The Four Labour Codes in Force: Where Employers Must Restructure First

India's labour law was, for decades, a patchwork of central statutes enacted between 1923 and 2008, overlaid by State amendments and rules. 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 were passed to consolidate that framework. After a long pause, the Ministry of Labour and Employment brought the Codes into force on 21 November 2025, and the central rules under all four Codes followed in May 2026.

Labour is a concurrent subject, so the practical position also depends on rules framed by each State. This paper focuses on the structural changes that apply across the board and that employers should address first.

1. The uniform definition of 'wages'

The single most consequential change for payroll is the common definition of wages in the Code on Wages, adopted across the other Codes. Wages include basic pay, dearness allowance and retaining allowance, and exclude specified components such as house rent allowance, conveyance, overtime, commissions and the employer's contribution to provident fund.

The critical rule is the proviso: if the excluded components together exceed fifty per cent of total remuneration, the excess is added back and treated as wages. Many Indian salary structures keep basic pay deliberately low and route the balance through allowances. Under the Codes, that structure no longer reduces the base for gratuity, and it may increase provident fund and other contributions computed on wages.

Employers should model the impact on each pay grade before the next revision cycle. The change can affect take-home pay as well as employer cost, and that needs careful communication.

2. Fixed-term employment and gratuity

The Codes recognise fixed-term employment across all sectors. A fixed-term employee must receive the same hours, wages, allowances and benefits as a permanent employee doing similar work. Importantly, the Code on Social Security makes a fixed-term employee eligible for gratuity on a pro rata basis after one year of continuous service, rather than the five years generally required.

Fixed-term contracts give flexibility, but they are not a route to avoid parity. Organisations using them should review contract templates and compensation bands to ensure equivalence with comparable permanent roles.

3. Retrenchment, closure and standing orders

Under the Industrial Relations Code, prior government permission for lay-off, retrenchment and closure is required in industrial establishments with three hundred or more workers, up from one hundred under the Industrial Disputes Act, 1947. The threshold for certified standing orders is also three hundred. States may modify the threshold by notification.

The Code also introduces a worker re-skilling fund. An employer that retrenches a worker must contribute an amount equal to fifteen days' last drawn wages to the fund, in addition to retrenchment compensation.

4. Strikes and dispute resolution

Notice requirements for strikes and lock-outs, earlier confined largely to public utility services, now extend to all industrial establishments. A strike cannot be held without notice within the prescribed period and during pendency of conciliation or tribunal proceedings. The Code also provides for a negotiating union or council and for two-member industrial tribunals. Employers with unionised workforces should revisit their grievance and negotiation framework in light of these changes.

5. Gig and platform workers

The Code on Social Security recognises gig workers and platform workers for the first time and contemplates social security schemes for them. Aggregators may be required to contribute between one and two per cent of annual turnover towards these schemes, subject to a cap of five per cent of the amount paid or payable to such workers. Businesses that engage delivery partners, drivers or freelancers through digital platforms should track the schemes as they are notified and assess whether they fall within the definition of an aggregator.

6. Working conditions and compliance

• Appointment letters must be issued to every employee, a simple obligation that many establishments did not previously meet consistently.

• Women may be employed in all establishments and at night, subject to their consent and to conditions on safety, holidays and working hours that the appropriate government may prescribe.

• Registrations, returns and registers are being consolidated, with a move towards single registration and electronic filing.

• Inspectors are re-cast as inspector-cum-facilitators, and several first offences may be compounded, but penalties for repeat contraventions are higher.

A practical sequence for employers

1. Run a wage-structure diagnostic against the fifty per cent rule and quantify the effect on gratuity, provident fund and leave encashment.

2. Recompute gratuity provisions in the books, including for fixed-term staff who now qualify after one year.

3. Review standing orders, HR policies and appointment letter templates against the Codes and the rules of each State where you operate.

4. Map contract labour and platform-based engagements, since the definitions of contractor, aggregator and principal employer have changed.

5. Update the compliance calendar for consolidated registrations and returns, and check which old registrations need to be migrated.

Conclusion

The Labour Codes simplify the statute book, but they do not simplify the work for employers in the first year. The wage definition alone can alter cost structures across an organisation, and the State-by-State rules add a further layer. Employers that treat the transition as a structured project, beginning with payroll and gratuity, will be far better placed than those that wait for inspections or disputes to reveal the gaps.