India’s New Labour Codes

India has replaced 29 central labour laws with four consolidated Labour Codes, effective from 21 November 2025. The new framework restructures wage definitions, expands social security to gig and platform workers, raises the retrenchment threshold from 100 to 300 workers and mandates pro-rata gratuity for fixed-term employees from day one. As of May 2026, over 30 states and union territories have notified rules for at least one code, with gig worker contribution rules expected by mid-2026. For foreign companies operating in India — whether through a subsidiary, GCC, branch office or EoR arrangement — these changes have direct implications for payroll, CTC structures, workforce flexibility and compliance costs. T&A Consulting helps foreign employers understand and implement the new labour framework across multiple Indian states.

Introduction: From 29 Laws to Four Codes

India’s labour law landscape has historically been one of the most complex in the world, with 29 central laws and hundreds of state-specific regulations governing everything from minimum wages and factory safety to trade union recognition and social security contributions. The fragmentation created compliance challenges, particularly for companies operating across multiple states, and discouraged formal employment in favour of contract and informal arrangements.

The four Labour Codes — 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 by Parliament between 2019 and 2020 but their implementation was repeatedly delayed due to the pandemic, state-level rule notification requirements and political considerations. The codes were finally brought into force on 21 November 2025, repealing all 29 predecessor laws. Central rules are being finalised, with state-level rules progressing at varying speeds across the country.

The Four Codes: What Has Changed

1. Code on Wages, 2019. The most immediately impactful change for employers. The code introduces a universal definition of “wages” that requires basic pay to constitute at least 50% of total CTC (cost to company). Allowances exceeding 50% of total remuneration will be treated as wages for the purpose of calculating PF, ESI, gratuity and bonus. This means companies that currently structure CTC with a low basic pay and high allowances (a common practice in India to reduce statutory contribution obligations) will need to restructure compensation. The result is higher employer contributions to PF and ESI, increased gratuity liabilities and higher take-home pay for employees after the adjustment.

2. Industrial Relations Code, 2020. The most significant change for manufacturing and large-scale operations. The code raises the threshold for government approval before retrenchment or closure from 100 workers to 300 workers. This gives medium-sized manufacturers (100 to 299 workers) significantly greater workforce flexibility without requiring government consent for restructuring. The code also introduces fixed-term employment as a formal category, requires 75% union membership to call a legal strike and strengthens conciliation mechanisms for dispute resolution.

3. Code on Social Security, 2020. The landmark expansion. For the first time, gig and platform workers — app-based delivery personnel, cab drivers and other digitally intermediated workers — are formally recognised as a category eligible for social security benefits, including provident fund and insurance. The code also mandates pro-rata gratuity for fixed-term employees from the first day of engagement, eliminating the previous five-year minimum service requirement. The Central Government is expected to notify specific contribution rates and eligibility thresholds for gig workers by mid-2026.

4. Occupational Safety, Health and Working Conditions Code, 2020. Consolidates 13 older safety laws including the Factories Act. The code mandates periodic safety audits, training requirements and health assessments. It introduces a single registration system for establishments, replacing the multiple registrations previously required under different acts. Working hour limits are standardised, with provisions for overtime and compensatory rest.

Practical Impact on Foreign Employers

• CTC restructuring required. Companies with CTC structures where basic pay is below 50% of total remuneration must restructure. This affects payroll, offer letters, employment contracts and statutory contribution calculations. The financial impact can be significant: for an employee with a Rs 15 lakh CTC currently structured at 30% basic, the shift to 50% basic increases employer PF contribution by approximately Rs 36,000 per employee per year.
• Multi-state compliance remains complex. Labour is a concurrent subject under India’s Constitution. While the central codes provide the framework, each state must draft and notify its own implementing rules covering inspection procedures, form formats, sector-specific registers and welfare fund contributions. As of May 2026, the pace and content of state rule notifications varies widely, creating a patchwork compliance environment.
• Gig worker obligations emerging. Foreign companies using gig or platform workers in India — including for last-mile delivery, customer support, content moderation or field services — must prepare for social security contribution obligations once the Central Government notifies gig worker-specific rules. Companies should begin internal assessments of their gig worker population now.
• Fixed-term employment becomes more attractive. The formal recognition of fixed-term employment with pro-rata benefits makes it a viable and compliant alternative to contract staffing through third-party agencies. Companies can now hire fixed-term employees directly with full benefits, reducing the compliance risks associated with contract labour arrangements.
• 48-hour full and final settlement. The codes introduce a 48-hour window for processing full-and-final settlements upon employee exit, replacing the previously undefined or multi-week timelines. This requires technology-backed payroll systems capable of rapid calculation and disbursement.

Implementation Status: A State-by-State Landscape

The implementation of the Labour Codes is uneven across India’s states. Some states, including Uttar Pradesh, Madhya Pradesh, Gujarat and Karnataka, have been more proactive in notifying state-level rules. Others are moving more slowly, creating a period of regulatory ambiguity during the transition.

For foreign companies operating across multiple Indian states, this means that compliance requirements can differ by geography. Professional tax rates, Shops and Establishments Act registrations, specific welfare fund contributions and inspection procedures all vary. Companies must monitor state labour department notifications and adjust their compliance frameworks accordingly.

The Shram Suvidha 2.0 digital compliance portal is expected to be the next major milestone, providing a unified digital interface for labour law compliance including registration, return filing and inspection management. This aligns with the broader government push toward digital compliance platforms that simplify reporting and monitoring.

ESG and Global Compliance Considerations

The Labour Codes are increasingly relevant to ESG (Environmental, Social and Governance) compliance. International investors, buyers and partners scrutinise labour practices in their India supply chains and operations. The formal recognition of gig worker rights, the expansion of social security coverage and the strengthening of occupational safety requirements align with global ESG standards and reporting frameworks.

Companies that adopt the new codes proactively — rather than waiting for enforcement — can use compliance as a competitive advantage in investor relations, supply chain partnerships and talent attraction. ESG-aligned labour practices are increasingly a prerequisite for participation in global supply chains, particularly for European and UK buyers operating under due diligence legislation.

How T&A Consulting Supports Labour Law Compliance

T&A Consulting provides comprehensive advisory for foreign companies navigating India’s new labour framework:

• CTC restructuring advisory. We model the financial impact of the 50% wage rule on employer costs, employee take-home pay and statutory contribution obligations, and design compliant CTC structures.
• Multi-state compliance mapping. We track state-level rule notifications and map compliance requirements across the states where our clients operate, providing a unified compliance calendar.
• Gig worker assessment. We help companies assess their gig worker exposure, model potential social security contribution obligations and design compliant engagement structures.
• Employment contract review. We review and update employment contracts, offer letters, employee handbooks and HR policies to align with the new codes.
• Ongoing compliance support. We provide ongoing monitoring of state-level notifications, regulatory updates and enforcement trends, ensuring our clients remain compliant as the implementation landscape evolves.

Contact us at: pnijhawan@taglobalgroup.com to discuss how the new Labour Codes affect your India workforce strategy.

Sources & references:
PwC India, Bar & Bench, DCP Solutions, Omnivoo, PIB