Over the course of 2020, India has experienced its biggest shift in the work force since World War II with the introduction of four Labor Codes to be effective on November 21, 2025. These Labor Codes will replace 29 different laws regarding labor relations and will help to bring Indian labour laws into the 21st Century by standardizing standards for employment, clarifying compliance obligations, and harmonising the expectations of both employers and employees.
As an employer or employee, you may be either trying to figure out what you need to do to comply with the new regulations, or just trying to understand what your next paycheck is going to look like. Here are the major changes you should know about.
The new framework consolidates existing laws into four concise codes:
1. The Code on Wages, 2019
2. The Code on Social Security, 2020
3. The Industrial Relations Code, 2020
4. The Occupational Safety, Health and Working Conditions (OSH) Code, 2020
1. A New Definition of "Wages"
It's widely discussed that the definition of wages has been standardized with regard to uniforms. The amount of Allowances will now not be larger than 50% of the total amount paid for all wages.
Impact : If an employee has Allowances (HRA, conveyance) over 50%, the excess will be treated as their Basic Pay and included when calculating their Provident Fund (PF) and Gratuity. As a result, an employee's contribution toward Provident Fund (PF) will increase and their take-home salary may decrease; however, he/she will have a larger retirement fund.
3. Faster Gratuity for Fixed-Term Employees
Previously, continuative 5 years of employment was a requirement to qualify for gratuity.
Change : Employees on fixed-term contracts can now receive pro-rata gratuity after just one year of service. This is a major win for employees who would not have received gratuity payments because they were employed for a shorter period of time than five years.
3. Recognition of Gig Workers
For the first time, gig and platform workers are now recognized legally as gig and platform workers (these are food delivery partners, taxi drivers, etc.). Additionally, new laws include that these workers will be eligible for social security benefits from their employer if they are on a gig or platform, funded by a contribution to their employer (1 to 2 percent of turnover).
4. Work/Life Balance and Leave
The number of hours a worker can work in any week is still capped at 48 hours, but companies now have more flexibility in putting on 4-day work weeks instead of 5 or 6 day work weeks, with each day consisting of a minimum of 12 hours. Moreover, there is now a standardization of leave encashment policies and the ability to gain access to leave has been made easier in various sectors.
1. Easier Layoffs and Retrenchment
With the passage of the Industrial Relations Code, companies may contact the Government for permission to lay off or terminate employees after the Closure of their Company .
The Change: Establishments with up to 300 workers (previously 100) can now lay off staff or close units without prior government approval. This offers mid-sized companies greater operational flexibility.
2. Simplified Compliance
. The end of Inspector Raj. All companies must now abide by a single licensing process and inspection must take place via an online random system. Companies will need fewer records and will submit their reports via Many fewer records are required to comply with these Acts.
3. Mandatory Appointment Letters
To ensure that Employees know their Responsibilities and other Employment Terms, the Act/Rule requires Companies to give each Employee his/her Appointment Letter.
4. Gender Equality in Shifts
Women now have the same Rights as Men concerning Night Shifts, provided that the Company employs Measures Related to Safety is general.
The transition represents the establishment of a more formalized, transparent and internationally competitive labour market. This requires immediate changes to both payroll processing and human resources policies, but the long-term goal will always be to have a secure workforce and a healthy economy.
As businesses adapt to these new compliance regulations, they must also navigate all of the complexities involved with restructuring their salary components and calculating their social security payments. To ensure your business is fully compliant and optimized for these new codes, connect with our experts at best FEMA Consultant for specialized guidance.