The New Labour Codes: Navigating Salary Structure Design

Executive Summary The four Labour Codes took effect on 21 November 2025 and for most organisations, existing salary structures are already non-compliant.

The 50% proviso applies to wages, not basic salary . A structure with basic at 50% may already carry a wage base of 70–80%, with cost implications most organisations have not yet quantified.

Special allowance is wages. Renaming it will not change that; the only viable restructuring path is replacing it with allowances that have a genuine, demonstrable link to the nature of the role.

The biggest financial impact for most organisations is on gratuity provisioning . Auditors are pushing hard and the window for orderly restructuring is narrowing.

Discretionary annual bonuses should be kept outside the remit of remuneration entirely ; contractual or guaranteed variable pay is wages and the distinction determines severance liability and statutory computation.

The defensibility of any allowance depends on the substance of what the organisation actually does, not over nomenclature or what it calls the component.

. India's four Labour Codes, which gestated for over a decade, are now an operational reality. The Code on Wages took effect on 21 November 2025 and with it came a redefinition of 'wages' that fundamentally unsettles the allowance-heavy salary architecture that most Indian organisations have spent years optimising. For leadership teams, the challenge is to manage diagnosis and remediation under audit pressure, against a compliance clock that is already running. Kanishka Maggon, Partner in the Labour and Employment practice at Trilegal, decoded the practical architecture of compliant salary structuring, examining where existing structures break down, what the law requires and how organisations can sequence redesign without creating disruption or perceived reward regression.

The New Definition of Wages The government's intent in introducing the new definition of wages was narrow and specific: to prevent the decades-old practice, common in manufacturing and certain other sectors, of keeping basic salary at 10–25% of total compensation while loading the balance into allowances to avoid provident fund and gratuity contributions. The response was a four-part definition that is deliberately broad in its inclusions, followed by a list of express exclusions and anchored by a deeming provision (the 50% proviso) that ensures wages cannot fall below half of total remuneration regardless of how a structure is configured.

According to the new definition, the substantive part captures all guaranteed remuneration, including allowances, as wages. Three components are expressly included: basic pay, dearness allowance and retaining allowance. Express exclusions cover HRA, conveyance, overtime and others, which an employer can legitimately rely upon to reduce the wage base. The deeming provision then operates as a floor: if the combined effect of exclusions pushes wages below 50%, the excess of exclusions is pulled back into wages until the 50% threshold is met. The result is a definition where the ceiling of wages is determined by the organisation's actual salary architecture instead of a fixed statutory percentage.

A common misunderstanding is that basic salary at 50% means compliance. It does not. Basic salary is one component of wages. Special allowance, the residuary amount that fills the gap in most Indian salary structures, is also wages, because it is guaranteed remuneration that falls within no express exclusion. An organisation with basic at 40%, HRA at 20% and special allowance at 40% will find that its wages are not 40% but 80%. The 50% proviso is a floor, not a ceiling, and it only becomes relevant when exclusions are large enough to push wages below it.

. Special Allowance: The Structural Problem Special allowance is the point at which most Indian salary structures fail the new definition. It is, by design, a residuary amount of the balancing figure that makes the total compensation add up to 100%. It sits within no express exclusion, it has no demonstrable link to any specific employment-related expense, and it is guaranteed. Under the new definition, it counts as wages. This conclusion applies regardless of what the allowance is called. Auditors and regulators look at substance, not nomenclature, and thus a grooming allowance, a wellness allowance or a professional development allowance that functions as a guaranteed monthly payment to all employees is not meaningfully different from the special allowance it replaces.

The restructuring path that the law permits, which most organisations are now navigating, is to reduce or eliminate the special allowance by introducing components that fall within express exclusions and that have a genuine, role-specific rationale. The most commonly deployed options are:

HRA - an express exclusion, with no statutory limit under the Labour Codes

Conveyance allowance- an express exclusion, subject to the constraint that it cannot be claimed where the employer already provides free transport

Remote work allowance that can be argued as defraying the cost of working from home.

A telephone allowance is viable for roles where employees use personal devices for work, provided the quantum is reasonable.

Each of these requires a policy that documents the rationale. A mere name change on a payslip without an underlying operational basis will not survive scrutiny. The conservative approach being taken by a number of organisations is to restructure gradually, preferably through an increment cycle where the total package is also changing, so that the shift from special allowance to other components cannot be characterised as a sham reclassification.

An organisation that moved Rs 30,000 from 'special allowance' to 'HRA' on a Monday, with nothing else changing, will find this practice harder to defend than one that increased the HRA as part of a broader compensation review. Some organisations are targeting wages at 55–60% rather than the statutory 50%, on the premise that being demonstrably above the floor reduces the likelihood of regulatory scrutiny.

. The Cost Impact: Gratuity, PF and Statutory Bonus The financial consequences of the new definition are not uniform; understanding where the impact falls is essential to prioritising the remediation effort. For most non-manufacturing organisations, the dominant cost impact is on gratuity. Provident fund contributions are currently unaffected for workforces earning above the Rs 15,000 statutory ceiling. (Contributions above that threshold are discretionary and most organisations are already contributing on a fixed basis.) That protection may not last, however, as a Supreme Court judgment has directed the government to reconsider the ceiling and expectations are that it will rise significantly, bringing a larger portion of the wage base into mandatory PF computation.

ESI eligibility has also changed materially. Where eligibility was previously determined on gross salary, it is now based on wages. Employees who were above the Rs 21,000 ESI threshold on gross may now fall below it on wages, bringing more employees into coverage and increasing employer contribution obligations. Similarly, statutory bonus eligibility has shifted: where the old law used gross, the new definition uses wages and the eligibility ceiling of Rs 21,000 per month now applies to wages rather than gross compensation.

Gratuity is a key pressure point because it is calculated on last drawn wages, and because provisioning requirements are immediate. Auditors are requiring organisations to restate provisions on the basis of the new wage definition – and those provisions will move significantly, depending on how allowance-heavy the existing structure is. The cash impact is deferred and materialises on exit rather than on a monthly basis. The P&L impact, however, is immediate, and for organisations with long-tenured workforces, the adjustment can be substantial. Since restructuring will bring wages closer to 50% through the next increment cycle, some organisations are taking the view that this year's provisions will be higher than the steady-state number and are accepting the near-term provisioning hit in exchange for a lower ongoing liability.

For employees who left the organisation after 21 November 2025 but before the salary restructuring was implemented, the technical position is that gratuity should have been calculated on the new wage definition from the date of effect. In practice, most organisations are not taking that position; the more common approach is to calculate arrears based on the restructured salary and pay interest on the shortfall. While a small minority of organisations have taken the technically correct position, the majority seem to be making a risk-based commercial call that the probability of a retrospective claim is manageable.

. Variable Pay, Bonuses and the Discretionary Distinction Classifications of variable pay carry greater risk than most organisations have priced in. The law draws a clear line between guaranteed variable pay, where payment is triggered on meeting a condition, and truly discretionary pay, where the employer retains full control over quantum, timing and whether to pay. The former is wages; the latter can be kept outside the 50% wage base, provided that discretion is genuine in both contract wording and actual practice. An employer that has paid a particular percentage every year for a decade will struggle to argue discretion before a tribunal, regardless of what the contract says.

Sign-on bonuses, referral bonuses and retention payments sit outside remuneration, but provided they are genuinely non-recurring and non-contractual. Stock compensation is generally safe, but contracts should not express it as a guaranteed component of the total package, since doing so pulls it into remuneration in kind.

. The Compliance Imperative The Labour Codes have not introduced a new set of rules so much as they have removed ambiguities that organisations had learned to exploit. The allowance-heavy salary architecture that most Indian firms spent years optimising was already legally vulnerable. The new definition has simply closed the gap between the technical position and the practical one. What the Codes require is salary architecture that reflects the actual nature of the employment relationship. That is a higher bar than compliance and for most organisations, it is also a more useful one.