Labor Codes for NGOs & How to be Ready - Part I

Session Layout

• Need for compliance with social security (SS) laws

• Labor Codes-Overview

• Code on Wages 2019 - before and now & Actions to consider by NGOS

• Code on Social Security 2020 - before and now & Actions to consider by NGOs (to be continued in Session 2)

Why Comply with Other Laws?

Section 12AB(5) of Income Tax Act states:

• The CIT may cancel the registration certificate based on due process in law for non-compliance of requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects.

• The above provision is also applicable when granting registration, renewal, conversion of provisional to regular registration, change in objects, etc.

Labor Codes Overview

• 29 existing labor laws have been consolidated under four new codes with an intent to amalgamate, simplify, and rationalize the relevant provisions of the subsumed laws.

• All Codes have been notified from 21.11.2025.

The Four Codes:

1. The Code on Wages, 2019: Amends and consolidates the laws relating to wages and bonus.

2. Industrial Relations Code, 2020: Consolidates and amends the laws relating to trade unions, conditions of employment in industrial establishments, investigation, and settlement of industrial disputes.

3. The Social Security Code, 2020: Amends and consolidates the laws relating to social security with the goal to extend social security to everyone in organized, unorganized, and any other sectors.

4. Occupational Safety, Health & Working Conditions Code, 2020: Focused on consolidating and amending the laws regulating the occupational safety, health, and working conditions of the persons employed in an establishment.

Comparison: Before vs. Under the Codes

What will change under Labor Codes

• Consolidation of all labor laws.

• Making labor laws relevant/contemporary to better handle current needs and complexities (some labor laws are over 100 years old).

• Universal coverage except where specifically exempted.

• Uniform definition, interpretation, and implementation across all matters of labor.

• Use of technology/digitization—transparency and accountability for both establishments and regulator.

• Effective enforcement—web-based audits, third-party audits, stricter penalties for non-compliance. Inspector cum facilitator model.

• Compounding of offences and Improvement Notices to remove hardships for genuine defaults.

• Final outcome: Ease of doing business.

The Code on Wages, 2019

Subsumed Legislations

The Code on Wages, 2019 subsumes the following:

1. The Payment of Wages Act, 1936

2. The Minimum Wages Act, 1948

3. The Payment of Bonus Act, 1965

4. The Equal Remuneration Act, 1976

Provisions Prior to Code on Wages

• Minimum Wages Act 1948: Centre & states fix minimum wage to prevent exploitation. Revised at least once every 5 years. Time/piece rate for 4 categories (unskilled, semi-skilled, skilled, highly skilled).

• Payment of Wages Act 1936: Applicable to specified industries with wage threshold up to Rs. 24k/month. Timely payment by 7th (under 1000 employees) or 10th (1000+ employees).

• Payment of Bonus Act 1965: Applicable to establishments with 20+ employees. Wage threshold up to 21k/month (basic+DA). Bonus between 8.33% and 20%.

• Equal Remuneration Act 1976: Equal pay for equal work, no gender discrimination. Applicable to all establishments with 10+ employees.

Chapter Layout in Code

• Chapter 1: Preliminary

• Chapter 2: Minimum Wages

• Chapter 3: Payment of Wages

• Chapter 4: Payment of Bonus

• Chapter 5: Advisory Board

• Chapter 6: Payment of Dues, Claims and Audit

• Chapter 7: Inspector cum Facilitator

• Chapter 8: Offences and Penalties

• Chapter 9: Misc

Key Provisions: Definitions & Coverage

• Employee: A person employed on wages by an establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward.

• Worker: Same as above but does not include those employed mainly in a managerial/administrative capacity, or supervisory capacity drawing wages exceeding Rs. 15k per month.

• Coverage: All types of employees (organized and unorganized) are covered.

• No Wage Threshold: No wage threshold for payment of wages now (vs. up to 24k/month earlier).

• Minimum Wage & National Floor Wage: Central govt. to fix floor wage. State govts. cannot fix wage less than the Floor wage. Applicable to all establishments. Revision once in 5 years.

Key Provisions: Definition of 'Wages' (Section 2(y))

"Wages" means all remuneration payable by way of salary, allowances, or otherwise expressed in terms of money.

1. Inclusions:

• Basic pay

• Dearness allowance

• Retaining allowance

2. Exclusions (11 items):

• Bonus payable but not forming part of remuneration

• House rent allowance (HRA)

• Value of house accommodation and utilities

• Remuneration payable under court order/award

• Employer contribution to PF/pension fund

• Sum paid to defray special expenses

• Conveyance Allowance/travelling concession

• Any Commission payable

• Any Overtime Allowance

• Any gratuity payable on termination

• Any retrenchment compensation/retirement benefit/ex gratia on termination

3. Conditional Inclusion:

• Exclusions are capped at 50% of total remuneration (except gratuity and retrenchment compensation). If exclusions exceed 50%, the excess is added back to Wages.

4. Remuneration in Kind:

• Value of remuneration in kind up to 15% of total wages will be considered as Wages.

Illustrations: Calculation of Wages

Scenario 1:

• Total Remuneration: INR 25,000

  • Basic: 8,000 | HRA: 4,000 | Special allow: 6,000 | Conveyance: 2,000 | OT: 3,000 | Commission: 2,000

• Excluded Amount: INR 11,000 (HRA + Conveyance + OT + Commission)

• Included Amount: INR 14,000 (Basic + Special Allowance)

• Test: Exclusions (11,000) do not exceed 50% of Total (12,500).

• Final Wages: INR 14,000

Scenario 2:

• Total Remuneration: INR 25,000

  • Basic: 8,000 | HRA: 4,000 | Special Allow: 4,000 | Conveyance: 4,000 | OT: 3,000 | Commission: 2,000

• Excluded Amount: INR 13,000 (HRA + Conveyance + OT + Commission)

• Test: Exclusions (13,000) exceed 50% of Total (12,500).

• Add back: 13,000 - 12,500 = INR 500

• Final Wages: Basic (8,000) + Special (4,000) + Added back (500) = INR 12,500

Sample NGO Calculation (Exclusion %):

• Basic: 50,000 | HRA: 25,000 | Special Allowance: 25,000 | Er PF: 6,000 | Gratuity/EL: 4,871

• CTC: 110,871

• Total Exclusions: 31,000 (HRA + Er PF)

• Exclusion % of CTC: 28% (Safe, as it is under 50%)

Operational Provisions

• Payment of Wages: Monthly basis by the 7th of the following month.

• Full & Final: Within 2 working days for removal or resignation.

• Deductions: Cannot be more than 50% of wages for a wage period. No unauthorized deductions.

• Bonus: 8.33% - 20% of Wages as statutory bonus if employee worked for 30 days.

• Gender Equality: No discrimination on the basis of gender in wages, recruitment, and conditions (including transgender persons).

• Wage Slip: Mandatory issue to all employees (digital or paper).

• Limitation Period: Uniform limitation of 3 years for claims.

• Penalties: Higher penalties, up to Rs. 1 lakh and imprisonment.

Applicability of Payment of Bonus to NGOs

NGOs are not covered under Payment of Bonus Chapter 4, Section 41(1)(e) if they are:

• Indian Red Cross Society or similar institutions;

• Universities and other educational institutions;

• Institutions including hospitals, chambers of commerce, and social welfare institutions established not for purposes of profit.

Action Points for NGOs

• Check coverability of Minimum Wages and Payment of Wages provisions.

• Review compensation structure for compliance with the new definition of "Wages".

• Adherence to National Floor wage.

• Ensure Full & Final settlement within 2 days.

• Ensure wage payout by the 7th.

• Equal remuneration for all genders.

• Focus on documentation (registers, display details) due to stiff penalties.

The Code on Social Security, 2020

Subsumed Legislations

The Code on Social Security, 2020 subsumes:

• The Employee's Compensation Act, 1923

• The Employees' State Insurance Act, 1948

• The Employees' Provident Funds and Miscellaneous Provisions Act, 1952

• The Employment Exchanges Act, 1959

• The Maternity Benefit Act, 1961

• The Payment of Gratuity Act, 1972

• Cine-Workers Welfare Fund Act, 1981

• Building and Other Construction Workers' Welfare Cess Act, 1996

• Unorganised Workers' Social Security Act, 2008

EPF & Misc Provisions Act 1952

• Inclusions: EPF Scheme 1952, EPS 1995, and EDLI 1976.

• Applicability: 20+ employees. NGOs are under EPF since 1.4.2015 by law. Voluntary coverage allowed with 10% contribution.

• Eligibility: All employees (full/part-time) worked more than 30 days.

• Wage Ceiling: Mandatory for employees drawing less than Rs 15,000/month.

• Contributions: Employer and employee contribute 12% each of Basic pay, DA, plus retaining allowances.

• EPS (Pension): Minimum 10 years service and age 58 for superannuation. Pension = (Pensionable Salary x Pensionable Service)/70.

• EDLI: Insurance benefit (Min Rs. 2.5 Lakhs - Max Rs. 7.0 Lakhs).

• Employer Cost: Total contribution is ~13% (includes admin charges).

• Withdrawals: 75% EPF withdrawal within 2 months of unemployment, balance after 12 months.

• Inoperative Account: Stops earning interest if no contributions are received for 36 months.

ESI Act

• Definition: Self-financing health insurance scheme.

• Applicability: Mandatory for organizations with 10 or more employees.

• Wage Limit: Employees with gross salary up to Rs. 21,000/month are mandatorily covered.

• Contribution: Employer: 3.25%; Employee: 0.75% of gross wages.

• Benefits: Medical, Sickness (up to 91 days), Maternity, Disablement, Dependent pension, Funeral expenses (Rs. 10,000).

Maternity Benefit Act 1961

• Leave: 26 weeks paid leave (8 weeks prenatal, 18 weeks postnatal) for up to two children.

• Eligibility: Minimum 80 days work in past 12 months.

• Crèche: Mandatory if employee strength is above 50.

Payment of Gratuity Act 1972

• Applicability: Establishments with 10 or more employees.

• Eligibility: 5 years continuous service (or 4 years 240 days for 6-day working).

• Calculation: Last drawn salary (Basic + DA) X Completed years X $15/26$.

• Ceiling: Rs. 20 Lakhs.

• Taxability: Least of actual gratuity, Rs. 20 lakhs, or formula-based gratuity is tax-free.