Indian Companies Brace for Higher Labour Costs Under New Regulations
Indian corporations are preparing for significant increases in their wage expenditures as they overhaul human resources policies and compensation frameworks to align with the recently implemented four labour codes. Industry specialists project that manpower expenses could surge between 5% and 10%, with certain organizations potentially facing even steeper cost escalations.
What's Driving the Cost Surge?
The primary factors contributing to rising wage bills include recalculated benefits such as gratuity payments, overtime compensation, performance bonuses, and leave encashment provisions. These components will now be computed according to the revised wage definition outlined in the new labour regulations.
Sonu Iyer, National Leader for People Advisory Services – Tax at EY India, confirmed that the recalibration of benefit calculations represents the main cost driver for employers. She emphasized that sectors with high labour dependency, including manufacturing industries and micro, small, and medium enterprises (MSMEs), along with companies maintaining fragmented pay structures, will likely experience the most substantial financial impact.
Variable Pay Structures Offer Some Protection
Viswanath PS, Chief Executive at Randstad India, provided additional context, noting that organizations where variable compensation and allowances constitute a major portion of total employee remuneration might encounter more moderate increases. "For companies with significant variable pay components, a 5-10% rise in manpower expenditure represents a reasonable projection, though the precise effect will differ across industries and depend on existing compensation designs," he explained.
Businesses are currently reevaluating their employment approaches, particularly examining the balance between contract workers and fixed-term employment arrangements. Simultaneously, they are restructuring salary packages to conform to the standardized wage definition mandated by the new codes.
Atul Gupta, Partner specializing in Labour and Employment Practice at Trilegal, highlighted a crucial aspect of the new regulations: "Since remuneration in kind, when applicable, up to 15% will now be categorized as wages, all employers must reassess which elements of their current compensation packages will qualify as 'wages' and which will be excluded from this definition." He specifically identified gratuity as the employee benefit likely to witness the most pronounced transformation.
Wide-Ranging Impact Across Sectors
Prabir Jha, Founder and CEO of Prabir Jha People Advisory, offered a detailed cost projection, stating, "For a typical organized employer, the manpower cost increase resulting from the recent labour codes could range between 5% and 12%. In cases where workforces heavily rely on allowances or contract labour, the increase might reach 10-15% or potentially exceed these figures."
From the employee standpoint, Sudhakar Sethuraman, Partner at Deloitte India, pointed out a significant protective measure within the new framework: "The labour codes explicitly forbid employers from reducing employee wages... Therefore, employees stand to benefit from these regulatory changes."
The government maintains that substantial reductions in compliance burdens achieved through the new codes will counterbalance any additional costs incurred by employers. This includes expenses related to overtime payments and mandatory health examinations for workers.
As Indian businesses navigate this transitional period, the comprehensive restructuring of compensation models and employment strategies will undoubtedly reshape organizational approaches to workforce management and financial planning.
