Decoding India’s New Labour Codes

India’s four new labour codes, introduced between 2019 and 2020 and consolidating 29 earlier laws into a single framework governing wages, social security, working conditions, and industrial relations, were implemented nationwide this month. 

For the IT and GCC ecosystem, the new codes have a direct impact on compensation structures, contractor oversight, fixed-term employment, and state-wise compliance obligations. 

Earlier, the Provident Fund (PF), the Employees’ State Insurance (ESI)  and the Minimum Wages Act used different definitions, allowing employers to distribute pay across allowances to limit statutory contributions. 

A significant part of this shift is the introduction of a single, statutory definition of “wages,” replacing the fragmented interpretations under older laws.

This is intended to ensure that employees receive higher statutory benefits, calculated as a certain multiple of their wages. 

This includes stronger PF contributions, improved gratuity payouts, clearer minimum-wage protection, timely wage payments, and more predictable severance and retrenchment compensation — by preventing salary structures that dilute the wage base used for these calculations.

Under the new codes, “wages” now include basic pay, dearness allowance (DA), and retaining allowance (RA), and these components must, together, account for at least 50% of total remuneration.

If excluded allowances, such as Housing and Rental Allowances (HRA), bonuses, special allowances or reimbursements, push the non-wage portion above 50%, the excess must be added back and treated as wages. 

Legal experts, however, caution against assuming that the codes mandate employers to restructure salaries so that basic pay automatically equals 50% of remuneration. 

A note from Khaitan & Co. points out that this interpretation is inaccurate. 

Companies are not legally required to redesign salary structures. However, when calculating statutory payments such as retrenchment compensation, overtime or notice pay, the codes require that “wages” used for these calculations be treated as at least 50% of total remuneration — even if the actual basic pay is lower.

However, if companies choose to restructure salaries so that wages account for 50% of total remuneration, the higher PF contributions that follow may prompt them to reduce allowances that are not tied to basic, particularly performance-linked variable pay. 

This shift would increase social-security deductions and leave employees with a smaller take-home salary.

Neeti Sharma, CEO of TeamLease Digital, a staffing company, told AIM that in the short run, the cost to the company will increase, and they may look at newer ways to protect their margins. 

“At the same time, they will not be able to reduce compensations for existing employees, as the risk of their attrition will be high.”

AIM also reached out to Kanishka Maggon, a lawyer and a partner at Trilegal. “When it comes to social security…the EPF [Employee Provident Fund] act has not been repealed,” he stated.

This means the public is still awaiting clarity on whether PF will be calculated under the new “wage” definition prescribed in the labour codes, which would increase an employee’s social security benefits. 

However, several companies and founders expressed a positive outlook towards the new labour code changes, in statements to AIM. 

Ankit Agarwal, founder of Unstop, a talent management and hiring company, said, “As a founder, I see the implementation of the four labour codes as a much-needed update to how India manages work and workplaces.”

He stated that for years, businesses have dealt with fragmented and heavy compliance loads, but these reforms bring in a more straightforward process, clear expectations, and a more predictable environment.

Besides the basic pay alignment, the labour code also focuses on several structural changes that affect how IT and GCC employers manage their workforce. 

Sharma pointed out that “vendor and contract workforce models will face tighter vigilance as principal employers become more accountable for social security and working conditions.”

The code on social security expands coverage for contract and platform (gig) workers, making principal employers directly accountable for ensuring PF, ESI and gratuity compliance across vendor-led teams.

Fixed-term employees now become eligible for gratuity after one year of continuous service, replacing the earlier five-year requirement and increasing long-term benefit obligations for high-attrition roles.

In addition, the code on wages introduces a statutory floor wage that no state can go below. 

It extends minimum-wage and timely-payment provisions universally to 100% of India’s employees — removing earlier coverage gaps that left specific categories of employees outside formal protection. 

With regards to the transition that companies now have to make — in terms of reworking contracts, updating payroll terms, training teams and tightening the compliance, Agarwal said that founders should see it as ‘investments, and not burdens.’

“If we get this right, we’ll end up with a workforce that feels more secure and a business ecosystem that’s far more transparent and future-ready,” he added. 

The State vs. Central Confusion 

Maggon pointed towards how state governments will need to notify their rules before the framework can operate without ambiguity.

“That’s the confusion that employers are grappling with,” said Maggon, adding that the anticipation is that states are going to move fast with the rules. 

“Labour is a concurrent subject,” he stated, explaining how many operational details, such as working hours, record formats, and local inspections, still rely on individual state notifications.

He stated an example of how this plays out with working-hour requirements. Under the Occupational Safety, Health and Working Conditions (OSH) Code, 2020, the daily work limit is eight hours, but most state Shops and Establishments Acts still allow a nine-hour workday before overtime is triggered.

In a statement to AIM, Sonal Arora, country manager at GI Group Holding, highlighted the practical challenge. “Rules on floor wages, working hours and welfare provisions will continue to vary, which means organisations operating across multiple regions must stay alert to these differences.”

A report from the law firm Obhan and Associates stated that, “As of late 2025, most states had published draft rules for one or more Codes. However, not all states have finalised or notified their rules. Some states, such as West Bengal, have even lagged in releasing drafts.”

“For instance, Karnataka, Maharashtra, and Kerala have notified their respective rules under the Labour Codes, whereas Delhi has notified its rules under the Wage Code and SS Code and is yet to release rules under the IR Code and OSH Code,” stated another report from the law firm DLA Piper. 

Arora added that these Codes, while they bring clarity, may struggle with uniformity, and that companies will need flexible systems and real-time oversight to remain compliant across all locations. 

“The most effective approach is to maintain a state-wise compliance tracker and link it with geotagged employee data so that salaries and statutory obligations update automatically.”

Having said that, a more controversial aspect of the new implementation concerns the ease of layoffs. Earlier, companies with 100 employees needed prior government approval for layoffs or shutting operations, but that threshold has now been stretched to 300. 

This has also led to various protests across regions in the country. 

However, the code also states that workers with at least one year of continuous service continue to be entitled to 15 days’ average wages for every completed year of service as retrenchment compensation. 

In addition, the Code now requires employers to contribute an amount equal to 15 days’ wages into a newly created re-skilling fund for each retrenched employee.

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