I am sure your you were curious as to why the number 17,742/- for a Software Engineer when you clicked on the link to land this article. Let’s see in detail. By the way, if you are a software engineer in Kerala getting paid below this figure, it’s probably the time to send this article to your HR Manager 😉
Recently, on Dec 24, 2020 to be exact, Government of Kerala announced the revised Minimum Wages for the Software industry in the state, after long 10 years of the earlier revision. Numbers have soared up. This article discusses the concept of minimum wages, with examples pertaining to Kerala state; however, the concept should be the same throughout the country.
What’s this “minimum wages”?
As the name implies, the minimum wages is the minimum wage per month to be given to an employee of a particular sector in a state. There is a national minimum wage declared by the central government, and various state-level minimum wages. The idea is to keep the state-level minimum wages equal to or above the national minimum wages. The concept of minimum wages will ensure access to equitable and justifiable pay, thereby eliminating the chances of exploitation by the management.
When is it decided?
Minimum wages are revised periodically. Minimum wages are defined for each sector separately. For example, the minimum wages for Software sector differs from that for the Oil Mills sector. There are roughly 80 such sectors identified for the State of Kerala; and similar numbers for other states as well. Governments revises the minimum wages when it deems that there is, inter alia, a significant increase in the cost of living over a period of time which is not manageable by a mere increase in Dearness Allowance (DA).
How is minimum wages calculated?
Minimum wage calculation for a role is easy. For example, look at the latest Software industry minimum wages notification for the State of Kerala available here.
If you look at the notification, in the Software sector, roles of jobs are categorised into different grades. For instance, an HR Executive is a Group F employee in the industry, while a Software Engineer is a Group E employee. An organisation needs to categorise all their employees into one of these grades (and, if not already done by any means whatsoever before, it would be advisable to communicate the same through an HR letter/notice, through internal HR portals, payslips, etc. to the employee so that they are aware of the same) Let’s take the example of Group E: Software Engineer for illustration purpose.
Demystifying the Minimum Wages Calculation: An Example
If you look at the Group E: Software Engineer, 16520-250-17770-300-19270 is the salary range shown for this role. What does that mean, let’s have a look!
The minimum wage for an employee who is a Software Engineer in an organisation is Rs. 16520. This amount is exclusive of another factor called Dearness Allowance (DA), which we will see about later.
Now, look at the number 250 in the wage structure. What does it signify? The notification says:
For every five years of completed or to be completed service in an establishment or under an employer, an annual increment at the rate next to the pay scale fixed in the new scale of pay shall be paid as service weightage to the employee concerned.
So, if an employee continues to be a Software Engineer under the same organisation/employer, then for every such service year, a minimum pay hike of Rs. 250/-pm should be paid as service weightage. That is, for someone with salary 16520/- as per month salary, and completed one year of service, s/he should get a minimum wage of Rs. 16520 + Rs. 250 = Rs. 16770/- pm during the second year of service. Every year, this figure per month will increase by Rs. 250/- for the first five years. Hence, s/he will have a wage of Rs. 17770/- pm during the fifth year of service. That’s the third number appearing in the pay structure.
Now, one can see a 300 next to 17770 in the pay structure. That means, we’re now done with the first five years and reached Rs. 17770/- pm as minimum wage for this employee. Hence for the next set of 5 years, the minimum wages should be increased for every service year by, not the old 250 but, Rs. 300/-. Hence, on the sixth year of service, the employee should have a minimum wage of Rs. 17770 + Rs. 300 = Rs. 18070/-. This will continue for the second block of 5 years. Hence, at the end of the 10th year (i.e. the fifth year of the second block), the employee should be getting a minimum of Rs. 19270/- pm as the salary. After the 10th year, the mandatory pay hike stops. If the employee gets promoted to a higher Grade, that’s a different story, in which case the minimum wages for that role will be applicable.
Image Courtesy: Investopedia
What if one gets more salary hike?
Good for them. The minimum wages talks about the minimum wages to be given, and the minimum pay hike to be given for every service years. If your pay is already above this level, then the employer is NOT obliged to give you the 250 or 300 pay hike.
Now, tell me about DA calculation?
Dearness Allowance is calculated based on an index called Consumer Price Index (CPI). I will skip the economy part and would encapsulate that it is a statistical number published by Dept of Economics and Statistics for various cities in the state, and it depicts the fluctuating cost of living. They publish it here.
DA is a mechanism provided to adjust the salaries for change in CPIs. If you look at the Minimum Wages notification, it says:
In addition to the basic rate of wages, all the employees shall be eligible for Dearness Allowance calculated on the basis of the Consumer Price Index published for the concerned District Head Quarters of the Department of Economics and Statistics at the rate of ₹ 26 (Rupees Twenty Six only) for monthly waged employees and ₹1 (Rupee One only) for daily waged employees respectively, for every point in excess of 300 points of the latest Consumer Price Index Number in the series 1998-99=100.
There are five parts to it:
- DA varies for each city (read district HQ)
- The rate of DA is Rs. 26/- for monthly waged employees
- DA is calculated for every point in excess of 300 points
- CPI is published periodically
- DA for this sector is calculated basis the CPI in the Series: 1998-99=100.
With these reading in mind, let’s calculate the DA for an employee posted in Trivandrum. Look at the CPI page on the EcoStat website and choose the latest month for which CPI is available. As I write this, it is Nov 2020. If you look at the Trivandrum’s CPI value under the column Estimated Indices for Base : 2011-12 = 100 Base : 1998-99 = 100 for Nov 2020, it is 369. That’s our little guy.
Now, we need to find out the DA from this 369. As per the #3 above, DA is calculated on the CPI-300 value. Here, it is 369-300 = 69.
We need to pay Rs. 26/- per month for every point in this 69. That means, the DA per month for an employee posted in Trivandrum is Rs. 26 * 69 = Rs. 1794/-
DA is paid over and top of the above minimum wage. DA may change when CPI changes.
Tip: An organisation need NOT provide DA as a pay structure component. They can subsume DA component in the gross pay and make sure that the gross pay is above the (minimum wages + DA) figure. But it would sound problematic for organisations who use the Wage Protection System, which mandates the DA component as such, in which case one may decide to keep that little guy in the pay structure.
Are we talking about Gross Salary or Basic+DA?
With the introduction of Code on Wages, 2019 (to be in force from Apr 1, 2021), all confusions with respect to the definition of wage will vanish. You may consider the Basic + DA + Other ordinarily paid allowances (other than OT, commissions, performance-based incentive, etc.) as the wage for this purpose, meaning we’re talking about the Gross Pay. Confused about Gross Pay, CTC, etc.? I’ll write about it in my next article 😉
Compliance is a Culture.
When is this to be effective from?
This notification is to be effective from Dec 18, 2020. Even if December 2020 and/or January 2021 salaries are already paid out by the employer, they are to abide by these changes. If there are revisions to be made as per this notification, then employers have to comply and give arrears wef Dec 18, 2020.
For the existing employees, if the salaries are to be revised to comply with this notification, then the employer must take care of the service weightage as well.
Where can I see minimum wages for other sectors?
Govt of Kerala published minimum wages notifications on this page. This is the old notification for the Software Industry.
Well, now find out the minimum wages to be paid to a Senior Software Engineer with 3.2 years of experience in the current organisation in that grade, and posted at Calicut. Post your answers in the comment box and let’s see how many of you get it right 😉
This article is originally published on PeopleFirst blog, LinkedIn and Medium.