Introduction of New Labour Codes in India – Impact, Advisory and Compliance Insights

Introduction

India has consolidated 29 central labour laws into four comprehensive Labour Codes effective from November 21, 2025, with the objective of simplifying compliance, improving ease of doing business, and strengthening employee welfare. While the Codes are yet to be fully implemented across all States, organizations should proactively prepare for significant changes impacting payroll, employment contracts, industrial relations, and compliance frameworks.

Overview of the Four Labour Codes

1. Code on Wages, 2019

To establish a uniform and transparent wage framework across all sectors, ensuring timely payment of wages, elimination of wage discrimination and facilitation of easy compliance for employers.

• Standardized Definition of Wages

The Code introduces a common definition of “wages,” applicable across all 4 labour codes. Wages are defined as all remuneration whether by way of salaries, allowances or otherwise payable to a person employed. This includes Basic pay, Dearness allowance, Retaining allowance, if any. If the allowances and benefits together (except gratuity and retrenchment compensation) exceed 50% of all the remuneration, the excess amount shall be added back to wages. Such added amount shall be treated as wages for statutory purposes.

Leave Encashment-The Code on Wages, 2019 specifically excludes leave encashment from the definition of "wages." Consequently, leave encashment is not considered for statutory computations such as Provident Fund, gratuity, bonus, or other benefits linked to the wage definition

Key Exclusions include:

Allowances: Accommodation, House Rent Allowance (HRA), Medical Allowance, conveyance allowance, overtime and other special expenses.

-Benefits: Employer contributions to PF/pension/ESIC, gratuity, retrenchment compensation, or retirement benefits.

-Variable Pay: Statutory bonuses, commissions, and overtime allowance.

-In-kind Remuneration: Value of house accommodation or other amenities.

-Other Payments: Remuneration under an award or settlement.

For Example

Maximum allowable allowances = 50% of Total Remuneration

50% of ₹50,000 = ₹25,000

Actual allowances paid = ₹26,000

Excess Allowance = ₹1,000 (Added back to basic + DA for statutory purposes)

Revised wages for statutory calculations = ₹14,000 + ₹1,000 = ₹15,000

Comparison Table - Pre and Post Amendment (Statutory Impact)

Cash Flow Analysis

✓ Immediate employer cash outflow increases by ₹169 per employee per month, driven by higher PF contribution and gratuity provisioning, even though total CTC remains unchanged.

✓ On an annual basis, this translates to ₹2,028 additional cash cost per employee scaling with headcount (for example 100 employees = ₹ 2,02,800 p.a.), directly impacting operating cash flows and margins.

✓ The higher wage base also results in increased future cash commitments through gratuity and bonus payouts, tightening long-term liquidity planning.

• Universal Applicability of Minimum Wages

Minimum wage provisions extend to all employments, replacing the earlier concept of scheduled employment. Wages for time work (hourly, Daily or monthly) or piece work based on skill of workers, location, Cost of living, difficulty and nature of work in case of hazardous occupations

• National Floor Wage

The Central Government may notify a uniform minimum income threshold, guiding States in fixing minimum wages.

• Payment Timelines and Compliance

Clear timelines for wage payments are prescribed, with enhanced penalties for non-compliance.

Daily basis - End of Shift

weekly basis - Last working day of the week

Fortnightly basis - Before end of second day after end of fortnight

Monthly basis – before or on seventh day of succeeding month

The wages are payable to the employee within two working days in case of his removal, dismissal, retrenchment or resignation

• Gender Neutrality and Equal Remuneration

Reinforces equal pay for equal work without discrimination on gender grounds.

2. Industrial Relations Code, 2020

To rationalize laws governing industrial relations while balancing workforce flexibility and industrial harmony.

• Revised Thresholds for Standing Orders

Mandatory standing orders apply to establishments employing 300 or more workers (earlier 100). Advisory impact: Increased operational flexibility for medium-sized enterprises.

• Layoffs, Retrenchment and Closure

Government approval requirements now apply only to establishments with 300+ workers, easing restructuring and exit processes.

• Recognition of Fixed-Term Employment

Fixed-term employees are entitled to wages and statutory benefits at par with permanent employees, including pro-rata gratuity.

• Trade Union Recognition Framework

Introduces a structured mechanism for recognition of a sole negotiating union or council, with 51% membership.

• Strikes, Lockouts and Dispute Resolution

Mandatory 14-day notice for strikes and lockouts extended across all sectors, along with time-bound dispute resolution processes.

3. Code on Social Security, 2020

To expand and strengthen social security coverage across the workforce, including emerging employment models.

• Expanded Coverage to New Workforce Categories

Formal recognition and coverage extended to gig workers, platform workers, and unorganized workers.

• Alignment of Wage Definitions

Harmonization with the Code on Wages impacts PF and ESIC contribution structures.

• AGratuity Rationalization

Fixed-term employees become eligible for gratuity on a pro-rata basis after 1 year, irrespective of minimum service tenure of 5 Years

• Social Security Funds

Provision for dedicated funds for unorganized and gig workers, funded by governments and mandatory contribution by aggregators (1-2% of Turnover)

• Digital Compliance and Registration

Mandatory digital registration for all employees through Aadhaar-based verification on a national portal (e-Shram) to ensure portable benefits

4. Occupational Safety, Health and Working Conditions Code, 2020

To ensure safe, healthy, and dignified working conditions, while simplifying registrations and inspections.

• Single Registration and Common Licensing

Establishments operating in multiple States can obtain a unified registration and license.

• Working Hours and Leave Entitlements

Standardized norms relating to working hours, 8-12 hours up to 48 hours/week; overtime-2x wages, and employees who work 180 days or more in a calendar year are entitled to 1 day of earned leave for every 20 days worked, Unavailed earned leave may generally be carried forward up to 30 days, while leave refused by the employer can be carried forward without limit

• Leave Encashment

Employees are entitled to encash earned leave upon resignation, retirement, dismissal, discharge, or death, with prescribed timelines for payment. The Code also permits encashment of leave at the end of the calendar year on the employee's request, including encashment of leave accumulated beyond the prescribed carry-forward limit, subject to the applicable rules.

• Enhanced Employer Responsibilities

Increased accountability for workplace safety, health audits, welfare facilities, and incident reporting.

• Annual Health Check-ups

Employers may be required to provide free annual health check-ups, at their own cost, for employees covered under the applicable Central/State Rules, including workers in hazardous occupations and, in certain cases, employees above the prescribed age. Organizations should maintain appropriate health records and incorporate periodic medical examinations into their occupational health compliance framework.

• Women Workforce Participation

Permits women to work across sectors and night shifts, subject to prescribed safeguards and consent.

• Inter-State Migrant and Contract Labour

Broader coverage and enhanced benefits, including journey allowances and welfare measures.

Impact on Employers and Businesses

The implementation of the Labour Codes will have multi-dimensional implications for employers, requiring both strategic and operational realignments:

➢ Increase in statutory cost due to revised wage structure

➢ Need to revisit employment contracts, HR policies, and payroll systems

➢ Greater focus on workforce classification including gig and platform workers

➢ Streamlined but closely monitored compliance and reporting requirements

➢ Potential industrial relations challenges during transition

Advisory & Compliance

For advisory and compliance firms, the Labour Codes present both challenges and opportunities. Clients will require structured guidance to navigate regulatory uncertainty, State-specific rules, and implementation timelines.

➢ Labour Code impact assessment and readiness diagnostics

➢ Wage restructuring and payroll modeling to align with wage definition

➢ Review and redrafting of employment contracts and HR policies

➢ State-wise compliance mapping and timely Implementation support

➢ Ongoing compliance management and Training in new compliance obligations

Conclusion

The New Labour Codes mark a significant shift in India’s employment law landscape. Although implementation is phased and State-driven, early preparation will be critical to ensure compliance, cost efficiency, and workforce stability. Advisory and compliance firms play a pivotal role in enabling organizations to transition smoothly and strategically.