Wages, gratuity, and more: What new Labour Codes mean for India’s workforce

On November 21, the government brought into force four consolidated Labour Codes, restructuring a large part of India’s central labour law framework.

The four new laws: Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020) and the Occupational Safety, Health & Working Conditions Code (2020), replace numerous older statutes. They also establish a new structure of rights and obligations that affects workers, employers and intermediaries across the country.

According to the government, the new codes allow for modernisation with simpler compliance, fewer overlapping filings, more transparency in employment relationships and wider social protection.

A closer look at these codes, and at how advisory firms such as BDO India and EY interpret their effects, shows that the reforms that could potentially affect India’s 643 million-strong workforce, land on three fronts: formalisation of work, rewritten wage and social-security rules, and a redesigned compliance architecture. And they do so while leaving many operational details to be filled in by later rules and state notifications.

A bigger formal labour market

A central aim of the codes is formalisation. The government has made appointment letters mandatory for all workers, introduced the principle of one registration, one return, and for the first time put legal definitions around gig work, platform work and aggregators. That, experts say, should bring many workers who previously sat outside statutory protection into the formal economy.

Neeti Sharma, CEO of TeamLease Digital, captures both the upside and the uncertainty. She says formalising gig and piecemeal work is a “big plus” because it extends social protection and statutory payouts to people previously outside the system. But she and other employers stress that the fine print matters: until rules spell out how the codes operate in detail, companies will be cautious about making major changes to pay or HR systems.

Wages, benefits and the cost question

The Code on Wages introduces a statutory right to a floor wage where the central government prescribes one. It also replaces multiple legacy definitions with a single, uniform definition of “wages.”

Advisory firm EY warns that the uniform definition could create ambiguities, for example around incentive payments and bonuses, until implementing rules clarify how different pay components are treated for statutory calculations.

That uncertainty has direct financial consequences. Sharma warns that changes to how wages count toward gratuity, leave encashment and other benefits could raise employer costs. 

She notes many companies expect benefit calculations to shift away from a basic-plus-allowances model and closer to larger proportions of total cost to company (CTC), which would require careful modelling and may push employers to adjust margins or pass costs on to customers.

Employment relationships

The codes recast how employers hire and who counts as an employee. Fixed-term employment now enjoys parity of benefits with permanent roles; importantly, fixed-term employees become eligible for gratuity after one year of service (the five-year threshold for permanent employees does not apply). BDO India highlights that this change may prompt employers to rethink reliance on fixed-term hires.

Sharma observes that earlier gratuity eligibility may influence retention. Some employees may stay to secure the one-year benefit, while others may feel freer to move on because of the change from a five-year threshold.

At the same time, EY points to tighter controls on contract labour. The codes restrict using contract workers for an employer’s core activities, a shift that is likely to force many firms to renegotiate vendor arrangements or change outsourcing models.

For digital platforms, the Code on Social Security creates new obligations. Aggregators are required to contribute (at 1–2% of annual turnover, subject to caps linked to payments made to platform workers) to fund social protection for gig and platform workers. EY describes this as an attempt to share responsibility for welfare among the state, employers and intermediaries.

Safety, inspections and compliance architecture

The Occupational Safety, Health & Working Conditions Code consolidates safety and welfare rules and sets out maximum working hours, overtime rules and mandatory health checks for certain age groups of workers. Inspectors will be retooled toward a technology-enabled, risk-based model, the government describes an “inspector-cum-facilitator” approach, and the codes move many minor offences from criminal to monetary penalties with possible compounding.

These structural shifts aim to reduce harassment from fragmented inspections and unnecessary criminal liability, but EY and BDO both caution that the practical effect will depend on the rules, digital portals and state-level implementation that follow.

Sharma highlights an indirect cultural impact. She expects companies to encourage greater use of leave rather than reliance on leave encashment, which will become more expensive for employers. In her view, this shift towards taking leave rather than banking it, will ultimately improve employee wellbeing.

The rollout

All four Codes were notified on November 21, but not every provision is immediately operative in the same way.

BDO notes that the Industrial Relations Code and the OSHWC Code are fully notified, while the Code on Wages and the Code on Social Security are only partially notified.

Because many operational details like, formats for registers, returns, scheme rules and state-level variances, still require separate rules, employers should expect a phased rollout and a possible period of “dual compliance” where legacy state rules continue to apply until they are explicitly superseded.

BDO warns that multi-state employers and staffing providers face particular complexity: they must align contracts, payroll systems and client expectations while waiting for final guidance.

“We are all still waiting for the fine print. The intent is clear, but until the detailed notifications come in, companies, employees and customers alike are trying to figure out what exactly the impact will be,” Sharma says.