Clipped from: https://taxguru.in/corporate-law/wages-wage-code-coss-2020-esic-applicability-key-nuances.html
Understanding “Wages” under the New Wage Code (CoSS 2020) ESIC Applicability, Definition & Critical Nuances Every Employer Must Know
With the implementation of the Code on Social Security, 2020 (CoSS 2020), one of the most significant changes impacting employers and professionals is the redefinition of “wages” under section 2(88). This change has a direct bearing on ESIC coverage, especially for employees earlier kept outside the threshold by salary structuring.
This article explains:
- What constitutes wages under the new code
- Why the definition is inclusive and not exhaustive
- How the ₹21,000 ESIC threshold must now be tested
- Key practical nuances often missed in implementation
1. Wages Definition under Section 2(88): Inclusive, Not Exhaustive
The Code defines wages as:
“All remuneration, whether by way of salary, allowances or otherwise…”
This opening language is crucial.
It makes the definition inclusive in nature, meaning:
2. Components Specifically Included
The definition expressly includes only three components:
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance (if any)
These form the core and undisputed part of wages.
3. Components Specifically Excluded
The Code then explicitly excludes certain items, such as:
- Statutory bonus
- Value of house accommodation & notified amenities
- Employer’s contribution to PF / pension
- Conveyance allowance
- Special expense reimbursements
- HRA
- Overtime
- Commission
- Gratuity
- Retrenchment / retirement benefits / ex-gratia on termination
Important nuance:
These exclusions are specific and limited.
Only allowances falling clearly within these categories can be kept out of wages.
4. Key Principle: What Is Not Excluded, Gets Included
Since the definition of wages is inclusive, a critical rule follows:
Any allowance or payment which does NOT fall under the excluded list will form part of wages.
For example:
- Uniform allowance
- Mobile allowance
- Internet allowance
- Attendance or shift allowance
-> If these are fixed monthly payments and not genuine reimbursements of actual expenses, they will be treated as wages.
Merely naming something an “allowance” does not take it outside wages—its real nature matters.
5. The Two Tests for ESIC Threshold Applicability
For determining whether an employee is covered under ESIC (₹21,000 limit), wages must pass two tests simultaneously:
√ Test 1: Definition Test
Wages must be computed strictly as per section 2(88)— i.e., including all remuneration except the specifically excluded items.
√ Test 2: 50% Rule (Anti-Avoidance Test)
The Code mandates that wages cannot be less than 50% of total remuneration.
If excluded allowances exceed 50% of total salary:
- The excess portion is deemed to be wages, and
- Added back for statutory purposes, including ESIC.
6. How ESIC Coverage Must Be Evaluated Now
The ESIC applicability threshold of ₹21,000 must be examined:
- On “wages”, not on gross salary or CTC
- After applying:
– Statutory exclusions, and
– The 50% rule
This is why many employees earlier kept outside ESIC are now becoming coverable employees under the new regime.
7. Key Takeaway for Employers & Professionals
Under the new Wage Code, wages are the rule and exclusions are the exception. Any payment not expressly excluded by law, or not a genuine reimbursement of employment-related expenses, will form part of wages—and will directly impact ESIC coverage.
Final Thought
The redefinition of wages under CoSS 2020 is not merely semantic—it is structural and anti-avoidance in nature. Employers must revisit salary structures with substance over form, or risk non-compliance and future litigation.
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