework: Currently, the concept of voluntary opt in and opt out regarding the applicability of EPF and ESIC does not exist. 
  • Prospective Framework: Under the Code, the employee threshold regarding the applicability of EPF and ESIC remains the same. However, the concept of voluntary opt in and opt out of social security schemes has been introduced under the Code. In case of opt in or opt out of the applicability of EPF, an application needs to be made to the Central Provident Fund Commissioner by the employer of the establishment and there should be an agreement between the employer and the majority of employees as regards the same. In case of opt in or opt out of the applicability of ESIC, an application needs to be made to the Director General of the Corporation by the employer of the establishment and there should be an agreement between the employer and the majority of employees regarding the same.

10. Employee’s State Insurance Corporation

  • Extant Framework: Currently, the Employees State Insurance Act, 1948 is applicable to all factories (including factories belonging to the Government) in which 10 (ten) or more persons are employed or were employed on any day of the preceding 12 (twelve) months, other than seasonal factories. Furthermore, the corporation rights are limited under the current legislation in respect of principal employer failing or neglecting to pay any contribution.  
  • Prospective Framework: The scope of the applicability of the ESIC has been widened under the Code, wherein, apart from the establishment where 10 (ten) or more persons are employed other than a seasonal factory, it is also applicable to such establishments which carries on hazardous or life-threatening occupation as notified by the Central Government, in which even a single employee is employed. Furthermore, the Code expands the scope of the corporation’s rights when an employer fails to pay the contribution to the employee which is inclusive of the employer’s failure or neglect to insure (i) an employee at the time of his appointment, which deprives him of the entitled benefits and (ii) employee on/after the date of accident resulting in personal injury, which disentitles him to receive dependent benefit or disablement benefit. Moreover, under the Code, the employer needs to register the person before taking into employment by entering his name and Aadhar number on the Shram Suvidha Portal unless registered under the ESIC, post which a registration number will be allotted to the employee which will be used by the employer for filing the contributions and the same number will be used by the employee for availing any benefits available to him and (or) his family members under the Code.

11. Maternity Benefit

  • Extant Framework: Currently, there is no concept of common creche facility being availed by an establishment. Moreover, a maximum amount of INR 20,000 (Indian Rupees Twenty Thousand) is granted by the Central Government as a medical bonus.
  • Prospective Framework: Under the Code, a common creche facility has been introduced wherein, any establishment may avail such common creche facility of the Central Government, State Government, municipality, or private entity or provided by non-Governmental organisation or by any other organisation or group of establishments who may pool their resources for setting up of common crèche. Moreover, the Code is silent on the aspect of maximum amount of medical bonus being granted by the Central Government. 

12. Concept of “principal employer” and “immediate employer” removed

  • Extant Framework: Currently, both the “principal employer" and the "immediate employer" are covered under the Employees' State Insurance Act, 1948. As per the provisions of the Employees' State Insurance Act, 1948, the establishment or factory's principal employer may hire employees through an immediate employer, who would then carry out the work of the factory or establishment under the supervision of the principal employer. 
  • Prospective Framework: Under the Code, the arrangement between the principal employer (including a contractor) and an immediate employer has been reformed under the respective heads i.e., “employer” and “contractor” (including a sub-contractor). 

13. Inspector-cum- Facilitator 

  • Extant Framework: The present legislations grant certain powers to officers and inspectors to undertake cognizance in the of matters of any non- compliances on the part of the employers and pass necessary orders, as it may deem fit.
  • Prospective Framework: It is noteworthy to see that the Code has adopted a neutral approach in respect of streamlining the processes of compliances to be undertaken by employers. The introduction of the concept of Inspector-cum-Facilitator has been predicted to play a very progressive role to change the dynamics of the labour laws in India. The role of the Inspector-cum-Facilitator is not limited to carry out search and seizures, inspection of the records, but shall also to act as a facilitator by rendering advice to the employers and employees in relation to compliances under the Code. The Code has also, recognised the significance of the principles of natural justice wherein prior to initiating a prosecution, the Inspector-cum-Facilitator must give an opportunity to the employer to comply with the provisions of the Code through a written direction. The employer is required to comply with the directions within the stipulated time period in order to avoid any prosecution. However, no such opportunity will be accorded to an employer if the violation of the same nature is repeated within a period of 3 (three) years from the date on which such first violation was committed. Additionally, the Code also allows inspection electronically and calling of information relating to inspection through a web-based platform. 

14. Employment Compensation

  • Extant Framework: Currently, the Employees Compensation Act, 1923, is applicable to a certain class of employers for payment of compensation to their employees for injury by accident. Furthermore, in the erstwhile legislation, disablement is defined under 2 (two) heads i.e., partial disablement and total disablement. 
  • Prospective Framework: Under the Code, the Employee’s Compensation is applicable to the employers and employees to whom ESIC does not apply. Furthermore, the Code has made a more distinctive division and it defines disablement under 3 (three) heads i.e., permanent partial disablement, permanent total disablement, and temporary disablement.

Under the Code, the liability for compensation to the employee by the employer has been increased which also includes an accident occurring to an employee while commuting from his residence to the place of employment for duty or from the place of employment to his residence after performing duty. Such accident shall be deemed to have arisen out of and in the course of employment if nexus between the circumstances, time, and place in which the accident occurred and his employment is established. This provision does not exist in the erstwhile legislation.

15. Employment Opportunities

  • Extant Framework: Currently, the role of employment exchange is limited which is to collect and furnish information by maintaining registers in relation to persons who seek to engage employees, persons who seek employment, and vacancies to which persons seeking employment may be appointed. 
  • Prospective Framework: Under the Code, the concept of ‘career centre’ has been introduced which includes any office (including employment exchange, place, or portal) established and maintained for providing career services (including registration, collection and furnishing of information, either by the keeping of registers or otherwise, manually, digitally, virtually or through any other mode). Further, the role of career centre has been broadened which also includes providing career counselling, vocational guidance, guidance to start self-employment, organizing job-fairs and job drives, conducting employment related surveys and studies, enhance employment opportunities, etc. 

16. Penalties

Under the Code, enhanced and stringent penalties have been imposed upon the employer for non-complying with the provisions stipulated under the Code. As an effective deterrent, the quantum of fines levied on the employer has been increased in matters pertaining to (including but not limited) the following: (i) failure to pay contributions; (ii) fails to pay amount of gratuity; (iii) fails to provide maternity benefit to a woman; (iv) fails or refuses to submit any return, report, statement or any other information; (v) fails to pay any amount of compensation to which an employee is entitled; (vi) obstructs Inspector-cum-Facilitator to discharge his duties and fails to produce on demand by the Inspector-cum-Facilitator any register or document in his custody; and (vii) dishonestly makes a false return, report, statement or information to be submitted.

Moreover, compounding of offences has been introduced under the Code which are broadly applicable to the offences relating to EPF and ESIC and other such offences as stipulated under the provisions of the Code. For instance, in case of an offence punishable with fine only, compounding is allowed for a sum of 50% (fifty percent) of the maximum fine and in case of an offence punishable with fine and imprisonment less than 1 (one) year, compounding is allowed for a sum of 75% (seventy five percent) of the maximum fine. 

A&A Analysis

By amalgamating the 9 (nine) major labour law legislations into 1 (one) Central Labour Code, the Government aims at promoting the ease of doing business and further, streamline and simplify the labour law related procedures. The conscious efforts taken by the Indian Government will inevitably help boost the economy comprising of small to medium sized enterprises and eliminate the fear of unrealistic labour law compliances and improve the formal employment conditions. 

It is interesting to note that the changes brought about in the Code are both employer and employee centric with the objective towards balancing the rights of both the employer as well as the employee. Under the Code, several new concepts have been introduced such as the fixed term employment, career centres, revised the definition of the term ‘wages’ with specified inclusions and exclusions therefore, making it uniform across all the 4 (four) codes. However, having a uniform definition for wages will inevitably impact the employers regarding the calculation and pay in terms of statutory benefits and amounts.  Furthermore, the concept of prior opportunity before prosecution has been introduced which will allow some time to the employer to rectify the non-compliances.  Moreover, social security benefits will be extended to unorganised workers, gig workers and platform workers who had been left out due to the restricted applicability of the erstwhile labour legislations.

The Code also empowers the Central Government to frame suitable welfare schemes and formulate social security fund to provide social security benefits to the unorganised workers, the gig workers and the platform workers who were earlier not covered by the labour law legislations in India. Such progressive steps by the Indian Government is the need of the hour, not only to ensure that the social security benefits are rightfully extended to the vulnerable workers across all the sectors but also to protect them from any discriminatory practises and exploitation. The Code also makes Aadhaar registration on the Shram Suvidha Portal mandatory for the workers across all sectors to receive the social security benefits. However, this could surface new challenges for the Indian Government and have far reaching implications for many workers who still do not possess Aadhaar cards and hence, will be devoid of such benefits. 

Lastly, stringent penal provisions coupled with significant rise in the amount of the fines being imposed have been prescribed under the Code for violation and non-compliance of its provisions which would act as an impetus for the employers to comply with the provisions of the Code, thus, ensuring social security benefits to workers. 

Considering the need for uniformity in the labour law framework in India, the codification and reformation exercise of such archaic labour law legislations under 1 (one) Central Code by the Indian Government is a step in the right direction. It would be interesting to note as to how the central rules and regulations coupled with the respective state rules are formulated and implemented and further observe, whether the same are consistent with the implementation of the Code or not to achieve the desired objectives.

In 2023, one of the key priorities of the Indian Government will be the implementation of the Labour Codes which is delayed time and again. In the meanwhile, the employers are advised to brace themselves with the impact of the vital changes which will be brought about by the implementation of the Code pertaining to the compensation structure and the benefits and accordingly revise the existing policies and the employment contracts to ensure that there are no disputes or discrepancies in future once the Codes are made effective.

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