1.
Overview
The Government of India has enacted a legislative overhaul by consolidating 29 central labour laws into
four comprehensive codes: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on
Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. This
consolidation alters the compliance framework for workforce policies, operational costs, and employer
obligations. Effective from 21 November 2025, these codes require immediate and strategic attention from
senior leadership. While the codes are now law, their full implementation is subject to the promulgation of
specific rules by both Central and State governments. This creates a complex transitional phase where,
until new rules are issued, the rules of the repealed laws continue to apply so long as they are not
inconsistent with the new codes. For an enterprise with a significant workforce and heavy reliance on
contractors, navigating this new regime is a strategic imperative. The most profound and cross-cutting
change introduced by this reform is the new, universal definition of “wages,” which will have a direct and
immediate impact on payroll, statutory contributions, and overall cost-to-company structures.
2.0 The Single Biggest Cross-Cutting Change: The Universal
Definition of “Wages”
The most important change made was the reconciliation of the legal definition of “wage." This reconciliation
is highly impactful to the organization both financially and structurally as it affects the compensation
calculation of the employees.
This new definition has all remuneration, like salary and [Link] three components are Basic Pay,
Dearness Allowance and retaining allowance. There are specific components that are excluded from this,
such as statutory bonus, HRA, conveyance allowances, overtime allowances, commission, contribution to
PF from the employer and gratuity . The critical element of this new definition is the "50% Rule." This
provision states that if the total value of the specified exclusions exceeds 50% of an employee's total
remuneration, the excess amount will be reclassified and added back to the "wages" component for the
purpose of calculating statutory payments. This rule is designed to prevent companies from structuring
salaries with low basic pay and high allowances to reduce their statutory contribution liabilities.
2.1 Payroll and Cost-to-Company (CTC) Impact
This re-calculated, and likely higher, "wages" figure will now be the base for calculating key statutory
contributions, leading to direct financial consequences. The immediate impacts on payroll and long-term
liabilities are significant.
● Provident Fund (PF): Both employer and employee PF contributions are calculated as a
percentage of "wages." A higher wage base will directly increase these contributions, impacting both
the company's wage bill and the employee's take-home pay.
● Gratuity: Gratuity is calculated based on the last drawn wages. With an expanded wage base, the
amount payable upon an employee's exit will increase, raising the organization's long-term financial
liabilities.
● ESI: While the specific wage threshold for Employees' State Insurance (ESI) coverage is yet to be
notified by the Central Government, any future calculations under the scheme will also be based on
this new, broader definition of wages.
HR and Payroll teams must immediately model the financial impact of this change on existing CTC
structures and the overall wage bill to prepare for these increased costs. This universal change sets the
stage for more specific reforms within each of the four codes.
3.0 Code-Wise Key Changes and Business Implications
3.1 Industrial Relations Code, 2020
This Code governs the core relationship between the employer, workers, and unions. For large enterprises,
its provisions introduce significant changes affecting hiring flexibility, disciplinary procedures, and
operational decisions.
● Standing Orders Threshold: The requirement to have certified standing orders, which codify
conditions of employment, now applies to any industrial establishment with 300 or more workers.
This makes the provision directly applicable to the company.
● Fixed-Term Employment (FTE): The Code formalizes FTE, stipulating that fixed-term employees
are now eligible for all statutory benefits (like PF, ESI, and bonus) available to permanent workers
on a proportionate basis. Crucially, they become eligible for gratuity after only one year of
service.
● Layoff, Retrenchment, and Closure Thresholds: The threshold requiring prior government
permission for layoff, retrenchment, or closure has been increased to 300 workers. This provides
the company with greater operational flexibility to restructure its workforce without lengthy approval
processes.
● Worker Definition: The definition of a "worker" has been expanded to include individuals in
supervisory roles who earn up to ₹18,000 per month. This broadens the scope of employees
covered by the protections and dispute resolution mechanisms of the Code.
● Strike and Lock-out Notice: A mandatory 14-day notice period is now required before any strike
or lock-out. Furthermore, strikes are prohibited during conciliation proceedings and for specified
periods thereafter.
● Grievance Redressal Committee (GRC): A GRC is mandatory for establishments with 20 or more
workers. The Code also mandates that these committees must have adequate representation of
women workers.
● Worker Re-skilling Fund: A new obligation requires employers to contribute an amount equivalent
to 15 days of the last drawn wages for each retrenched worker into a re-skilling fund.
Enterprise Impact: These changes collectively require a strategic review of workforce management. The
formalization of FTE offers a new contractual model, but it comes with new gratuity liabilities. The increased
thresholds for retrenchment provide greater flexibility, while the expanded "worker" definition and
mandatory GRC necessitate updated internal dispute resolution protocols.
3.2 Social Security Code, 2020
This Code aims to universalize social security, formally recognizing new forms of work and expanding
employer obligations beyond the traditional employee-employer relationship.
● Recognition of Gig and Platform Workers: For the first time, Indian law defines "gig worker" and
"platform worker." The Code establishes a framework for a national Social Security Fund to provide
them with benefits.
● Aggregator Contribution: The Code introduces a new liability for "aggregators"—digital
intermediaries connecting workers with users. These entities are now required to contribute 1-2% of
their annual turnover (capped at 5% of the amount paid to these workers) towards the social
security fund.
● Gratuity for Fixed-Term Employees: Echoing the Industrial Relations Code, this Code also
provides that FTEs are eligible for gratuity on a proportionate basis after one year of continuous
service, a significant reduction from the previous five-year requirement for permanent employees.
● EPF and ESI Updates: The core provident fund regime under the EPF Act remains unchanged for
now, as the corresponding provisions in the Social Security Code have not yet been notified. For
ESI, coverage is extended nationwide, removing previous geographical restrictions, though the new
wage threshold for eligibility is still awaited.
● Inspector-cum-Facilitator: The role of inspectors is being transformed into a more advisory and
facilitative function, with the stated aim of promoting compliance through guidance rather than
purely punitive measures.
Enterprise Impact: This Code significantly expands the company's compliance perimeter. The organization
must conduct a thorough review of all vendor, consultant, and contractor relationships to identify any
potential classification as an "aggregator" and quantify the associated financial liability. The new gratuity
rules for FTEs also require immediate attention from finance and HR teams.
3.3 Occupational Safety, Health & Working Conditions (OSH) Code, 2020
This Code consolidates and updates the rules for workplace safety and employee welfare. For a
contractor-heavy enterprise, it imposes clearer and broader duties on the principal employer.
● Principal Employer Responsibilities: The duties of the principal employer are explicitly expanded.
The principal employer is now directly liable for providing all basic welfare amenities (such as a
canteen, first-aid, and changing rooms) to contract labour. Furthermore, the principal employer is
responsible for ensuring the payment of wages to contract labourers if the contractor defaults.
● Statutory Appointment Letters: Issuing a formal, written appointment letter to every employee is
now a mandatory legal requirement.
● Single Registration: The Code provides for a single electronic registration for an establishment,
simplifying what was previously a multi-faceted compliance burden under various laws.
● Working Hours and Overtime: The standard working day is defined as 8 hours, with a 48-hour
week. Crucially, any work performed beyond these hours must be compensated as overtime at a
rate of twice the normal rate of wages.
● Employment of Women in Night Shifts: Women are now permitted to work night shifts (between 7
PM and 6 AM), provided they give their explicit consent and the employer ensures adequate safety
measures, including safe transportation to and from the workplace.
● De-criminalization of Offences: The Code shifts the penalty for many procedural offenses from
criminal liability (imprisonment) to civil liability (monetary fines), reflecting a move towards a more
compliance-focused regulatory approach.
Enterprise Impact: This Code substantially increases the principal employer's direct liability for its entire
workforce, including those engaged through contractors. It mandates greater formalization of employment
processes, requires a robust review of vendor agreements to account for new liabilities, and necessitates
updates to time-tracking systems to ensure accurate overtime calculation and payment.
4.0 What Companies Must Review Now: An Action Checklist
To ensure readiness for this new regulatory framework, the company must initiate a holistic review across
its HR, Payroll, Legal, and Procurement functions. The following checklist outlines the immediate, practical
actions required.
● Payroll & CTC Structure
○ Audit all current CTC structures against the new "wages" definition.
○ Identify employee segments where non-wage components (exclusions) exceed 50% of total
remuneration.
○ Model the financial impact of increased PF and gratuity contributions based on the revised
wage base and project the impact on the annual wage bill.
● Fixed-Term Employment (FTE)
○ Review all FTE contracts to ensure they provide for pro-rata statutory benefits as required.
○ Update HR and payroll systems to correctly calculate and provision for gratuity liability for
FTEs completing one year of service.
● Standing Orders and Industrial Relations
○ Confirm the applicability of Standing Orders, as the workforce exceeds the 300-worker
threshold, and initiate the certification process if not already completed.
○ Review and update internal protocols regarding lay-off, retrenchment, and closure to align
with the new government approval thresholds.
○ Ensure a compliant Grievance Redressal Committee is in place with appropriate female
representation.
● Contract Labour Governance
○ Review all vendor and contractor agreements to ensure they explicitly cover the principal
employer's new duties regarding worker amenities and backup wage payment liability.
○ Strengthen the vendor onboarding and due diligence process to verify contractor licenses
and their capability to comply with the new codes.
● Workplace Policies and Documentation
○ Implement a standardized process to issue statutory appointment letters to all new hires and
regularize documentation for existing employees.
○ Develop and document a formal policy for engaging women in night shifts, including
templates for consent forms and protocols for safety and transport.
● Time and Attendance Systems
○ Review and update overtime policies and time-tracking systems to ensure they accurately
capture work performed beyond 48 hours per week and trigger payment at double the wage
rate.
● Gig/Platform Worker Exposure Analysis
○ Conduct a thorough audit of all relationships with contractors, consultants, and freelancers to
determine if any could be classified as "gig" or "platform" workers under the new definitions.
○ Assess whether the company could be classified as an "aggregator" in any of its business
relationships and quantify the potential 1-2% turnover contribution liability.
5.0 Risks, Gaps, and Items to Verify in Primary Law/Rules
While the four Codes provide a broad framework, full clarity on many operational aspects depends on the
forthcoming Central and State rules. This creates ambiguities that require ongoing monitoring. The
following items represent key areas of uncertainty.
1. State-Specific Rules: The final compliance landscape will vary by state, as each state must
promulgate its own rules to implement the Codes. These rules will govern many day-to-day
compliance activities.
2. ESI Wage Threshold: The monthly wage ceiling that determines employee eligibility for ESI
benefits is yet to be notified by the Central Government.
3. "Appropriate Government" Complexity: The definition of the 'appropriate government' (whether
Central or State jurisdiction applies) differs slightly across the four codes, which could create
compliance complexities for multi-state operations.
4. Gratuity Ceiling: The maximum amount of gratuity payable to an employee is to be prescribed by
the Central Government and is awaited.
5. Aggregator Contribution Mechanism: The practical process for calculating, collecting, and
remitting the 1-2% turnover contribution for gig and platform workers needs to be detailed in the
rules.
6. "Core Activity" Definition for Contract Labour: The final determination of what constitutes a
"core activity" of an establishment (where contract labour is prohibited) is subject to a specific
government order, creating uncertainty for workforce planning.
7. PF & EDLI Transition: The exact timeline for repealing the old EPF Act provisions and formally
notifying the corresponding new provisions under the Social Security Code for Provident Fund and
insurance is not yet confirmed.
8. Women's Night Shift Safety Conditions: The specific conditions regarding safety, holidays,
working hours, and transport facilities for women working in night shifts will be detailed in the
forthcoming rules.
9. Worker Re-skilling Fund Administration: The precise operational details for the maintenance,
contribution, and disbursement of the new worker re-skilling fund are yet to be outlined.
6.0 Conclusion and Recommended Next Steps
The new Labour Codes represent a fundamental restructuring of India's employment law framework. The
overarching themes are clear: greater formalization of the workforce, expanded social security coverage to
non-traditional workers, and increased direct liability for the principal employer. Procrastination is not a
viable strategy; a proactive and structured approach to compliance is essential to mitigate risk and adapt to
this new reality. The company should move forward with a clear, three-pronged strategy to ensure a smooth
transition.
We recommend the following immediate next steps:
● Internal Audit: Commission a cross-functional task force comprising representatives from HR,
Legal, Finance, and Procurement to conduct a detailed impact assessment based on the
compliance checklist provided in this document.
● Policy and Contract Overhaul: Initiate a comprehensive review and update of all employment
contracts (especially for FTEs), vendor agreements, and internal HR policies to align them with the
new legal requirements.
● Strengthened Vendor Management: Implement more robust due diligence, monitoring, and
contractual safeguards for all labour-supplying contractors to mitigate the increased principal
employer risks under the OSH and Social Security Codes.
By taking these decisive steps, the organization can not only ensure compliance but also leverage the
intended benefits of the new codes, such as greater operational flexibility and a more streamlined
regulatory environment.