India Labour Codes Implementation: Key Changes & Employer Impact

In a landmark regulatory consolidation, India formally activated the Four Labour Codes (mentioned below) on November 21, 2025 replacing a patchwork of 29 central labour laws, some dating back to the pre-independence era, with a unified compliance architecture designed to simplify employer obligations while simultaneously expanding the floor of worker protections across the organized and unorganized sectors

• Code on Wages, 2019
• Code on Social Security, 2020
• Industrial Relations Code, 2020
• Occupational Safety, Health and Working Conditions Code, 2020 (OSH & WC) Code, 2020

Below are the key compliance requirements under each of the four codes including the clarity provided through FAQs released on March 16, 2026 and summary of key action items are as follows:

Part 1: Changes That Directly Impact Payroll

1.1 Unified Definition of “Wages”

This is the single most consequential change for payroll. All four Codes now use a standardised definition of “wages” defined in the Code on Wages and the Code on Social Security. The new definition came into effect on November 21, 2025.

What “Wages” now means:

•     Basic Pay + Dearness Allowance + Retaining Allowance

What is excluded from “Wages”:

•     HRA, conveyance allowance, overtime allowance, house accommodation, employer PF/pension contributions, statutory bonus, gratuity, retrenchment compensation, commissions, ESOPs, travel concessions, and other specified items listed under the Code

The 50% Cap (Critical):

If the total of excluded components exceeds 50% of total remuneration, the excess must be added back to the wage base. This directly affects the calculation of PF, ESI, gratuity, bonus, and overtime.

Further MoLE FAQs have clarified on the definition of what is included and excluded in the wages calculation for 50% criteria:

Included

• Overtime allowance
• Employer PF/pension contributions
• Statutory bonus
• Remuneration in kind (food coupons, ration items, mobile recharge etc.)

Not Included:

• Gratuity, ESI, and other retirement benefits
• Annual performance-based incentives

Further, it is clarified that the definition of “wages” is distinct from “minimum wages”,  minimum wages are statutory and fixed by the appropriate government; wages are per the terms of employment

1.2 Gratuity – New Rules and Retrospectivity

Key changes including clarifications provided in FAQs:

• Fixed-term employees (FTEs) are now eligible for gratuity after 1 year of continuous service (down from 5 years under the old Payment of Gratuity Act)
• FTE gratuity applies only to employees directly engaged by the employer, not contract labour through contractors
• For contract labour, the contractor (not the principal employer) bears the gratuity liability, payable after 5 years continuous service
• Gratuity is calculated on the revised definition of “wages” effective November 21, 2025, this has been explicitly confirmed by MoLE
• Gratuity for the entire service period (including pre-November 2025 service) is calculated based on wages last drawn at the time of exit, under the new Code, it is not split between old and new regimes
• Components not specified under specific section of the Code on Social Security are excluded from gratuity calculation

Gratuity Calculation:

The standard calculation is 15 days’ wages (or a number notified by the Central Government) for every completed year of service, or part thereof exceeding six months, based on the rate of wages last drawn.

Special Calculation Cases:

1.3 ESI Coverage –  New Wage Definition, Same Ceiling

• ESI contribution rates remain at 0.75% (employee) and 3.25% (employer)
• The wage ceiling for ESI coverage remains ₹21,000 per month
• However, from November 21, 2025, the ₹21,000 threshold is now applied to “wages” as defined under the Code on Social Security (Basic + DA + Retaining Allowance) rather than gross salary
• ESIC coverage is now pan-India, the old “notified areas” restriction has been removed
• Establishments with even one employee in hazardous processes must mandatorily provide ESI coverage
• Establishments with fewer than 10 employees may voluntarily opt in with mutual consent

1.4 EPF – Continuity with Expanded Scope

• EPF provisions continue under the Code on Social Security, 2020
• EPF applies to all establishments employing 20 or more employees, the earlier “scheduled employments” restriction under the EPF Act has been removed
• Employee PF contribution must equal the employer’s contribution; if an employee opts to contribute more than 10%, the employer is not required to match beyond the prescribed share
• EPF inquiry and recovery proceedings now have a 5-year time limit, to be completed within 2 years (extendable by 1 year)
• Suo-moto reopening of EPF cases has been abolished
• EPF appeal deposit reduced from 40-70% to 25% of the assessed amount
• The EPF wage ceiling remains ₹15,000/month (unchanged since September 2014); a revision to ₹21,000 or ₹25,000 is under active government consideration but has not been gazetted

1.5 Overtime – Wider Eligibility

• All employees whose minimum rate of wages is fixed under the Code on Wages are eligible for overtime, this extends beyond just “workers” to include employees more broadly
• Overtime is payable at twice the normal rate for work beyond 8 hours/day or 48 hours/week
• Overtime is allowed only with the worker’s consent

1.6 Leave and Leave Encashment

• Workers can carry forward up to 30 days of leave to the succeeding calendar year
• Leave applied for and refused by the employer can be carried forward without any limit
• There is no prescribed maximum limit for leave encashment under the OSH&WC Code
• At separation, the worker is entitled to encash all accumulated leave to their credit
• Leave provisions apply to workers and supervisors earning up to ₹18,000/month
• Where the Code and State law differ on leave accumulation, the Code prevails but the employee is entitled to State law benefits if more favourable

1.7 Minimum Wages – Universal Coverage

• Minimum wage is now a statutory right for all workers across organized and unorganized sectors, not limited to scheduled employments as before
• A National Floor Wage will be set by the Central Government based on minimum living standards, no state can fix minimum wages below this level.
• Wages must be paid within the prescribed wage period (daily, weekly, fortnightly, or monthly, no wage period exceeding one month)

1.8 Payments due on leaving employment:

Full and final settlement must be completed within 2 working days of exit

Further, the Industrial Relations Code, 2020, sets out rules for employer obligations during worker layoff and retrenchment.

For layoff, employers must pay compensation equal to 50% of the worker’s basic wages and dearness allowance.

For retrenchment, employers must give at least one month’s notice and provide compensation calculated at 15 days’ average pay for every completed year of continuous service.

Additionally, employers must contribute an amount equal to 15 days’ wages per retrenched worker to the Workers’ Re-Skilling Fund..

1.9 Timely Payment of Wages

• Provisions for timely payment and prevention of unauthorized deductions now apply to all employees with no wage ceiling restriction
• This extends protection to white-collar employees who were previously outside the scope of the Payment of Wages Act (which had a ₹24,000 wage ceiling)

Part 2: Structural and Compliance Changes

2.1 Mandatory Appointment Letters

All workers must be issued appointment letters specifying designation, wages, and social security entitlements. As per the draft Central Rules published December 30, 2025, appointment letters must be issued within 3 months. This formalises employment relationships across the board.

2.2 Fixed-Term Employment

• Fixed-term employees (FTE) are entitled to all benefits at par with permanent employees, including leave, medical benefits, and social security
• Equal wages as permanent staff for the same or similar work
• Gratuity eligibility after 1 year (not 5 years)
• FTE covers only direct employees of the employer, not contract labour engaged through contractors

2.3 Gig and Platform Workers

• “Gig work,” “Platform work,” and “Aggregators” have been defined in law for the first time
• Aggregators must contribute 1–2% of annual turnover, capped at 5% of amounts paid/payable to gig and platform workers
• This contribution is notified only by the Central Government, states cannot separately levy

Aadhaar-linked Universal Account Number for portable welfare benefits across states

2.4 Women in the Workforce

• Women are permitted to work night shifts across all establishments, subject to consent and mandatory safety measures
• Equal pay for equal work is mandatory; gender discrimination explicitly prohibited, including against transgender persons
• Mandatory women’s representation in grievance redressal committees
• Parents-in-law added to the family definition for female employees, expanding dependent coverage
• Crèche facility must be provided irrespective of the gender composition of the workforce

2.5 Contract Labour

• Contract labour provisions apply to establishments employing 50 or more contract workers (raised from 20)
• All-India licence valid for 5 years (replacing work-order-based licensing)
• Principal employer must provide welfare facilities (health, safety measures)
• If the contractor fails to pay wages, the principal employer is liable
• Gratuity liability for contract workers rests with the contractor

2.6 Inter-State Migrant Workers

• Definition expanded to cover workers employed directly, through contractors, or who migrate on their own
• Employers must declare the number of inter-state migrant workers
• Benefits include annual travel allowance and portability of public distribution system and social security benefits

2.7 Industrial Relations

• Lay-off/retrenchment/closure approval threshold raised from 100 to 300 workers; states may enhance further
• Mandatory 14-day notice for strikes and lockouts across all establishments
• Work-from-home permitted in service sectors with mutual consent
• Re-skilling Fund: Employers contribute 15 days’ wages per retrenched worker, credited within 45 days

2.8 Occupational Safety and Health

• Free annual health check-ups mandatory for all workers above 40 years
• Safety committees mandatory in establishments with 500+ workers
• Working hours capped at 8 hours/day and 48 hours/week; overtime at twice the normal rate with worker consent

2.9 Enforcement — Inspector-cum-Facilitator Model

• The traditional Inspector role is replaced by Inspector-cum-Facilitator
• Web-based, algorithm-driven, randomized inspections replace discretionary visits
• Employers receive a mandatory 30-day notice to rectify compliance gaps before legal action

All records, registers, and returns must be maintained electronically

While the four Labour Codes have been formally enacted and are legally in force from November 21, 2025, it is important to note the Central Rules were published on December 30, 2025 for public consultation, but as of March 30, 2026, these have not been formally notified.

At the state level, only Gujarat has finalized rules under all four Codes, while most states remain at the draft or pre-publication stage.

During this transition period, the Ministry of Labour and Employment (MoLE) has confirmed (via the December 30, 2025 FAQs) that existing rules under the repealed Acts will continue to apply to the extent they do not conflict with the Codes

For employers, this means that the substantive provisions, the wage definition, the gratuity calculation, the ESI wage definition, the overtime rules are already applicable and must be complied with now, while the procedural and administrative aspects should follow the existing processes until the new rules are published.

Please contact your Mercans’ services delivery team for any additional information regarding the implications of the above change.

Mercans Recommends

View PDF

India – Labour codes Implementation

Size

1.71 MB