Author Note
Two days ago, my client came to me and asked, “Sir, how will the new labour code affect me and my employees and do I need to pay gratuity to all my employees even if they leave in two years?”
He is an entrepreneur and often delays salaries due to cash flow problems. Hence, to give him advisory, I started going through this Code. I hope my analysis will help you. Happy reading!
Introduction
On 21 November 2025, the Ministry of Labour & Employment notified the commencement of major provisions of the four Codes, namely the Industrial Relations Code, 2020, Occupational Safety, Health & Working Conditions (OSHWC) Code, 2020, the Code on Social Security, 2020 and the Code on Wages, 2019
, which tend to replace and consolidate 29 central statutes. The notifications and gazette entries will tell which sections are in force and the appointed dates.
Now, let’s discuss these points with benefits and policy intent in a practical manner.
First, the simplification and single-window compliance means this consolidation reduces fragmentation, i.e., employers who previously dealt with multiple statutes and authorities will now have one single code per theme. This will help them with more consistent interpretation, maintenance of unified registers, and maybe we can come across digital filing in the realm of labour codes in the near future. This will definitely make the process easier for larger employers and multi-state establishments.
Secondly, the single statement of wages/benefits, one set of registers, and the single concept of “wages” simplify payroll design and statutory reconciliations.
The expansion of social security to cover gig and platform workers is a good step, as it broadens the scope of ESIC and EPFO-style protection and creates a system where benefits can move with the worker, even if they shift platforms or jobs. This also opens the door for creating sector-specific social security funds, such as dedicated funds for delivery partners.
For businesses, it provides a clear framework to develop compliant and structured contracting models instead of relying on ad-hoc or informal arrangements. This will ultimately support both workers’ security and employers’ regulatory certainty.
The mandatory appointment letters, annual health checks, separate washrooms for gender identities, defined overtime at double rates, and an 8-hour daily ceiling (with specified riders) are all formal safeguards that will help under-protected categories (women, migrants, contract workers).
As per me, these are the tangible worker protections given by these Codes.
Flexibility with Safeguards
Raising thresholds relating to standing orders or prior government permission for layoffs is intended to balance employer flexibility with procedural safeguards (works committees, grievance committees, retraining funds). If implemented well, this should improve ease of doing business without wholly removing worker remedies.
A few points that I found may be subject to litigation
While the aim of implementing this policy is sound, several drafting choices and procedural gaps create practical risk and legal uncertainty. For example, in the Code, there are conflicting and ambiguous definitions of “wages.” Also, these Codes attempt to create a problem in salary structuring by adding back certain allowances when they exceed 50% of basic + DA + retaining allowance.
However, the “50%” test is mechanical and may yield arbitrary results by giving different treatment across payroll components. Also, multiple sections across Codes use similar phrases but with differing cross-references (Code on Wages vs Social Security), risking inconsistent base calculations for PF, ESI, gratuity, and bonus, and so on.
Confused? Let’s discuss it with an illustration:
Dipanshu is my employee at STS Ventures, on a salary. He has a basic salary of Rs. 30,000, DA of Rs. 3,000, and other allowances of Rs. 20,000.
Here, his basic + dearness allowance is Rs. 33,000, 50% of which is Rs. 16,500.
As the allowances of Dipanshu are Rs. 20,000, which exceed 50% by Rs. 3,500 (i.e., 20k – 16.5k), Rs. 3,500 will be treated as “wages.”
This will result in increasing the base of PF, ESIC, and/or bonus by Rs. 3,500, which will increase my cost as the employer and also increase the employee’s contribution (unless the government prescribes otherwise).
This sort of computation shall be automated by every payroll team and documented. Now I am waiting for the official notification regarding this. Maybe the government exempts it; maybe it will really increase the CTC.
Practically speaking, based on the illustration above, we may conclude that payroll re-engineering projects will be required, and disputes, litigations, and retrospective claims may arise over which allowances are “allowances” vs “wages,” and also cases regarding valuation of in-kind remuneration, which is capped at 15%.
The Social Security Code’s “remuneration in kind up to 15% will be part of wages” is, in my view, poorly worded. It is uncertain whether “does not exceed” or “exceeds” was intended. Such wording errors may create interpretation issues and enforcement arbitrariness. Hence, I am waiting for official clarification in this matter.
The Code on Wages expands “establishment” to any place where any occupation is carried on, like CA firms. We all know the case where a girl in one of the Big 4 lost her life due to work pressure. Maybe the intent of the law is to cover these establishments, but it may potentially bring very small operations under these complex wage rules. I agree, inclusion broadens protection, but it also imposes compliance burdens on micro employers and may be administratively impractical for widespread, low-value work (like self-employed contractors). So I expect sectoral exemptions or implementation notifications in this regard.
Although replacing various offences with compounding schemes may reduce criminal prosecutions, on the other hand, it may increase administrative discretion in sanction amounts. Along with that, the combined inspector and facilitator power may risk ad-hoc enforcement unless clear compounding scales and appeal mechanisms are notified. I will discuss this later in the article.
Employers should be prepared for possible sanction notices from the authorities. In many cases, they may also need to negotiate for compounding of offences to settle the matter without prolonged litigation. However, trade unions may oppose compounding because they feel it reduces the seriousness of offences and weakens deterrence.
Changes in Thresholds
Under the new Code, contract labour rules apply only when an establishment has 50 or more contract workers. This gives relief to many businesses that use smaller numbers of contract workers. However, the Code does not clearly address the earlier distinction between prohibited core activities and permissible routine outsourcing, which may create practical confusion for employers.
The test for what counts as “core” or “ordinarily outsourced” is factual and may generate disputes.
Illustration:
A construction site uses 45 contract workers most of the year but peaks at 55 workers for two months. Under the new Code, contract labour provisions would apply (since the threshold is counted on any day in the preceding 12 months), triggering obligations (registrations, welfare). Employers must therefore monitor month-to-month counts and register in advance.
51% Recognition Rule and Strike Definition
I believe when a union with 51% membership is recognised as the sole negotiating union, it becomes easier for one union to control all negotiations. But this may sideline smaller unions and change the balance of negotiations within the workplace. Further, the Code now treats “mass casual leave” of 50% or more workers on the same day as a strike. This means a tactic that was earlier in a grey area may now attract penalties. Such tightening may lead to legal challenges on constitutional grounds, especially the rights to association and peaceful assembly, and may result in more litigation.
Even though expanding ESIC and EPFO coverage is a positive step, implementing it on the ground will be challenging. For smooth operations, the authorities need stronger district-level offices, better systems for handling claims, and reliable technology for portability of benefits. If these upgrades are not made, it can lead to delayed claims, disputes over contributions, and a build-up of compliance issues, ultimately hurting the workers whom the Codes are meant to support.
Gratuity Should Be Paid Even If One Year of Service Is Completed?
I came across many Instagram posts and fin-influencers claiming this, but it’s a wrong interpretation. Under the new Labour Code, fixed-term employees are also made eligible for gratuity, but only if they complete the full tenure for which they were appointed.
Let’s discuss it with an illustration:
If I hire Jyoti as my employee on a two-year fixed-term contract and she actually works for the full 2 years, she will become eligible for gratuity on a pro-rata basis even though she has not completed the 5-year period. However, if Jyoti leaves after 1 year, she won’t be eligible because she has not completed the fixed tenure as agreed in the contract.
Many people misunderstand this and assume gratuity becomes payable after just 1 year, but the rule is clear: gratuity applies only when the fixed tenure is fully completed. That means if someone is appointed on a 1-year fixed-term contract and they complete that full 1 year, they would be eligible for pro-rata gratuity for that 1 year.
In this case, for regular employees, the limit of 5 years will apply as per the existing law.
Now, What Did I Advise My Client?
First of all, I told him that under the new Labour Codes, timely salary payment is no longer optional. Delays will attract stricter penalties and may even lead to sanction notices. I guided him to plan cash flows more carefully and ensure wages are released within the prescribed timelines.
I also asked him to review his payroll immediately by recomputing the wages for PF, ESIC, bonus, and gratuity using the new 50% test and documenting the methodology and board approvals. Prepare pro-forma salary structures for new hires, and update contracts & appointment letters, with proper contract labour mapping. If there are more than 50 contract workers at any time in 12 months, then he is required to re-design outsourcing to mitigate unexpected coverage.
I also told him to conduct an Industrial Relations audit, meaning to check union membership rolls, works committee composition, and grievance redressal mechanisms, and plan communications if the 51% recognition threshold might trigger bargaining changes.
For safety & health compliance, I asked him to implement mandatory annual health checks by tying up with hospitals, safety audits, separate washroom facilities, and written overtime consent mechanisms. Also, be prepared for inspections by giving adequate training to HR and legal teams for “inspector-cum-facilitator” interactions and compounding negotiations, and keep records in order.
Legislative & Administrative Angle
The Government must issue an authoritative, consolidated schedule or a central notification that sets out exactly how each wage-linked statute is to compute its base (PF, ESI, gratuity, and bonus). This will avoid contradictory readings and litigation. Ideally, illustrative numeric examples should be included in the notification.
Secondly, as discussed above, a transparent schedule should be created relating to compounding fees tied to turnover or wage base, with a clear appellate route (administrative and judicial). This reduces discretion and bribery risk.
For getting IT ready and achieving manpower benchmarks, transition windows should be provided for small employers along with phased implementation. This will avoid claim backlogs and employer panic.
Also, sectoral rules or a non-exhaustive list with examples for industries (manufacturing, IT, logistics, construction) should be issued to clarify when contract labour is prohibited. Permit industry associations and trade unions to be heard before finalising.
Conclusion
The four Labour Codes represent a major reform and can bring long-term advantages—more formal employment, wider social security, clearer rules in many areas, and recognition of new forms of work. But there are still gaps in drafting, high administrative requirements, and several new compliance risks. These may create practical problems and disputes in the initial months of implementation. To avoid disruption, the Government will need to issue timely clarifications and consider a phased rollout. At the same time, employers should strengthen their compliance systems and take guidance from specialists like us. This balanced approach will help the Codes achieve their objectives without hurting businesses or workers.
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Author can be contacted at aman.rajput@mail.ca.in
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