The New Labour Codes: What Organisations Need to Know

Executive Summary • Definitions, including that of wages, have been made more consistent and uniform , altering how PF, gratuity, bonus and retrenchment costs are calculated.

• More roles have been brought under statutory protection .

• State-level adoption is so far uneven, creating a dual-regime transition period.

• Contractor engagement will face sharper scrutiny, especially for core functions.

• Working hours, overtime and leave rules have been united, but vary across states .

• IR oversight has increased , with stricter rules on unions, standing orders and disputes.

. With the four long-delayed Labour Codes coming into force, India’s employment regulation landscape is being fundamentally redrawn, creating new concerns – and opportunities – for businesses. At a recent joint session of the India CEO, CFO, CHRO, CMO and Policy Forums, Rashmi Pradeep offered a clear, practitioner-led view of how these Codes alter wage structures, workforce classifications, compliance obligations and state-centre dynamics. The conversation unpacked the practical implications for cost models, contractor management, documentation and governance, and examined what organisations must prepare for as the regulatory environment transitions from fragmented legacy laws to a more structured, uniform and scrutiny-heavy regime.

. Wages & Compensation Structures What has Changed

• A single national definition of ‘wages’ now applies across laws.

• Exclusions from wages are explicitly listed and capped at 50% of total remuneration.

• Any excess exclusion needs to be added back into wages, increasing statutory bases.

• PF, gratuity, statutory bonus, leave encashment and retrenchment compensation will now rely on a common definition of wages.

• Senior management may fall within statutory wage rules where duties place them inside the definition.

Uniform definitions intend to remove administrative complexity created by decades of fragmented legislation. These shifts will now require firms to review every pay component (monthly and non-monthly) to assess its treatment under the new structure. Many CTC constructs built around reimbursements or allowances may no longer hold, and variable pay must be examined using the ‘universally and ordinarily payable’ test.

Grey Areas

• Whether the 50% threshold applies to historic periods (affecting gratuity for past service).

• Treatment of variable pay that is performance-based but paid consistently.

• Application of definition of wages to joining and retention bonuses and one-off awards.

• How PF systems respond to sudden changes in reported wage components.

Interpretations around retroactivity and variable pay remain unsettled. Organisations that restructure pay prematurely risk mismatches with PF workflows or future state rules.

What Organisations Should Do Now

• Conduct a full wage-component audit for all employee groups.

• Model revised PF, gratuity and retrenchment costs under different scenarios.

• Avoid immediate restructuring of PF wages until state rules clarify operational details.

• Align compensation design to withstand scrutiny under the ‘ordinarily payable’ test.

A structured compensation review will ensure internal clarity while avoiding premature realignments that may need reversal once states publish final rules.

. Worker Definitions & Classifications What has Changed

• The definition of ‘worker’ now covers a broader set of roles, including supervisory staff with monthly pay of up to Rs 18,000.

• Fixed-term employees will receive full statutory benefits proportionate to their tenure.

• Senior personnel may fall into worker categories depending on actual duties.

These changes widen the statutory net and require organisations to map roles by function rather than title. Misclassification risks have increased, especially where sales, field or supervisory roles were earlier treated as outside statutory coverage.

Grey Areas

• Determining supervisory versus managerial duties where the lines are blurred.

• Whether certain sales roles fall within the definition, despite a higher incentive component.

• Treatment of fixed-term contractors performing roles similar to permanent employees.

• Inclusion of remote or hybrid roles in working-hour and leave requirements.

Certain ambiguities around duties (as opposed to designations) means that organisations must document job content more precisely to defend classification decisions.

What Organisations Should Do Now

• Redraw workforce maps to classify employees, workers, fixed-term staff, contractors, gig and platform workers.

• Review job descriptions to reflect actual duties and supervisory authority.

• Apply consistent classification criteria across states and business units.

Clearer internal classifications/definitions can help bolster compliance with respect to wages, working hours, benefits and dispute mechanisms.

. State Rules, Transition & Dual-Regime Exposure What has Changed

• Central Codes have been notified, but state rules vary widely: some states have final rules, some have drafts and a few have opted out.

• In areas not expressly overridden, legacy state laws continue to operate.

• Central laws now prevail where there is direct conflict, especially under OSH.

This creates a complex transition period in which organisations may operate under two parallel regimes, depending on geography, establishment type or subject matter.

Grey Areas

• Which provisions take precedence in states that only have draft rules.

• Duration and enforceability of legacy state requirements under the General Clauses Act.

• Treatment of exemptions (e.g., Karnataka IT sector orders) until state rules are issued.

• How inspectors will apply facilitation versus enforcement during early implementation.

The lack of a formal transition period means that while organisations are technically non-compliant if unaligned, certain ambiguities makes immediate, full adoption operationally risky.

What Organisations Should Do Now

• Build a state-wise compliance grid mapping final rules, draft rules and silent areas.

• Identify where legacy state laws still apply and where central laws override.

• Prepare dual workflows temporarily for states with significant divergence.

• Engage proactively with local labour authorities to understand emerging interpretations.

A structured, state-wise approach would help prevent inconsistent implementation and reduce inspection exposure.

. Contractor Models & Engagement Risk What has Changed

• Contractor oversight has strengthened, with greater accountability on principal employers.

• Roles forming part of core operations may need to be brought in-house.

• PF/ESI compliance for contract workers will face closer scrutiny.

The Codes push organisations toward clearer boundaries between outsourced services and in-house operations. Core business functions cannot rely indefinitely on third-party labour without documentation and justification.

Grey Areas

• Interpretation of ‘core activity’ across industries, particularly in services and tech.

• Whether long-term contractors who function as employees must be regularised.

• Extent of liability for PF/ESI shortfalls by vendors.

• Whether onboarding systems must be redesigned to validate contractor compliance.

Given the central role of contractors in many operational models, these uncertainties have immediate cost and governance implications.

What Organisations Should Do Now

• Conduct a contractor-role census to identify functions that may trigger reclassification.

• Strengthen compliance clauses, indemnities and audit rights in vendor contracts.

• Ensure documentation for PF/ESI contributions is complete and reviewable.

• Build a defensible position on which activities are core versus peripheral.

These steps can reduce exposure to misclassification claims and avoids sudden operational disruption if contractors must be regularised.

. Working Hours, Leave & OSH Requirements What has Changed

• Daily and weekly working hours, overtime limits and annual leave rules are now consolidated under OSH.

• Women can work across shifts with safety measures and explicit consent.

• Leave can be accumulated and encashed more flexibly, depending on state rules.

Although the Codes unify working-hour principles, state rules still diverge sharply—for instance, overtime limits, leave accrual rates and carry-forward entitlements.

Grey Areas

• Conflicting overtime thresholds in different states.

• Whether leave encashment applies under revised wage definitions.

• Required safety protocols for women in night shifts before consent is valid.

• How hybrid or remote employees are counted in working-hour compliance.

Until the state rules settle, organisations must adopt conservative interpretations in safety-critical or high-risk establishments.

What Organisations Should Do Now

• Update rosters, overtime tracking and shift logs to adhere to the strictest applicable rules.

• Recalculate leave encashment and carry-forward liabilities using new wage definitions.

• Formalise women’s safety protocols to meet OSH requirements.

• Align HR systems to capture working hours and leave accurately across states.

These steps should ensure readiness for inspections and reduce exposure under the Codes’ safety and working-condition provisions.

. Industrial Relations, Standing Orders & Governance What has Changed

• Negotiating unions must be recognised; where multiple unions exist, a negotiating council is required.

• The threshold for retrenchment permissions has been raised from 100 to 300 workers.

• Model Standing Orders for services and manufacturing now set baselines for classification, discipline and working conditions.

• GRCs become mandatory in establishments with 20 or more workers, ensuring equal employer-employee representation and gender parity.

• Penalties have increased significantly, with scope for compounding and rectification.

The Codes strengthen governance and transparency across employer–employee interactions, requiring more formal structures, clearer documentation and faster escalation processes.

Grey Areas

• Whether existing standing orders automatically lapse or remain valid until recertified.

• Treatment of establishments with hybrid footprints across states.

• Extent of employer discretion in evaluating grievances under new GRC standards.

• Application of union-recognition requirements in fragmented or partially unionised workforces.

These uncertainties make it essential for organisations to align labour governance models with emerging norms.

What Organisations Should Do Now

• Compare current standing orders with model templates and prepare for certification.

• Establish or update GRCs with required representation and procedures.

• Train line managers on revised dispute-resolution timelines and protocols.

• Review retrenchment and closure processes for the new 300-worker threshold.