Change in labour laws: Analysis

Author note

Two days ago, my client came to me and asked, sir how will the new labour code effect me, and my employees, he is an entrepreneur and often delay the salaries dueto cash flow problems. Hence to give him advisory I started going through code, hope my analysis will help you. Happy reading

Introduction

On 21 November 2025, the Ministry of labour & employment notified the commencement of major provisions of the four Codes, namely the industrial relations code, 2020, occupational safety, health & working conditions (OSHWC) code, 2020, the code on social security, 2020, and code on wages, 2019 which tend to replace and consolidate 29 central statutes. The notifications and gazette entries will tell which sections are in force and the appointed dates.

Now, let’s discuss these points with benefits, policy intent in a practical manner

First, the simplification and single-window compliance, that means this consolidation reduces fragmentation, i.e. employers who previously dealt with multiple statutes and authorities will now have one single code per theme. This will help them in more consistent interpretation, maintenance of unified registers and maybe we can come across digital filing in the terms of labour codes in near future. This will definitely make the process easier for larger employers and multi-state establishments.

Secondly, the single statement of wages/benefits, one set of registers, single concept of “wages” simplifies the payroll design and statutory reconciliations.

The expansion of social security to cover gig and platform workers is a good step, as it broadens the scope of ESIC and EPFO style protection and creates a system where benefits can move with the worker, even if they shift platforms or jobs. This also opens the door for creating sector-specific social security funds, such as dedicated funds for delivery partners.

For businesses, it provides a clear framework to develop compliant and structured contracting models, instead of relying on ad-hoc or informal arrangements. This will ultimately support both workers’ security and employers’ regulatory certainty.

The mandatory appointment letters, annual health checks, separate washrooms for gender identities, defined overtime at double rates, and an 8-hour daily ceiling (with specified riders) are all formal safeguards which will help under-protected categories (women, migrants, contract workers).

As per me these are the tangible worker protections, given by these codes.

Flexibility with safeguards

Raising thresholds relating to standing orders, or prior government permission for layoffs is intended to balance employer flexibility with procedural safeguards (works committees, grievance committees, retraining funds). If implemented well, this should improve ease of doing business without wholly removing worker remedies.

Few points that I found may be subject to litigation

While aim of implementing this policy is sound, but the several drafting choices and procedural gaps create practical risk and legal uncertainty, like in the code, there are conflicting and ambiguous definitions of “wages”, also these codes attempt to create a problem in the case of salary-structuring by adding back certain allowances when they exceed 50% of basic + DA + retaining allowance.

However, the “50%” test is mechanical and may yield arbitrary results by giving the different treatment across payroll components, also the multiple sections across codes use similar phrases but with differing cross-references (code on wages vs social security), risking inconsistent base calculations for PF, ESI, gratuity and bonus and so on.

Confused? Let’s discuss it with Illustration:

Dipanshu is my employee at STS Ventures, who is on a salary. He has basic salary of Rs. 30,000, DA of Rs.3,000, with other allowances of Rs. 20,000.

Here, his basic + dearness allowance is Rs. 33,000, 50% of which is Rs. 16,500

As in this case the allowances of Dipanshu is Rs. 20,000 that exceed 50% by Rs. 3,500 i.e. 20k-16.5k, it will make Rs. 3,500 to be treated as “wages”.

This will result in increasing the base of PF, ESIC, and/or bonus by Rs. 3,500, which will increase my cost being employer and also it will increase employee contribution (unless government prescribes).

This sort of computation shall be automated by every payroll team and document the same, now I am waiting for official notification regarding this, maybe government exempts it, maybe it will in real increase the CTC.

Practically speaking, based on above Illustration, we may conclude that the payroll reengineering projects will be required, and the disputes, litigations and retrospective claims may arise over which allowances are “allowances” vs. “wages” and also cases regarding valuation of in-kind remuneration which are capped to 15%.

The Social Security Code’s “remuneration in kind up to 15% will be part of wages” is identified by me in the notification as poorly worded, it is uncertain whether “does not exceed” or “exceeds” was intended. Such wording errors may create interpretation issues and enforcement arbitrariness. Hence, I am waiting for official clarification in this matter.

The code on wages expands “establishment” to any place where any occupation is carried on, like CA firms, we all know the case where a girl in one of the big4 lost her life dueto work pressure, maybe the intent of the law is to cover these establishments but it may potentially bring very small operations under these complex wage rules. I agree, inclusion broadens protection, but it also imposes compliance burden on micro employers and may be administratively impractical for widespread, low-value work (like, self-employed contractors), so I expect sectoral exemptions or implementation notifications in this regard.

Although replacing various offences with compounding schemes, may reduce the criminal prosecutions, but on the other hand it may increase administrative discretion in sanction amounts. Along with that with combined inspector and facilitator power, it may risk ad-hoc enforcement unless clear compounding scales and appeal mechanisms are notified, I will discuss it in later part of this article.

Here, employers should be prepared for possible sanction notices from the authorities. In many cases, they may also need to negotiate for compounding of offences to settle the matter without prolonged litigation. However, trade unions may oppose compounding because they feel it reduces the seriousness of the offence and weakens its deterrent effect.

Changes in thresholds

Under the new Code, contract labour rules apply only when an establishment has 50 or more contract workers. This gives relief to many businesses that use smaller numbers of contract workers. However, the Code does not clearly address the earlier distinction between prohibited core activities and permissible routine outsourcing, which may create practical confusion for employers.

The test for what counts as “core” or “ordinarily outsourced” is factual and may generate disputes.

Illistration: A construction site uses 45 contract workers most of the year but peaks at 55 workers for two months. Under the new Code, contract labour provisions would apply (since threshold counted on any day of preceding 12 months), triggering obligations (registrations, welfare). Employers must therefore monitor month-to-month counts and register in advance

51% recognition rule and strike definition

I believe, when a union with 51% membership is recognised as the sole negotiating union, it becomes easier for one union to control all negotiations. But this may sideline smaller unions and change the balance of negotiations within the workplace. Further, the code now treats a “mass casual leave” of 50% or more workers on the same day as a strike. This means a tactic that was earlier in a grey area may now attract penalties. Such tightening may lead to legal challenges on constitutional grounds, especially the rights to association and peaceful assembly and may result in more litigation.

Even though, expanding ESIC and EPFO coverage is a positive step, but implementing it on the ground will be challenging. For smooth operations, the authorities need stronger district-level offices, better systems for handling claims, and reliable technology for portability of benefits. If these upgrades are not made, it can lead to delayed claims, disputes over contributions, and a build-up of compliance issues, ultimately hurting the workers whom the Codes are meant to support.

Now what I advised my client?

First of all, I told him that under the new Labour Codes, timely salary payment is no longer optional, the delays will attract stricter penalties and may even lead to sanction notices. I guided him in planning cash flows more carefully and ensure wages are released within the prescribed timelines.

I also asked him to review his payroll immediately, by recomputing the wages for PF, ESIC, bonus and gratuity using the new 50% test and document the methodology and board approvals. Prepare pro-forma salary structures for new hires, also to update contracts & appointment letters, with proper contract labour mapping, and in case there are more than 50 contract workers at any time in 12-months, then he is required to re-design outsourcing to mitigate unexpected coverage.

Also, told him to conduct Industrial relations audit, that means to check union membership rolls, works committee composition and grievance redressal mechanisms, plan communications if 51% recognition threshold might trigger bargaining changes.

For safety & health compliance, I asked him to implement mandatory annual health checks by tying up with hospitals, safety audits, separate washroom facilities and written overtime consent mechanisms. Also to be prepared for inspections, by giving adequate training to HR, legal teams for “inspector-cum-facilitator” interactions and compounding negotiations, and keep records in order.

legislative & administrative angle

Government must issue an authoritative, consolidated schedule or a central notification that sets out exactly how each wage-linked statutory is to compute its base like PF, ESI, gratuity, and bonus. This will avoid contradictory readings and litigation. Ideally make illustrative numeric examples in the notification.

Secondly, As discussed above, a transparent schedule should be made relating to compounding fees tied to turnover or wage base, and a clear appellate route (administrative and judicial). This reduces discretion and bribery risk.

For getting IT ready and achieving manpower benchmarks, the transition windows shall be provided for small employers along with phased implementation. This will avoids claim backlogs and employer panic.

Also, sectoral rules or a non-exhaustive list with examples for industries (manufacturing, IT, logistics, construction) shall be issued which must clarify when contract labour is prohibited. Permit industry associations and trade unions to be heard before finalising.

Conclusion

The four Labour Codes represent a major reform and can bring long-term advantages, more formal employment, wider social security, clearer rules in many areas, and recognition of new forms of work but there are still gaps in drafting, high administrative requirements, and several new compliance risks. These may create practical problems and disputes in the initial months post implementation. To avoid disruption, the Government will need to issue timely clarifications and consider a phased rollout. At the same time, employers should strengthen their compliance systems and take guidance from specialists like us. This balanced approach will help the Codes achieve their objectives without hurting businesses or workers.

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