Labour Codes 2025 Change Pay Structures as 50% Wage Rule Applies

Impact of the New Labour Codes: A Case Study Approach

1. The Government of India has consolidated 29 central labour laws into a simplified, unified framework by bringing into effect four Labour Codes – namely 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.

In this article, the term “Labour Codes 2025 ” refers to the four Labour Codes that came into effect on 21 Nov 2025. The implementations of the Labour Codes, 2025 represents a paradigm shift in the regulation of wages and employment relationships in India.

The real financial and compliance impact of the New Labour Codes is best understood through a practical case study.

2. Case Study: XYZ Co. Ltd. has a total workforce of approximately 500 personnel, comprising employees under various employment arrangements. Of these, approximately 280 are permanent employees, forming the organisation’s core workforce. In addition, 150 employees are engaged on Fixed Term Employment (FTE) for specific projects and time-bound assignments, and around 70 individuals work within the company premises but are engaged through external contractors or intermediaries. Although these workers contribute to the organisation’s operations, their employment relationships and statutory obligations differ depending on the nature of their engagement.

A diversified workforce highlights the varied impact of the New Labour Codes on wage restructuring and social security coverage across distinct categories of workers.

3. Impact on Permanent Employees: Permanent employees are engaged on a regular, long-term basis with full-service benefits. For permanent employees, particularly in government organisations and PSUs, the impact of the New Labour Codes is relatively limited.

By and large, the salary structure for permanent employees is already well defined and regulated, with basic pay and dearness allowance constituting a substantial portion of total remuneration. In most cases, allowances are already within the 50% ceiling prescribed under the new wage definition.

As a result, the requirement to restructure wages under the New Labour Codes does not lead to any major change in salary composition for permanent employees. Consequently, the immediate financial impact in terms of increased statutory contributions or take-home pay adjustments remains minimal for this category of employees.

4. Impact on Fixed Term Employees: Fixed-term employees are engaged for a specified period under a written contract, with the employment automatically terminating on the expiry of the contract.

Under the New Labour Codes, fixed-term employees are entitled to wages, hours of work, and statutory benefits comparable to permanent employees during the period of engagement.

In XYZ Company. Fixed Term Employees ( FTEs) constitute a significant segment of the workforce. The enforcement of the Labour Codes 2025 is likely to have far-reaching financial & Compliance implications for both FTEs and employers.

At present, FTEs are compensated through a fixed salary-cum-stipend model. With the redefinition of wages and the extension of pro-rata gratuity eligibility, a substantial shift in their compensation structure is anticipated. The impact of these changes can be better understood with an Illustration.

Illustration: Ms Preeti has been appointed as a Fixed Term Employee (FTE) in XYZ Company for a period of 2 years, with a fixed annual remuneration of Rs. 6,00,000.

The comparative table below illustrates the impact of the restructuring of wages and the applicability of pro-rata gratuity under the Labour Codes, 2025, on her remuneration and statutory benefits.

Existing Remuneration Structure ( Before Labour Codes 2025)

Revised Remuneration Structure ( After Labour Codes 2025)

5. Restructuring of Wages: Under the new Labour Codes, wages are required to be structured such that basic pay and dearness allowance together constitute at least 50% of total remuneration.

6. Gratuity Coverage: The Labour Codes extend gratuity coverage to Fixed Term Employees on a pro-rata basis upon completion of one year of continuous service.

7. Computation of Gratuity: For the purpose of explaining the concept of pro-rata gratuity, it is assumed that Ms Preeti completes one year and three months (15 months) of continuous service during the tenure of her fixed-term engagement. The Gratuity liability is determined through the following two steps:-

Step 1: Convert the service period into years

15 months = 1.25 years

Step 2 : Apply Gratuity Formula

15/26 x Last Drawn Monthly Wages xPeriod of service

15/26 x 25,000 x 1.25 = Rs. 18,028

Note: The above calculation is illustrative. Actual gratuity computation would depend on the final notified rules and clarifications issued by the Government

8. Impact Analysis: Fixed Term Employees (FTEs) : The implementation of the Labour Codes 2025 brings a structural shift in the employment experience of Fixed Term Employees. With the redefinition of wages, FTEs move away from a consolidated pay model to a wage-linked compensation structure, ensuring parity with permanent employees in terms of statutory benefits.

Eligibility for pro rata gratuity after completion of one year of service significantly enhances income security for FTEs, particularly in project-based or time-bound engagements. A higher wage base also results in increased Provident Fund contributions, strengthening long-term savings and social security.

However, this transition may lead to a moderate reduction in monthly take-home pay due to higher statutory deductions, which FTEs may be sensitised to through proper communication.

Overall, the Labour Codes improve financial stability, dignity of employment, and benefit coverage for the FTE workforce.

10. Impact on Employer: From the employer’s perspective, the Labour Codes 2025 necessitate a reassessment of the cost structure associated with Fixed Term Employment. In XYZ Company, where Fixed Term Employees constitute a significant portion of the workforce, Wage restructuring in line with the new definition increases the statutory base, resulting in higher liability towards Provident Fund & Gratuity.

The introduction of pro-rata gratuity requires employers to create gratuity provisioning even for shorter-tenure employees, which was not factored into manpower budgeting earlier.

Organisations with a sizable FTE workforce may experience an increase in per-employee cost and need to revisit project costing, tender pricing and workforce deployment strategies.

11. Impact on Workforce Engaged Through Intermediaries/ Contractors In XYZCompany, a considerable segment of the workforce is deployed through intermediaries, vendors or contractors. While the immediate responsibility for statutory compliance for such workers rests with the contractor, the ultimate accountability under the Labour Codes, 2025, lies with the Principal Employer, i.e., XYZ Company.

The Labour Codes mandate enhanced compliance with respect to wage structures, social security contributions, and conditions of employment for contract labour. As a result, XYZ Company will be required to review existing contractual arrangements, strengthen the monitoring mechanism and ensure that contractors adhere strictly to the revised statutory provisions.

Non-compliance by the contractor may expose the principal Employer to regulatory action, financial liability and reputation risk.

Further, the redefinition of wages and the expansion of social security coverage are expected to increase the statutory costs borne by contractors. In practical terms, the additional financial burden is likely to be factored into contract pricing and passed on to XYZ Company during contract renewals and negotiations. Consequently, existing service contracts may require revisions and renegotiation to account for increased wage and compliance costs.

11. Conclusion and Way Forward Although the labour Codes have been brought into force by the Central Government with effect from 21 Nov 2025, the detailed rules and modalities of implementation are still awaited. State Governments are required to submit their suggestions within 45 days, after which state-specific rules will be notified.

In the interim, it is essential for the HR & Finance Teams of XYZ Company to adopt a proactive and coordinated approach, with focused attention on wage restructuring, social security obligations, gratuity and contract labour compliance, to ensure readiness and smooth implementation once the final rules come into effect.

Disclaimer: The article is for educational purposes only.

The author may be approached at caanitabhadra@gmail.com