Cost To Company In India - A Façade Or A Myth
Author: LawSphereX
Category: Corporate & Insolvency
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COST TO COMPANY IN INDIA: A FAÇADE OR A MYTH
Muktha Bhat, BBA LLB, KLE Society`s Law College, Bengaluru Archisha Kashyap, BBA LLB, KLE Society`s Law College, Bengaluru
ABSTRACT
The entire concept of labour remains dependent on the pay it ensues. The labour laws have been considered as welfare laws in India due to their interpretation, but behind the curtains, they consist of several loopholes which are covered by the concept such as ‘benefit’ and ‘welfare’. Employees often face the dangers of several concepts such as payroll fraud, a conflict between take-home, unpredictable salary deduction, unpaid overtime, unpaid gratuity and provident funds and so on, due to the fluctuating amounts and their illegal utility by organisations. The Indian salary structure is built on components like basic salary, allowances, social security contributors, and reimbursements.
Cost to company is often predefined by companies in the form of total expenses of employees that an employer spends annually, which is a complete bundle of expenses in the form of a package with all forms of expenditure an organisation bears towards its employees. Employees often remain unaware of the viability of certain deductions made using the façade of compulsory deductibles. Companies use tactics such as non-cash components in the cost to companies in the form of health insurance, provident fund contributions and gratuity which are valuable but can lead to an inflation in the cost to company without changes in the cash in hand.
This research paper would involve a detailed study of the concept of cost to company in the perspective of its role in a company and the impact it creates in the salary structure in India, and also on employees, whether positive or negative, following its utility for unfavourable purposes, leading to personal gains of employers. The research aims to create an understanding of the concept of cost to company and the controlling effect it perceives in terms of salaries of employees who are unaware of such utility. Keywords: Cost, Company, Salary, Pay, Employer, Employee, Illegal, Benefits.
I.
CHAPTER 1: THE
INTRODUCTION
TO COST TO COMPANY “Whoever controls work and wages, controls morals” - Susan B. Antony The collaboration between company law and labour law often raises questions about the former's superiority to the latter and vice versa. We often tend to avoid the question of whether the laws relating to companies prevent companies from coming under the scrutiny of labour law in India. A company, being the employer, consists of employees working towards their purpose using their qualifications for a certain period of time. In return for such work, employees are often given monthly payments in the form of salaries or wages or stipends which are structured on the basis of several factors it ensues. Several concepts were introduced relating to the payroll of employees by employers, one being the concept of cost to the company.
1.1. THE COST TO COMPANY- A
BACKGROUND
Cost to company is a common corporate concept which is often linked to wages and employee payroll. Often known as total compensation, it is the total amount a company would spend on an employee in a particular year, which includes all possible monetary expenditure that a company would make on behalf of an employee or for the employee. The concept can be considered as a hamper of several forms of monetary expenditure a company or employer makes for its employee such as salary, allowances, other variable payments, benefits, professional tax, TDS1 and other such deductions in the form of training costs or food allowances.
The concept, lacking legal backing, has created loopholes for companies to abuse the said principle on the grounds of employee welfare, leading to several damages being facade in the name of benefits and given to employees who subsequently face the consequences of the actions of the employer. Regardless of being a managerial terminology and concept, the cost to company consists of several components under it, making it a more of a concept accepted as a sub category to the legal concepts for which it is a subordinate.
1.2. RESEARCH
OBJECTIVE
The objectives of this study on Cost to Company are as follows
1. To study the concept of Cost to company in the context of the labour industry in
India.
2. To study the wage legislations in India and the impact they create on decisions
relating to the cost to companies of various sectors.
3. To study the utility of such concepts in companies for the benefit of employees.
4. To study the common misuse of the concept of cost to company
1.3. RESEARCH PROBLEM
The concept of cost to company refers to the aggregate financial outlay an employer makes for an employee, excluding any statutory components or non-statutory components. As the concept has not been defined legally under any statute, the ambit the utility of this concept pertains is broad and consists of several loopholes which result in employees being exploited by their employers under their nose. This paper would focus on understanding the legal standing of the concept of cost to company and what are the common means through which the companies utilise this concept to exploit their employees.
1.4. SIGNIFICANCE OF THIS STUDY
This study would highlight and create awareness among labourers on the utility of the concept of cost to the company along with their rights under the labour laws established for the same as wage legislations. The study further aims to highlight the legal utility of cost to company along with the common components it ensues under each form in different sectors of the economy involving labour.
1.5. LIMITATIONS OF THIS STUDY
This study is conducted on the basis of existing information and studies conducted previously on the concept of cost to the company. The principles of the said concept established in the referred papers may vary in their utility in the present circumstances of labour law.
II.
CHAPTER 2: THE CONCEPT OF COST TO COMPANY IN INDIA
"A labourer not only wants equality but he needs liberty also, it is intolerable and detrimental where system proposes equality but denies liberty" - Dr. B.R. Ambedkar
1.1. THE PRINCIPLE OF COST TO COMPANY IN THE CONTEXT OF LABOUR
LEGISLATIONS IN INDIA A Canadian Scholar, Langille stated that the principles established under labour law in India that are primarily on the basis of “justice”, which involves employment and productive working relations, which could be delayed in obtaining in circumstances of workers in the labour market are on the losing end of their bargaining powers in the labour contracting process. 2 The response to this problem under labour law are in several forms but in general are in two main forms: one would involve securing justice by reviewing, revising and rewriting on the basis of a statute resulting in a substantive deal between the workers and the employers.
The process under the first option predominantly involves providing, creating, or establishing certain labour standards, which would inevitably involve maximising of the hours, vacations with minimum wages, benefits involving health, safety regulations and other such components. 3The second response would involve responding in the context of the received commotion, which would not be through the creation of substantive entitlements but would involve procedural protection by giving procedural rights involving fair bargaining. 4 The principles of labour law do not consider “labour” as a commodity but consider it the regulation of the employment process involving two principles intentions, one being to ensure successful market transactions and the second being to protect the interest of the workers in circumstances of the commodification of workers in the economy.
5 Author Hugh Collins had once mentioned that workers sell their labour power, which consists of their time, efforts, and skills, in return for wages. As with other market transactions which deal with commodities, the legal expression of the relationship between an employer and employee is in the form of a contract6. In Naptosa V. the Minister of Education, Western Cape, 7the court further clarified the utility of labour law in employee relations where it had stated that labour law is fundamentally an as important as any other legal backing along with being extremely sensitive as a subject. The subject of labour law is purely on the basis of political and economic compromises between the labourers and their employers.
1.2. INDIAN LABOUR LAW ON THE CONCEPT OF COST TO COMPANY
The principle of cost to company, being a managerial concept, has not been defined by law as a whole or an individual concept. The components of a particular concept, on the other hand, play a prominent role in creating a legal landscape for the application of the principle. Statutory regulations such as The Employees` Provident Fund and Miscellaneous Provisions Act of 1952, under section 6, which states: The contribution which shall be paid by the employer to the Fund shall be ten per cent.
of the basic wages, dearness allowance and retaining allowance (if any) for the time being payable to each of the employees whether employed by him directly or by or through a contractor), and the employees’ contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten per cent of his basic wages, dearness allowance and retaining allowance (if any), subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words ten per cent, at both the places where they occur, the words twelve per cent shall be substituted Provided further that where the amount of any contribution payable under this Act involves a fraction of a rupee, the Scheme may provide for the rounding off of such a fraction to the nearest rupee, half of a rupee or quarter of a rupee.
[Explanation 1] - For the purposes of these 12 sections, dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee. [Explanation 2. —For the purposes of this section, “retaining allowance” means an allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services. ] 8 create a mandate upon employers and employees to contribute a specific percentage of their basic wages or allowances towards provident funds. This contribution by the employer is a component under the principle of Cost to Company but not as a part of the take home salary of the employee.
Another example of the legal landscape established to regulate the components facilitating the process of cost to companies in Indian organisations is the Payment of Bonus Act of 1965, which establishes a mandate for the payment of bonuses to the employees that earn below the wage threshold. The act states that there ought to be a minimum bonus of 8. 33 per cent of the wages where the salary limited fixed for the purpose of eligibility is within the range of Rs. 3, 500 per month and this payment is subject to the stipulation that ensures that the bonus is payable to the employees that draw the wages or the salary which does not exceed R. s 10,000 per month that is calculated in such a manner that the salary or wages is assumed to be Rs. 3,500 per month.
Under this circumstance, the Central Government is considered as the appropriate authority under the definition of Appropriate government under section 2(a) of the Industrial Dispute Act of 1947. The said provisions have a possibility of being a part of the cost to company structure in several organisations. Insurance has always been an inevitable component in the cost to company of an organisation where several statutes, such as the Employees` State Insurance Act of 1948, state that an employer contributes towards the medical insurance of an employee, which constitutes a part of the structure of cost to company in India. Similarly, several labour welfare and protection legislations often tend to oversee the possible loopholes it creates by not paying attention to the possible abuse of the powers given to employers or the mandates given to employers under their respective statutes.
1.3. COST TO COMPANY AND ITS VARIOUS COMMON COMPONENTS IN
INDIAN ORGANISATIONS Cost to Company as a concept consists of certain common components among companies divided on the basis of the utility of the said monetary value given to employees of a particular organisation,
1.3.1. THE BASIC SALARY OF AN EMPLOYEE
The primary monetary value for an employee` work is in the form of their salary or wages which the receive on the basis of the number of hours they work in a week, the definition of salary is the same as that of wages which is enshrined under section 2(y) of the Code of Wages 2019, which in brief states that "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, The Wages Act further includes what wages do not include, which narrows the scope of the definition to only the includes of the wages.
The component is not only essential as itself but is also a necessary factor in determining the subsequent benefits which come under the principle of cost to company, such as determination of the value of the Provident funds of the employee, the gratuity and the house rent allowance of an employee. The basic salary of an employee comes as a basic necessity to be fulfilled by an employer under the Employees` Provident Fund Act of 1952 and the Gratuity Act of 1972.
1.3.2. DEARNESS ALLOWANCE
The dearness allowance of an employee is the cost of living adjustment which is often given to the workers of the public sector in order to counter the ever-changing inflation rates in the country. The said concept is recognised under the Industrial Relations Code 2020, which was previously individually recognised under the Industrial Employment (standing order) Act of 1946. The concept of a dearness allowance is often considered to be a portion or a part of the concept of ‘wages’ under the code on wages, 2019.
1.3.3. CONVEYANCE
The concept of conveyance under labour law means a fixed amount or a reimbursement for the purpose of commutation. The income tax act of 1961 exempts the same on the basis of a limit where it is not necessarily a concept under labour law but has a fair role in the decision making process upon a wage negotiation or deciding upon company policies in India.
1.3.4. MEDICAL REIMBURSEMENT
The reimbursement of medical expenses involves a fixed medical allowance given to an employee by an employer. The said allowance is established under the Employees` State Insurance Act of 1948, which instils a mandate on employers to provide medical benefits to employees earning less than Rs. 21.000 per month. The said reimbursement is not a mandate but is often included to ensure labour welfare in a company.
1.3.5. PERFORMANCE INCENTIVES
Also known as Bonus, Performance incentives are a variable payment made by an employer to an employee on the basis of their performance in the company by utilising their skills and qualifications.
It is the Payment of Bonus Act of 1965 which governs this process, where it mandates a minimum bonus for employees earning less than or equal to Rs. 21,000 a month along with having worked for a minimum 30 days in a year. The minimum, according to this act, is 8.33% of the salary or Rs. 100, whichever is higher. Being one of the most complicated structures in a company, the detailed planning of each component requires resonance with the existing laws governing the said components, which creates a safety net for employees facing certain grievances due to the lack of a legal platform supporting the entire concept of cost to the company.
III.
CHAPTER 3: THE MISUSE OF THE CONCEPT OF COST TO COMPANY “You never want to be in a position where you cannot make payroll” - Brian Acton The 20th century was considered as the century of management; several theories on management were introduced and taught, reflecting on previous practices and brainstorming the future of such practices. The subsequent introduction of several theories began considering the relationship between an employer and employee more personal, making the 20th century the era of Fordism. The 21st century, considering the relationship between an employer and employee more of a relationship involving one another on the basis of economic interests. The rise in the importance of corporate governance created a package of legal, cultural and institutional arrangements.
9 The role of an employee is not only constrained to being an asset to an organisation but also proceeds to being a pioneer in ensuring an organisation`s sustainability and long term growth along with prosperity. The welfare of employees, therefore, contributes to the long term increase in the profits of the company along with achieving their goal. The satisfaction of employees leads to greater productivity. 10
3.1. THE MISUSE OF PAY STRUCTURE
The concept of cost to company, regardless of being a standard in employment contracts, has also become a means to mislead employees using monetary rewards as a façade.
3.1.1. THE FAÇADE OF HIGH SALARY
Companies often create a cover of high salary by inflating the figure which would include non cash or deferred benefits giving employees the false hope of massive or high compensation. 11The salaries often result in future gratuity liability along with annual bonuses without guarantee, along with prerequisites in the form of premium insurances not resulting in any monetary gain for an employee. The sugar coated cost to company often misleads employees into working more than what they earn.
3.1.2. THE INVOLVEMENT OF STATUTORY CONTRIBUTIONS IN THE FORM
OF PERKS Statutory contributions in the name of perks often spark lacunas in the legislations due to there not being any remedies for the same. This includes contributions such as mandatory statutory contributions like employee provident funds and employee state insurance packaged in the name of benefits, misleading employees. An example of such an act would be when the employees` provident funds and miscellaneous provisions act of 1952 necessitates both employer and employee to contribute 12% of their basic wages, which would also include the share of the employer in the cost to company, the same being suggested as compensation for employees often results in the misuse of the powers under statutes given to employers with regards to cost to company leading to under paid employees. 12
3.1.3. THE MINIMUM WAGES- GRADUAL EROSION
Employers often mislead their employees while deciding the structure of their cost to company by enlarging allowances and reimbursements and minimising wages leading to gross underreporting of wages resulting in violating the code of wages of
2019. The definition of wages is often manipulated under, leading to employees
losing their basic salary as per the market value for their experience and qualifications. The code stipulates that the non wage components included in the payment structure of a company under the cost to company must not exceed 50 per cent of the total remuneration. This is often overlooked by companies as a mere formality, leading to several violations under the code of wages of 2019.
3.1.4. THE PRINCIPLE OF EQUAL REMUNERATION
The concept of equal renumeration is linked legally to the Equal Renumeration Act of 1976, which has mandated equal pay for equal work. Employers use cost to the company as a shield to misuse and manipulate the pay structure by inflating the non wage components or allowances, which prevents employees from comparing their original wages among themselves.
3.1.5. STATUTORY BENEFITS BEING WITH HELD
Companies often oversee their obvious violation of the Industrial Disputes Act of
1947 by recovering their statutory liabilities from the pay of an employee, resulting
in a shift of the burden on the weak. This is a prima facie violation of the Industrial Dispute Act of 1947, which consists of the principle of unfair trade practices with remedies on the same. 13
3.2. THE JUDICIAL INTERVENTION
Indian judiciary has, on several circumstances, emphasised on the misuse of the concept of cost to company by the Companies prima facie, In the case of Regional Provident Fund Commissioner v. Vivekananda Vidyamandir, The court had held that: “Any allowance paid universally to all employees must be considered and treated as wages for the calculation of provident funds” 14 The judgement played a prominent role in responding to certain actions of employers in India, creating awareness on the misuse of the concept of cost to the company.
IV. CHAPTER 4: THE
CONCLUSION
Cost to company is a phenomenal concept which creates a structured roadmap on the payroll process and chart of an employee on the basis of their role and designation. This, however, does not control the powers of a company in terms of structuring and defining it for their own organisation. Reasonable control ought to be introduced to protect the welfare of employees who remain unaware of the actions of their employers on which the law remains unable to identify. There is a necessity for bringing rigid rules governing the same. The industrial relations code of 2020 has, under section 40, made efforts to regulate the cost to company where these hidden provisions attempt to increase the cost to company granting annual increments. The 2020 code has brought forth a requirement for review and revision of all employment contracts, compensation structure, registrations and compliance.
The code further emphasises on the necessary focus on the definition of wages which the 2020 code specifies on exclusion which If exceeds 50 per cent of such percentage as specified by the central government, of renumeration, then the amount exceeding such 50 per cent would be considered as renumeration and considered under the definition of wages in the code of 2020. 15 The code further categorises schemes such as provident funds, gratuity, ESIC and so on as a percentage of the wage, which are expected to be changed in the total payouts on the grounds of social security and retirement benefits. The act aims to ensure that every enlightened and progressive employer makes plans for restructuring the salary due to the retrospective increase in the gratuity and lease the encashment provisions that include hidden financial burdens on the employer.
Gratuity would be paid at higher rates for all previous services and encashments, leaving the calculations on the basis of the last drawn salary of the employee decided by the employer. 16 The legislature has made efforts to create scrutiny on the misuse of the process of cost to company, which ensures more promotion of labour welfare among the various sectors in India. The concept of cost to company which was previously a facade used for misuse by employers is now a benefitting structure for employees who would receive the pay for their work which makes this unbelievable concept real and not a myth among organisations which would, upon the enactment of the Industrial relations code of 2020, create this structure keeping in mind the benefits of employees.