New Labour Codes: Critical Actions HR Must Take Now

India’s four new Labour Codes i.e 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 consolidate over 29 central labour statutes into a rationalised framework and came into effect on 21^st November, 2025.

While the central rules have come into effect on 8^th May, 2026, the state rules continue to be in varying stages. This article identifies five priority areas where HR leaders and employment counsel must act immediately, pending the rules coming into effect.

1. Wage Restructuring: The Most Imminent Compliance Imperative

The Code on Wages introduces a new definition of ‘wages’ that directly impacts the base for Gratuity, Provident Fund contributions, ESIC, and other social security entitlements.

The Code mandates that the components explicitly excluded from ‘wages’, such as house rent allowance, conveyance, overtime, commission, and similar allowances, must together not exceed fifty per cent of total remuneration.

If they do, the excess is deemed ‘wages,’ and is required to be added back for the computation of statutory dues.

The Current Reality in Most Organisations

In practice, most Indian employers structure compensation so that basic pay accounts for only 30 to 40 percent of the total Cost to Company. The balance generally comprises HRA, special allowances, LTA, food coupons, and a range of other components.

In the new wage definition, as exclusions are limited and everything that is not an exclusion becomes a part of wages, the effective ‘wage’ base for most companies comes to about 60–70% of total remuneration under the new definition.

While the Code does not mandate immediate restructuring, the compliance burden arising from the recalculated Gratuity liability alone can be material.

Therefore, even though the law does not compel restructuring, failure to restructure is leading to a significantly higher Gratuity, PF, and ESIC base. For large workforce organisations, the actuarial impact on Gratuity provisioning can run into crores.

It is therefore, a matter of priority for Companies to review their wage structures as early as possible, as provisions with respect to the same have come into effect from 21^st November, 2025.

2. Classification of Workers: A Prerequisite to Accurate Financial Planning

Perhaps the most under-appreciated compliance task for service sector organisations and corporate head offices is the classification of their workforce into ‘workers’ and ‘employees’ (or non-workers) under the applicable Code.

Why Classification Matters

Labour laws, both existing and under the new Codes, prescribe specific entitlements for ‘workers’ only. Crucially, these include:

Statutory leave encashment: the obligation to pay for unavailed earned leave upon termination or resignation is a statutory requirement for workers and not employees.
Carry-forward limits: the number of days of earned leave a worker may carry forward is capped by statute. For non-workers, this is governed by company policy alone.
Overtime: rate and eligibility are governed by statute for workers; for supervisory and managerial employees, contractual terms apply.
Welfare compliances to be provided by the Company based on the number of workers in the establishment, such as canteen, creche, retrenchment compensation, etc.

The Test Is Nature of Work, Not Job Title

Classification is not determined by what a person is called. The threshold tests under the Codes turn entirely on the actual function performed rather than designation or salary.

A ‘Senior Manager’ who exercises no independent supervisory or managerial authority over other employees, and whose role is primarily execution of instructions, may earn one lakh rupees a month and shall still qualify as a worker under the applicable definition.

Particular Relevance for Service Sector and HO Establishments

Manufacturing establishments have long operated under the Factories Act framework and are familiar with this classification exercise. For service sector organisations – IT, ITES, financial services, consulting, e-commerce – and for head office functions of large companies, this is new territory.

A significant proportion of the workforce at these establishments may qualify as workers, creating statutory leave encashment and overtime liabilities that have not been provisioned for.

Concern over Interplay with Shops & Establishments and OSH Code

Establishments registered under the applicable State Shops & Establishments Acts will face dual compliance obligations due to the overlap with the Occupational Safety, Health and Working Conditions Code, 2020.

This issue is particularly significant as compliance requirements under the Shops & Establishments Acts vary considerably across states.

For organisations operating across multiple states, the compliance burden becomes more onerous since aspects such as leave entitlement, leave encashment and carry forward of leave are prescribed under both frameworks.

3. Fixed Term Employment and Gratuity Implications

The new Labour Codes formally recognise Fixed Term Employment (‘FTE’) as a mode of engagement and provide that a fixed term employee is entitled to all statutory benefits, including Gratuity, proportionate to the period of service, on completion of one year without the requirement of completing five years.

This is a significant departure from the current Gratuity regime.

Risk of Consultant qualifying as FTE & Gratuity implication

Where a consultant or independent contractor arrangement is re-characterised as fixed-term employment, the individual may become entitled to gratuity for the duration of the engagement, calculated on a proportionate basis.

Depending on the tenure of engagement and the last drawn remuneration, the resulting gratuity liability can be significant, particularly for organisations engaging a large consultant workforce.

Organisations should reassess the nature of work performed by such consultants, as well as the structure of the engagement itself, to evaluate whether the arrangement may in substance qualify as fixed-term employment.

Factors such as prescribed in-out timings, applicability of internal leave policies, integration into organisational reporting structures, and performance of regular or business-critical functions may weaken the characterization of an individual as a pure consultant and instead support the existence of an employer-employee relationship.

Many organisations engage retired employees as consultants, typically obtaining a GST invoice from the individual and treating the arrangement as a business-to-business service contract.

This structuring is commercially convenient and is assumed to take the engagement outside the employment framework. However, that may not be sufficient to keep them out of the risk of being classified as a Fixed Term Employee under the Labour Code.

4. Contract Labour: Core Activity Restrictions and Wage Compliance

The Code on Occupational Safety, Health and Working Conditions and the Industrial Relations Code both address the use of contract labour. The key compliance obligations for principal employers and contractors under the new framework include two distinct but related challenges.

Core Activity Restrictions

The prohibition on deployment of contract labour in the “core activities” of an establishment continues under the new labour codes and remains one of the most heavily contested compliance issues, particularly for the manufacturing sector where a significant portion of operations are traditionally supported through contract labour arrangements.

Industry stakeholders and employer associations have already made representations to the government, highlighting the practical challenges arising from the broad and ambiguous interpretation of “core activity”.

The central interpretive question remains: what constitutes an activity that is “essential to the core activity” of a business? Principal employers should therefore undertake a fresh legal review of their operational structure to assess which activities qualify as core activities, which are perennial in nature, and which can legitimately be categorised as intermittent, ancillary, or seasonal in nature.

Wage Restructuring for Contract Labour

The Code on Wages applies to all employees and workers, including those engaged through contractors. The fifty per cent cap on excluded allowances and the consequences of breaching it, apply with equal force to contract workers. Principal employers must contractually require contractors to restructure the wages of deployed workers in line with the Code’s definition, and audit compliance periodically.

The liability for non-compliance by the contractor may, in certain circumstances, flow to the principal employer. Revising contractor agreements to include wage-structure warranties, compliance representations, and audit rights is an essential immediate step.

5. Tracking State-Level Rule Notifications: A Moving Target

One of the most practically challenging aspects of the new regime is that the four Codes follow a concurrent model, i.e., the central government notifies central rules (applicable to central establishments and certain industries), while state governments must notify their own rules for all other establishments.

For most private sector employers, particularly in manufacturing, IT, ITES, BFSI, retail, and hospitality, the state rules will be the operationally relevant instrument for 3 out of 4 codes (COW, OSHW & IR).

For Companies having presence in more than one state, the Central Social Security rules will be applicable, whereas for companies having presence in only one state, the state rules will be applicable.

Status on the Ground

The rule-notification landscape is uneven and evolving rapidly. Gujarat and Arunachal Pradesh are among the states that have already notified rules under one or more of the Codes, while Maharashtra has published draft rules and invited public consultation, with the consultation period running to 12 June under the current timeline; final rules are expected to follow shortly thereafter.

States such as Rajasthan, Uttar Pradesh, and Telangana are at varying stages of draft preparation or consultation.

At the central level, rules have been notified, but their applicability is largely confined to mines, oilfields, major ports, and establishments under central government control, making state rules the operationally relevant instrument for most private sector employers.

The author maintains the current status of state rules on this webpage for ease of tracking.

The practical consequence of this staggered rollout is that when a state notifies its rules, organisations will face a compressed window to implement operational changes.

Waiting for formal enforcement dates before initiating compliance reviews is not a viable strategy. Organisations with multi-state operations should designate state-specific compliance owners and commission legal reviews of each state’s rules as and when they are notified.

Conclusion: The Window to Prepare Is Now

The four Labour Codes represent the most comprehensive restructuring of Indian labour law in seven decades. Their enforcement, when it comes, will be sudden, and there will not be a grace period for organisations that have not prepared.

HR leaders and employment counsel who address these issues proactively, aligned with existing business cycles such as appraisals and contract renewals, will be best positioned for a compliant and financially predictable transition. Those who wait for enforcement dates risk compressed timelines, elevated costs, and regulatory exposure.

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