The Indian Government rolled out four labour codes on 21 November 2025 replacing 29 existing central labour laws. These four consolidated codes covering wages, social security, industrial relations, and occupational safety. These changes aim to simplify compliance and improve worker protection. The existing 29 labour laws got consolidated into 4 codes:
- Code on Wages, 2019
- Industrial Relations Code, 2020
- Occupational Safety, Health and Working Conditions Code, 2020
- Code on Social Security, 2020
Some of the key changes will enhance the financial outlay for the companies with regard to employee costs such as:
- Increase in Employee Cost on account of widening of the definition of “wages” providing that the Basic salary must be equal to or more than 50% of total remuneration.
- Increased Social Security Coverage due to possible inclusion of Fixed-term employees (pro-rata gratuity)
- Changes in leave encashment & working hours will lead to standardization of leave policies and work hours for the employees.
- Enhanced compliance leading to increased technology cost and administrative costs.
It will directly impact the M&A transactions mainly due to increased cost and compliance. Measurement of additional cost on account these new Labour laws will have a direct impact on the profile & loss leading to compression of EBIDTA and the Enterprise valuations. The Buyers will now have to normalize EBITDA for labour cost changes and make labour-adjusted valuation adjustments. Further, the diligence from buyers’ side would be more stringent and focused on the labour law compliances and appropriate provisioning. Key diligence areas would include misclassification (contract vs full-time) historical wage structuring (to test 50% rule impact), contingent liabilities (gratuity, leave encashment), compliance with social security expansion, union exposure and industrial relations risk. Such diligence could lead to SPA indemnities, escrow structures or deferred consideration.
Some of the key deal structuring implications are highlighted below:
- Asset vs Share Deals – Asset deals will help to ring-fence labour liabilities if the employees are not transferred. Otherwise, employee transfer triggers continuity obligations and thereby adjustment for the labour related liabilities.
- Slump Sale & Business Transfer Agreements – In both these cases the successor employers risk increases as these mandatory benefit obligations get carried forward to the buyer.
- Transitional Service Agreements (TSAs) – Helps to mitigate these risks for the transition period and not permanently. Further, such TSAs could lead to GST leakage.
The Investors would now carry out detailed diligence and in some cases forensic diligence to assess the risks especially to make price adjustment, seek escrow arrangement, seek increased indemnifications with regard to labour law compliances and ask affirmative confirmations that no aggressive or non-compliant practices have been followed by the seller.
Key deal risks emerged on account of these new Labour Codes include:
- Financial Risks – under provisioned social security liabilities, hidden employee benefit exposures.
- Regulatory & GAAR-like Risks – aggressive structuring to minimise labour cost or misuse of contractor models.
- Competition Law Intersection – Recent developments reveal that regulators scrutinizing anti-poaching agreements or wage suppression practices to identify any malpractices followed or not.
Apart from structuring challenges, these labour codes will throw open post implementation challenges such as harmonizing compensation structures (due to enhanced social security obligations), integrating social security coverage across the workforce, etc.
In summary, there will be a paradigm shift as this is not merely a compliance reform, but it is an important determinant. It fundamentally reconfigures valuation models, deal structuring, and post-merger integration strategy. Labour is now a core financial variable in deal making rather than a formal diligence process. The deals and M & A transactions will have financial impact in the form of adjustment in the valuations, escrow arrangement, and specific indemnification on account of compliance with labour laws.
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Author; Jayesh Kariya, Leader Transaction & Business Advisory, Bhuta Shah & Co. LLP.
