Nov 26, 2025
On November 21, 2025, the landscape of Indian employment law underwent its most significant transformation in decades. The simultaneous implementation of the four new Labour Codes—Wages, Social Security, Industrial Relations (IR), and Occupational Safety, Health (OSH)—has replaced 29 archaic laws with a consolidated framework.
For businesses and HR leaders, the "wait and watch" era is over. The new regime requires an immediate audit of payroll structures, employment contracts, and statutory liabilities.
Here is the technical breakdown of what has changed and how it impacts your books.
1. The Code on Wages, 2019: The "50% Rule"
The most disruptive change is the uniform definition of "Wages" under Section 2(y).
The New Definition
Previously, "Wages" had different definitions for PF, ESI, and Gratuity. Now, a single definition applies across all codes.
INCLUSIONS: Basic Pay, Dearness Allowance (DA), and Retaining Allowance.
EXCLUSIONS: HRA, Bonus (statutory), Overtime, Conveyance, House Accommodation value, etc.
The Proviso (The 50% Cap)
The Code states that if the Excluded Components (Allowances) exceed 50% of the Total Remuneration, the excess amount shall be added back to "Wages" for statutory calculations.
Impact Analysis: Old vs. New Structure
Scenario: An employee with a monthly CTC of ₹1,00,000.
Component | Old Structure (Typical) | New Compliant Structure | Impact |
Basic Pay | ₹30,000 (30%) | ₹50,000 (50%) | Must increase |
HRA & Allowances | ₹70,000 (70%) | ₹50,000 (50%) | Reduced flexibility |
PF (12% of Basic) | ₹3,600 | ₹6,000 | Liability Increases |
Net Take Home | Higher | Lower | Due to higher PF deduction |
Gratuity Base | ₹30,000 | ₹50,000 | Liability Increases |
The Bottom Line: Employers face higher gratuity and PF costs. Employees see a dip in monthly cash-in-hand but a significant rise in their retirement corpus.
2. Code on Social Security, 2020: The Gratuity Shift
This code significantly alters the liability landscape for short-term employees.
Fixed-Term Employees (FTEs): Gratuity in 1 Year
Under Section 53, the eligibility for Gratuity has been decoupled from the standard 5-year continuous service rule for Fixed-Term Employees.
New Rule: FTEs are eligible for Gratuity on a pro-rata basis if they complete one year of service.
Regular Employees: The 5-year continuous service rule remains unchanged.
Gig & Platform Workers
For the first time, gig workers (delivery partners, freelancers) are brought under the social security net.
Aggregator Liability: Digital platforms must contribute 1-2% of their annual turnover (capped at 5% of the amount paid to workers) to a designated Social Security Fund.
3. The OSH Code, 2020: Leave & Overtime
The Occupational Safety, Health and Working Conditions Code changes how "Earned Leave" constitutes a liability on your balance sheet.
Leave Eligibility Reduced
Old Rule: An employee had to work 240 days in a year to be eligible for leave.
New Rule: Eligibility now kicks in after working just 180 days.
Accrual Rate: Remains at 1 day of leave for every 20 days of work.
Impact: Higher provision for Leave Encashment is required in actuarial valuations.
Overtime Wages
Overtime must be paid at twice the rate of ordinary wages.
It is now strictly consent-based; an employee cannot be forced to work overtime without agreement.
4. Industrial Relations (IR) Code: Hiring Flexibility
The IR Code formalizes Fixed Term Employment (FTE), giving it statutory legitimacy.
Parity: FTEs must receive the same hours of work, wages, allowances, and statutory benefits as permanent workers doing the same work.
No Retrenchment Compensation: The expiry of a fixed-term contract is not considered retrenchment, meaning no severance pay is required (provided gratuity is paid if tenure > 1 year).
Compliance Checklist for Employers
At The Tax Co, we recommend the following immediate actions for our clients:
Payroll Audit: Check if
(Basic + DA)< 50% of CTC. If yes, restructure immediately to avoid interest and penalties on short-deducted PF.Contract Revisions: Update employment contracts to include the new statutory definition of wages. Ensure all FTE contracts explicitly state the tenure to avoid "permanent" status claims.
Actuarial Re-valuation: Your Gratuity and Leave Encashment liabilities have likely increased. Request an updated actuarial report for the current financial year.
Appointment Letters: It is now mandatory to issue a formal appointment letter to every employee (including daily wagers), detailing their role, wages, and social security.
Need Help Navigating the Shift?
The "Great Indian Salary Shift" is complex, but it brings long-term standardization to the Indian workforce. If you need assistance with payroll restructuring or compliance impact assessment, our team at The Tax Co is ready to assist.