With the Labour Codes now in force, their implementation continues to face practical challenges due to incomplete notification of supporting rules across jurisdictions and evolving compliance mechanisms. While the Ministry of Labour and Employment (‘MoLE/ Ministry’) has clarified that the Codes became effective from the date of their publication in the Official Gazette (i.e. 21st Nov. 2025) and therefore prevail over the repealed labour laws, the existing rules under those repealed laws will continue to apply until new rules are notified, so long as they are not inconsistent with the Codes. In this backdrop, the definition of “wages” assumes particular importance, as it forms the foundation for multiple compliance obligations relating to compensation, social security and employment exits. This note briefly examines the definition of “wages” and its implications for employers and employees/workers.

A Uniform Definition, but Not a Complete Solution

Under the erstwhile labour laws, the definition of “wages” varied across statutes, with each law adopting its own formulation based on its specific purpose and objective. This lack of uniformity led to considerable ambiguity and frequent litigation, particularly between employers and employees. The Labour Codes seek to address this issue by introducing a more uniform definition of “wages” across labour legislations. However, despite this attempt at standardisation, interpretational concerns still remain, especially regarding the precise scope of inclusions and exclusions within the definition.

Under Section 2(y) of the Code on Wages (and mirrored as Section 2(88) of the Code on Social Security and in the OSH&WC Code), wages means

“All remuneration whether by way of salary, 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,

1. basic pay;
2. dearness allowance; and
3. retaining allowance, if any

The statute specifically excludes certain components from the ambit of wages, including inter alia:

1. any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment,
2. the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
3. any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
4. any conveyance allowance or the value of any travelling concession;
5. any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
6. House Rent Allowance (HRA)
7. remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
8. any overtime allowance;
9. any commission payable to the employee
10. any gratuity payable on the termination of employment;
11. any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment:

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (a) to (i) exceeds one-half, or such other per cent. as may be notified by the Central Government, of all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause:”

50% Rule: Core Mechanism of the New Wage Framework

The initial para of the definition of wages is the same as provided under the repealed laws, which generally covers all kinds of remuneration capable of being expressed in terms of money and the same is payable to an employee upon fulfilment of the terms of employment. Besides, the Code provides an inclusion list and an exclusion list while determining the wages of any worker/ employee. Under the Code, the definition has prescribed threshold limits to some specified allowances to restrict the employer from reducing the basic pay of employees, which the employers used to practice to reduce their liability such as ESI, PF, Gratuity, Leave Encashment, etc. In terms of the first proviso to the definition, if payments made under clauses (a) to (i) of the excluded list exceed 50% of all remuneration, the excess shall be deemed as remuneration and added back to wages. This means the Code sets a floor wage (basic pay + DA + retaining allowance) that must constitute at least 50% of total remuneration, and where they fall short, the shortfall is bridged by reclassifying a portion of allowances as wages.  

The Principle of Universality and Its Continued Relevance

In this regard, there is a need to understand the ‘Principle of Universality’ which was laid down by the Hon’ble Supreme Court of India in one of the landmark cases namely “The Regional Provident Fund Commissioner (II) West Bengal and Ors. Vivekananda Vidyamandir”. In the said case law, certain principles were laid down setting the premise on what constitutes ‘basic wages’ under Indian labour laws:

1. Universality Test (Positive): Wages universally, necessarily and ordinarily paid to all employees across the board constitute basic wages. [Vivekananda Vidyamandir, Para 9]
2. Opportunity Test (Negative): Where a payment is available only to those who avail a particular opportunity, it is not a basic wage. [Vivekananda Vidyamandir, Para 9]
3. Incentive Test (Negative): Any payment by way of special incentive or reward for extra output above the norm is not a basic wage. [Vivekananda Vidyamandir, Para 7]
4. Burden of Proof: Where an employer seeks to show that a payment is not basic wages, the burden lies on the employer to demonstrate that the payment is genuinely variable, linked to incentive/production, or not universally paid.  [Vivekananda Vidyamandir, Para 14]  

From the above, the principles laid down by the Supreme Court are required to be followed not only under the repealed laws but also under the newly notified labour codes, since the definition of wages includes all kinds of remuneration, whether by way of allowance or otherwise. Thus, employers need to assess whether a particular allowance forms part of basic pay or not by complying with the ‘Principle of Universality’.    

Persistent Grey Areas Despite a Uniform Definition

Despite the effort to standardize the definition of “wages,” certain grey areas continue to remain. In particular, ambiguity persists on whether all forms of allowances are to be tested only against the specific exclusion list under the Code, or whether allowances outside that list should still be examined through the judicially evolved “principle of universality.” To address some of these uncertainties, the Ministry has issued FAQs on various issues relating to inclusion and exclusion within wages, while also clarifying that the Code will prevail in case of any inconsistency. The following discussion examines these FAQs individually.

Grey Area 1: What Exactly Counts as "Total Remuneration" for the 50% Denominator?

This is the most litigated question in practice. The statute says "50% of all remuneration," but the phrase "all remuneration" was undefined, leaving open whether CTC elements like employer PF contribution, ESI, statutory bonus, and actual gratuity paid count in the denominator.

In fact, in one of the FAQs (i.e. FAQ No. 7), the Ministry has considered CTC as a denominator while calculating 50% of Basic and DA i.e., the Ministry has included Gratuity and Retirement benefits in the CTC. At the same time, the proviso of the definition clause has not considered these items to calculate the limits of allowances. If the law does not require consideration of these two benefits in the numerator, then how will these be considered in the denominator. Moreover, the nature of these items is different from other allowances, as these are not payable monthly to employees and its contingent upon the fulfilment of criteria to get these benefits. Further, for all practical purposes, gratuity and retirement benefits, while considered part of remuneration, will go against the interests of the employees and workers, as basic salary will either not increase or increase by a nominal amount.

Grey Area 2: whether employers’ contribution forms part of wages

Only statutory components such as employer PF and pension contributions and statutory bonus are included in "total remuneration" for computing the 50% floor. Gratuity, ESI, and other retirement benefits are not included. (Additional FAQs issued by the Ministry on March 2026, Sl. No. 1)

Grey Area 3: Are Annual Performance Incentives and ESOPs Part of Wages

Many large employer compensation structures include significant variable pay, ESOPs, and annual performance bonuses. The statute is silent on whether these are "remuneration."

Performance-based incentives, Employee Stock Option Plans (ESOPs), variable part of the component or reimbursement-based payments to the employee shall not be part of the wages. (FAQ no. 3 issued by the Ministry on 30th December 2025)

Grey Area 4: Is Leave Encashment Part of the Allowance Pool

As mentioned in Section 2(y) of Code on Wages, 2019, leave encashment is not a part of allowances. (FAQ no. 5 issued by the Ministry on 30th December 2025)

Grey Area 5: ESI Coverage Threshold and the New Wage Definition

With effect from 21.11.2025, the definition of wages under the CoSS, 2020 shall apply. At present, Rs 21,000 per month wages notified for ESI coverage will be applicable.

From the above FAQs, the Ministry has clarified that the benefits attributable to performance or which are contingent upon any events do not form part of wages of any employee. ‘Grey Area-1’ is something that the industry needs more clarity on the remuneration of an employee, to assess the 50:50 Rule to arrive the basic wages to determine further other statutory benefits such as ES, PF, gratuity and leave encashment.

Based upon the understanding of the law and FAQs issued by the Ministry, there is a list of allowances to decide whether these form part of ‘wages’ or not: