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New Labour Code: Decoded

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Work, Wages & Welfare: Breaking Down India’s New Labour Code: Decode

India has entered a new era of employment governance.

With the implementation of the four new Labour Codes, 29 old and fragmented labour laws have been consolidated into a unified framework. These reforms have far-reaching consequences for employees, employers, HR managers, business owners, and the rapidly growing gig workforce. This blog is your complete 2500-word guide to the Labour Codes — explaining their structure, changes, industry impact, salary restructuring, compliance requirements, and practical steps companies must take. Whether you are an employer, HR leader, founder, or employee, this guide will help you understand exactly what has changed and what it means for your business or career.

1. Introduction: Why the New Labour Codes Matter

India’s labour laws were historically complicated—spread across 29 acts, multiple ministries, outdated definitions, unclear enforcement, and state-wise variations. Business owners often struggled with compliance. Employees lacked consistent protections, especially gig and unorganized workers.

  1. To solve this, the Government of India introduced:
  2. The Code on Wages, 2019
  3. The Industrial Relations Code, 2020
  4. The Social Security Code, 2020
  5. The Occupational Safety, Health & Working Conditions Code (OSHWC), 2020

These codes modernise India’s labour landscape by:

  • Allowing flexibility in hiring and work hours
  •  Ensuring fair wages
  • Expanding social security
  • Improving workplace safety
  • Streamlining compliance
  • Protecting gig, platform, and contract workers

In essence, the codes aim to create a balanced and transparent labour ecosystem.

2. The Four Labour Codes Explained

Let’s understand each code in simple language.

A. Code on Wages, 2019

This code replaces:

  • Minimum Wages Act
  • Payment of Wages Act
  • Payment of Bonus Act
  • Equal Remuneration Act
Key features:
Uniform definition of “Wages”
  1. National floor minimum wage
  2. Gender-neutral equal pay
  3. Timely payment of wages
  4. Overtime at twice the normal rate
  5. Simplified coverage across all employees

Why this matters:

Companies can no longer manipulate salary structures to reduce PF, bonus, or gratuity liabilities. Employees get fairer compensation.

B. Code on Social Security, 2020

This code merges:

  • EPF Act
  • ESI Act
  • Maternity Benefits Act
  • Employee’s Compensation Act
  • Unorganised Workers’ Social Security Act And more
Key features:
  1. Social security to gig workers, platform workers, and freelancers
  2. Gratuity rights expanded to fixed-term employees
  3. Option to digitise all social security records
  4. Employer contributions for gig workers (1–2% of turnover)
  5. Extensive coverage for MSMEs and unorganised workers

Why this matters:

Millions of workers will now have access to PF, pension schemes, insurance, and maternity benefits.

C. Industrial Relations Code, 2020

This code replaces:

  • Trade Unions Act
  • Industrial Disputes Act
  • Standing Orders Act
Key features:
  1. Higher threshold for lay-off permissions (100 → 300 employees)
  2. Faster dispute resolution
  3. Fixed-term employment standardized
  4. Rules for strikes, lockouts & union recognition
  5. Improved employer flexibility in workforce restructuring

Why this matters:

Industries get more agility, while workers get clearer rights and dispute mechanisms.

D. OSH & Working Conditions Code (OSHWC), 2020

This code merges laws across:

  • Factories
  • Mines
  • Construction
  • Beedi & Cigar Workers
  • Contract labour
Key features:
  1. Standardised working hours
  2. Annual free health check-up above 40 years
  3. Women allowed in night shifts
  4. Better safety, sanitation & welfare facilities
  5. Single license for factory and contract labour
  6. Broader coverage of establishments (shops, IT, logistics, etc.)

Why this matters:

Workplaces become safer, healthier, and more accountable.

3. The 50% Wage Rule: The Biggest Salary Change

One of the most impactful reforms is the new definition of wages, which requires:

Basic Salary + Dearness Allowance = At least 50% of total CTC.

This has multiple implications:

Impact on Employees

  • Take-home salary may reduce
  • PF deduction increases
  • Gratuity increases
  • Long-term retirement savings grow
  • More protection during job changes

Impact on Employers

  1. Higher cost of compliance
  2. Need to restructure salary slips
  3. More predictable wage components
  4. Increased PF & gratuity liabilities

Example Salary Breakdown Before vs After

Before Labour Codes

  • Basic: 30%
  • Allowances: 50%
  • Bonus/Other: 20%

PF only on Basic → lower PF

➡ Lower gratuity

After Labour Codes

  • Basic: 50%
  • Allowances: 30%
  • Bonus/Other: 20%

➡ Higher PF

➡ Higher gratuity

➡ Slightly lower take-home

This ensures fair pay and long-term financial security.

4. Working Hours, Overtime & Leave Changes

The new Labour Codes introduce structural changes:

Working Hours
  • 8–12 hours per day
  • Maximum 48 hours per week
  • 4-day workweek possible (12 hours/day)
Overtime
  • Overtime wages = 2 × normal wages
  • Clear tracking of attendance and shifts is mandatory
Leave Rules
  • Leave eligibility: 180 days instead of 240
  • Leave encashment annually
  • Adolescent workers get special protection

These rules aim to balance flexibility for employers and protection for employees.

5. Impact on Industry Sectors

The impact varies across industries. Here’s a detailed breakdown.

A. Manufacturing Sector

  • Positive Impact
  • Flexibility to scale workforce
  • Clear rules for fixed-term workers
  • Streamlined safety guidelines
Challenges
  • Higher PF & gratuity burdens
  • Increased cost of welfare facilities
  • Overtime cost increases

B. IT & IT Enabled Services

  • Positive Impact
  • More women workforce participation due to night shift permissions
  • Transparent wage standards
  • Improved clarity for contract staffing
Challenges
  • Salary restructuring required
  • Freelancers and gig-based resources may fall under compliance
  • Higher cost in contract-heavy projects

C. Gig Economy & E-Commerce

  • Positive Impact
  • Gig workers recognised by law
  • Access to insurance, pensions, and social security
  • Reduced exploitation
Challenges
  • Platforms must contribute to social security funds
  • Increased cost per delivery/ride
  • Need for structured contracts

D. Retail & Hospitality

  • Positive Impact
  • Clear wage & work-hour norms
  • Flexible shift structures
  • Increased worker stability
Challenges
  • Overtime and weekend costs may rise
  • Compliance documentation mandatory
  • E. MSMEs
  • Positive Impact
  • Single registration, single licence
  • Simplified compliance
Challenges
  • Wage-floor increases
  • Additional PF/gratuity burden
  • Annual health checks

F. Construction Sector

  • Positive Impact
  • Strong safety standards
  • Mandatory welfare facilities
  • Appointment letters for all workers
Challenges
  • Contractor compliance
  • Higher operational cost
  • Infrastructure for welfare provisions

6. HR, Payroll & Compliance Impact Employers?

HR Must Update:
  1. Appointment letters
  2. Offer letters
  3. Contractor agreements
  4. Gig worker terms
  5. Shift rosters
  6. Overtime policies
  7. Leave policies
  8. POSH & night-shift guidelines
Payroll Teams Must Update:
  • PF calculations
  • Gratuity calculations
  • Salary breakup
  • OT calculations
  • Wage registers
Compliance Teams Must Update:
  • Registers & filings
  • ESIC & PF integration
  • Digital attendance
  • Employee records under the new codes

7. Risk of Non-Compliance

The risk is very real.If employers fail to align with the Labour Codes, penalties include:

  • PF undayment penalties
  • Higher gratuity liabilities
  • Backdated compliance dues
  • Fines for missing appointment letters
  • Compensation for gig/contractor misclassification
  • Litigation from workers
  • Factory/establishment closure in extreme cases

Compliance is no longer optional — it’s essential.

8. How Companies Can Reduce Cost Legally (Not Unethically)

These methods are safe, legal, and recommended:

  1. Increase variable pay components
  2. Use reimbursement-based salary elements
  3. Minimise overtime through workforce planning
  4. Upskill employees to reduce headcount
  5. Digitise attendance & shift planning
  6. Optimise gig workforce contracts
  7. Align contractors with formal compliance
Avoid shortcuts like
  • 11-month contracts
  • Forced PF exclusion
  • Allowance-heavy structures
  • These can backfire legally.

9. Action Plan for Employers (AUR Consultant Framework)

We recommend a 7-step compliance framework:

Step 1: Salary Structure Audit

  • Rebuild salary framework under the 50% wage rule.

Step 2: Workforce Classification Audit

  • Permanent, fixed-term, gig, contractor.

Step 3: Review All Employment Documents

  • Appointment letters, contracts, NDAs, gig agreements.

Step 4: Update HR Policies

  • Leave, OT, night shift, remote work, safety, POSH.

Step 5: Align Payroll & HRMS Systems

  • Ensure all calculations match the new wage definition.

Step 6: Contractor & Vendor Compliance Review

  • Contract workers become your liability if the vendor is non-compliant.

Step 7: Training HR & Supervisors

  • Ensure every decision-maker understands the new rules.

Conclusion

New Labour Code: Decoded

The New Labour Codes represent a foundational shift in India’s employment landscape. They aim to balance employee protection, business flexibility, and compliance simplification.

Companies that adapt early will:

  • Reduce risk
  • Improve employee loyalty
  • Strengthen culture
  • Stay audit-proof
  • Become preferred employers

Companies that delay face:

  • Heavy penalties
  • Legal disputes
  • Loss of employee trust
  • Operational disruption

 

Learn more from our collection of Blogs Here.

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