Insight
India: Understanding the New Labour Codes
August 2026
Decoding India’s new labour era: Simplified rules, broader protections, and fresh obligations for employers.
India’s new labour codes represent one of the most significant overhauls of employment regulation in decades, with direct implications for cost structures, workforce models and compliance requirements for businesses operating in the country. For organisations, understanding these changes is essential not only for compliance, but for effective workforce planning and financial management.
The Government of India has consolidated twenty nine existing labour laws into four new labour codes:
1. The Code on Wages, 2019
2. The Code on Social Security, 2020
3. The Occupational Safety, Health and Working
Conditions Code, 2020
4. The Industrial Relations Code, 2020
While the codes have come into effect from 21 November 2025, the final Central and State Rules required to implement certain provisions are still awaited.
Need for labour reforms
Much of India’s labour legislation dates back to the pre-Independence and early post- Independence era (1920s to 1950s), when economic conditions and employment relationships were fundamentally different. Fragmented laws, inconsistent definitions, and complex compliance requirements created challenges for both employers and employees. The labour codes seek to simplify compliance, extend social protection and align labour laws with the realities of today’s workforce.
Key changes impacting organisations
New definition of wages and impact on costs
A key change brought about by the labour codes is the uniform definition of “wages”. All remuneration payable as per terms of employment is included in wages, except specific excluded components. Importantly, excluded components are limited to fifty percent of total remuneration and any excess must be added back to wages. Statutory benefits such as gratuity, Provident Fund, Employees’ State Insurance contributions, leave encashment for workers, overtime payments, and bonus will be calculated based on the expanded wage base. While this brings consistency, this will also increase employer costs. Recent accounting clarifications require organisations to recognise the increased costs, particularly for gratuity and leave encashment, in the financial statements.
Expanded social security coverage
The Code on Social Security extends social security coverage to non-traditional employment arrangements including gig and platform workers. It also provides for fixed term employees to be eligible for gratuity upon completion of one year of service instead of the five-year timeline applicable for regular permanent employees.
Organisations should reassess hiring models to ensure alignment with the evolving social security obligations.
Worker versus employee classification
Several provisions relating to working hours and leave are applicable specifically to workers, a category narrower than employees. Workers are persons employed who do not perform managerial or administrative roles or supervisory roles with wages exceeding eighteen thousand Indian Rupees. This classification applies across sectors and is not limited to manufacturing. Employers should therefore map job roles and responsibilities to identify workers and ensure compliance with the applicable provisions.
Payroll and wage payment requirements
The Code on Wages mandates payment of monthly wages by the seventh of the following month and requires final settlement within two working days of an employee leaving the organisation. It also specifies permissible deductions and caps total deductions to fifty percent of wages. Organisations may need to revisit payroll systems, settlement processes and internal controls to meet these timelines and limits.
Working hours and leave
Working hours and leave provisions in the Occupational Safety Health and Working Conditions Code apply to workers. For other employees, the existing state-specific Shops and Establishments law will continue to apply. Organisations need to review their working hours and leave policies to ensure compliance with the applicable parallel
regulations.
Contract labour and inter-state migrant workers
The labour codes introduce new definitions for contract labour and inter-state migrant workers and increase employers’ responsibilities.
Employers are required to pay contractors before the due date for payment of wages by contractor to contract labour (i.e. before the seventh of the subsequent month). This means that organizations will now be required to pay the contractors on a monthly basis.
Furthermore, organisations need to implement mechanisms to identify inter-state migrant workers and ensure compliance with requirements such as payment of annual journey allowance for travel to and from their native place of residence.
Other key areas
The labour codes also introduce provisions relating to appointment letters, minimum wages, hiring practices and employee relations, as well as requirements such as free annual health examinations for specified categories of employees and the formation of certain committees.
The way forward for employers
The labour codes have wide-ranging implications across various aspects of an organisation covering compensation, workforce models, payroll, contracting arrangements, working conditions and employee relations. Compliance will involve both financial and operational aspects together with the need to monitor the evolving rules.
Beyond compliance, the reforms present an opportunity for organisations to rationalise compensation structures, reassess workforce models and strengthen governance around employment practices in India.
About the authors
Viswanathan Vaidyanathan
Chennai, India
Viswanathan Vaidyanathan is a Partner at Sharp & Tannan, which he joined in 2006. He specialises in Assurance, with experience spanning statutory audits of large listed companies, complex multinational consolidations across multiple GAAPs, due diligence, tax audits, and GAAP conversions.
viswanathan.vaidyanathan@sharpandtannan.com
Meena Narayanan
Chennai, India
Meena Narayanan is a Consulting Director at Sharp & Tannan, based in Chennai. A Chartered Accountant with over 15 years of experience, she specialises in employee and expatriate taxation, covering global mobility, immigration, social security, and international tax.