Code on Social Security, 2020

The Code on Social Security, 2020 is the most expansive of the four labour codes, consolidating nine existing social security legislations into a unified framework of 164 sections across 14 chapters. The subsumed statutes are: the Employees' Provident Funds and Miscellaneous Provisions Act, 1952; the Employees' State Insurance Act, 1948; the Payment of Gratuity Act, 1972; the Maternity Benefit Act, 1961; the Employees' Compensation Act, 1923; the Building and Other Construction Workers' Welfare Cess Act, 1996; the Unorganised Workers' Social Security Act, 2008; the Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959; and the Cine-Workers and Cinema Theatre Workers (Regulation of Employment) Act.

The Code marks a paradigm shift in Indian social security by extending coverage beyond the traditional employer-employee relationship to include gig workers, platform workers, and unorganised workers. For the first time, aggregators and platform companies face statutory obligations to contribute towards social security schemes for their workers. The Code creates the National Social Security Board and State-level boards to recommend and administer schemes for these newly covered categories.

For conventional employers, the Code's impact is primarily felt through the new wage definition (aligned with the Code on Wages). Since PF, ESI, gratuity, maternity benefits, and compensation are all calculated on "wages" as defined in the new framework, the 50% threshold rule cascades across every social security obligation. Employers with CTC structures where basic pay is below 50% of total remuneration face significantly higher contribution liabilities across the board.

The Employees' Provident Fund provisions under the Code on Social Security retain the fundamental structure of the EPF Act, 1952, but with a critical change in the wage base. Every establishment employing 20 or more employees must register with the EPFO and contribute to the provident fund. The contribution rates remain at 12% of wages from the employer and 12% from the employee (with 8.33% of the employer's contribution diverted to the Employees' Pension Scheme).

The transformative change is the definition of "wages" on which these contributions are calculated. Under the current regime, most employers contribute PF on basic pay plus dearness allowance, which is often structured at 40-50% of CTC. Under the new wage definition with the 50% threshold rule, if excluded components exceed 50% of total remuneration, the excess is reclassified as wages. This means the PF contribution base could increase by 20-40% for employers who currently maintain low basic wages.

Consider a practical example: an employee with a monthly CTC of INR 50,000 where basic pay is INR 15,000 (30%). Under the 50% rule, the minimum wage component becomes INR 25,000. The employer's PF contribution rises from INR 1,800 (12% of INR 15,000) to INR 3,000 (12% of INR 25,000) — a 67% increase per employee. For international workers, the Code continues the social security agreement framework, and exemptions are available based on bilateral agreements. Voluntary provident fund contributions by employees above the mandatory 12% remain permissible. The Code also introduces provisions for portability of PF accounts through the universal account number system.

The Employee State Insurance provisions under Chapter IV of the Code on Social Security apply to establishments employing 10 or more employees (or as notified by the government). The wage threshold for ESI coverage remains at INR 21,000 per month. The contribution rates are 3.25% from the employer and 0.75% from the employee, calculated on the wages earned during the contribution period.

ESI provides a comprehensive social security net covering six categories of benefits: medical benefit (full medical care for the insured person and their family), sickness benefit (70% of wages during certified sickness for up to 91 days per year), maternity benefit (full wages for 26 weeks), disablement benefit (temporary at 90% of wages, permanent at a rate dependent on the extent of disability), dependants' benefit (90% of wages to dependants in case of death), and funeral expenses. The Code also enables the ESI Corporation to extend coverage to new categories of establishments and provide benefits beyond those specified.

Under the new wage definition, the ESI contribution base changes similarly to PF. Since ESI applies to employees earning up to INR 21,000, the reclassification of allowances as wages could bring more employees within the ESI threshold. An employee whose basic pay was INR 18,000 (below the INR 21,000 threshold) but with total remuneration of INR 30,000 may now have deemed wages exceeding INR 21,000, potentially changing their ESI coverage status. The Code empowers the Central Government to extend ESI coverage to hazardous industries regardless of the workforce size and to plantation workers. Employers must register on the ESIC portal and file monthly returns.

Gratuity provisions under the Code on Social Security introduce two significant changes from the Payment of Gratuity Act, 1972. First, the calculation base shifts to the new wage definition under Section 2(y) of the Code on Wages, potentially increasing gratuity liability. Second, fixed-term employees become entitled to pro-rata gratuity after completing one year of service, eliminating the traditional five-year qualifying period for this category.

The gratuity formula remains: last drawn wages multiplied by 15, divided by 26, multiplied by the number of years of completed service (with service exceeding six months rounded up to the next year). For piece-rated employees, the calculation uses average wages of the preceding three months. The maximum gratuity payable is currently INR 20,00,000, though this ceiling is periodically revised by the government. The forfeiture provisions continue — gratuity can be forfeited wholly or partially if the employee's services are terminated for willful destruction of employer property or for riotous or disorderly conduct, or for any act constituting a moral turpitude offence.

The impact of the new wage definition on gratuity is substantial. For an employee with 10 years of service earning INR 50,000 per month with current basic of INR 20,000, gratuity would be approximately INR 1,15,385 under the old base. If the deemed wage increases to INR 25,000 under the 50% rule, gratuity rises to INR 1,44,231 — a 25% increase. For organisations with large workforces and low attrition, the aggregate gratuity provisioning impact can be material. Employers should recalculate actuarial gratuity provisions under the revised wage base and assess the impact on financial statements under Ind AS 19.

The maternity benefit provisions under Chapter VII of the Code on Social Security substantially reproduce the enhanced entitlements introduced by the Maternity Benefit (Amendment) Act, 2017. Every woman employed in an establishment (whether directly or through a contractor) is entitled to maternity benefit at the rate of her average daily wage for 26 weeks for the first two children, and 12 weeks for the third and subsequent children. The 26-week period can be availed up to 8 weeks before the expected delivery date.

Women adopting a child below three months of age are entitled to 12 weeks of maternity benefit from the date of adoption. The same entitlement applies to commissioning mothers (surrogacy) from the date the child is handed over. In case of miscarriage or medical termination, the woman is entitled to six weeks of paid leave from the date of the event. Additionally, the "work from home" provision allows employers to permit women to work from home after the maternity leave period, subject to mutual agreement and the nature of work.

Every establishment employing 50 or more employees must provide a creche facility within a prescribed distance, either individually or as a common facility with other establishments. The woman is permitted four visits to the creche daily, including the interval for rest. Employers are prohibited from discharging or dismissing a woman during her maternity leave or on account of her pregnancy. Any such termination is void. The employer cannot require a woman to do arduous work or work involving long hours of standing during the six weeks immediately before delivery and ten weeks after delivery. Non-compliance with maternity benefit provisions attracts penalties including imprisonment up to one year or a fine up to INR 5,00,000 or both.

The inclusion of gig workers and platform workers in the Code on Social Security is a landmark development in Indian labour law. Section 2(35) defines a "gig worker" as a person who performs work or participates in a work arrangement and earns from such activities outside of a traditional employer-employee relationship. Section 2(61) defines a "platform worker" as a gig worker who accesses other organisations or individuals through an online platform and provides services or solves specific problems for payment. An "aggregator" under Section 2(1) is a digital intermediary connecting buyers and sellers.

Chapter IX establishes the framework for social security schemes for gig and platform workers. The Central Government is empowered to frame schemes covering life and disability insurance, health and maternity benefits, old age protection, and any other benefit determined by the government. The financing mechanism requires aggregators to contribute between 1% and 2% of their annual turnover towards the social security fund. The total contribution from the aggregator, gig worker, and government combined cannot exceed 5% of the amount paid or payable by the aggregator to gig and platform workers.

The National Social Security Board is constituted to recommend schemes and monitor their implementation. Every aggregator must register with the Board and file returns containing details of gig and platform workers. Workers must register on the designated portal and obtain a unique identification number linked to Aadhaar. The framework is deliberately broad, enabling the government to progressively expand coverage as the gig economy matures. For platform companies, the compliance requirement is clear: register, contribute to the social security fund, and maintain records of all workers engaged through the platform.

Chapter IX of the Code on Social Security also addresses unorganised workers — defined as home-based workers, self-employed workers, or wage workers in the unorganised sector who are not covered by the PF, ESI, or gratuity chapters. India's unorganised workforce constitutes approximately 93% of total employment, making this segment the most significant for social security expansion.

The e-Shram portal serves as the national database for unorganised workers. Registration is Aadhaar-based and provides workers with a Universal Account Number (UAN) that enables portable benefits across states and employment categories. As of 2025, over 29 crore unorganised workers have registered on the e-Shram platform. The Code mandates that the Central and State governments frame social security schemes for unorganised workers covering life and disability cover, health and maternity benefits, old age protection, education, and any other benefits as determined by the government.

The National Social Security Board (chaired by the Union Labour Minister) and State Unorganised Workers' Social Security Boards are responsible for recommending schemes, monitoring implementation, and reviewing the record-keeping of registered workers. Existing schemes such as the Pradhan Mantri Jeevan Jyoti Bima Yojana (life insurance), Pradhan Mantri Suraksha Bima Yojana (accident insurance), Atal Pension Yojana (pension), and Ayushman Bharat (health insurance) are expected to be integrated within this framework. For employers engaging unorganised workers through informal arrangements, the Code creates potential compliance obligations around registration and contribution, particularly where the engagement resembles an employer-worker relationship.

The Code on Social Security introduces a unified penalty framework that replaces the disparate penal provisions across the nine subsumed acts. For non-payment or delayed payment of contributions (PF, ESI), the employer is liable to pay damages at prescribed rates in addition to the arrears. Criminal prosecution can result in imprisonment up to three years and a fine of up to INR 1,00,000 for repeat offences involving PF defaults. For ESI contribution defaults, the penalty is imprisonment up to two years and a fine.

The concept of dual liability is significant: both the principal employer and the immediate employer (contractor) are liable for social security contributions of contract workers. The principal employer who fails to pay the contractor's workers is entitled to recover the amount from the contractor but cannot escape primary liability. This provision has major implications for companies relying heavily on contract labour.

The compounding mechanism under the Code permits first-time offenders to compound offences (where punishable only with fine) by paying 50% of the maximum fine to the designated officer. This avoids prosecution and provides a compliance-friendly resolution path. The unified registration system under Section 142 requires every employer to obtain a single registration covering all applicable social security schemes, replacing the current requirement for separate PF, ESI, and gratuity registrations. The single electronic return replaces multiple returns filed under different acts. The inspector-cum-facilitator has powers of inspection, inquiry, and prosecution, but also a mandate to assist employers in achieving compliance, particularly small and medium establishments.