Demystifying India’s New Labour Codes: What SMBs Need to Know
India’s New Labour Codes: What SMBs Need to Know About Hiring, Payroll, and Compliance
India’s new labour codes aim to simplify decades of fragmented labour laws into four unified frameworks. For small and mid-sized businesses, these reforms will directly impact hiring practices, payroll structures, employment contracts, and compliance obligations. This guide explains the key changes and highlights areas where uncertainty still remains.
The Four New Labour Codes Explained
The overarching objective of the new labour codes is to simplify compliance, standardise definitions, and strengthen employee protection across sectors.
| Code | Primary Focus |
|---|---|
| Code on Wages | Unification of laws related to wages, bonus payments, and equal remuneration |
| Industrial Relations Code | Regulations governing employment conditions, trade unions, and industrial dispute resolution |
| Social Security Code | Consolidation of laws related to Provident Fund (PF), Gratuity, ESIC, and other social benefits |
| Occupational Safety, Health and Working Conditions Code | Rules governing workplace safety, employee health, working hours, and welfare provisions |
Key Policy Shift: The New Wage Definition
The most significant reform introduced by the labour codes is the revised definition of wages. As per the new rule, allowances cannot exceed 50 percent of the total compensation (CTC). Any amount exceeding this threshold must be included in the statutory wage component.
Direct Impact on Companies
- Increased statutory liabilities: Provident Fund and gratuity contributions may rise due to a higher wage base.
- Change in take-home pay: Certain employees may see a reduction in net salary to maintain CTC compliance.
- Mandatory payroll restructuring: Salary templates and compensation structures must be redesigned.
- Compliance alignment: Offer letters and CTC breakups must clearly document adherence to the 50 percent rule.
This change is expected to have the most substantial impact on payroll budgets and financial planning.
Recruitment and Employee Management Under the New Codes
The labour codes introduce greater structure and formalisation in workforce management.
Key Changes for Employers
- Clearly defined notice periods and industrial dispute handling processes
- Formal recognition of gig and contract workers, creating new reporting and contribution considerations
- Mandatory maintenance of digital employee records, including attendance and onboarding documentation
Small and mid-sized businesses should prioritise streamlining HR documentation and digitising records in advance.
Social Security and Employee Benefits
The new codes aim to widen the social security net and include more categories of workers.
What This Means for Employers
- Expanded coverage for PF, ESIC, maternity benefits, and gratuity for certain fixed-term employees
- Greater predictability in long-term labour costs, along with higher compliance responsibility
Workplace Norms and Working Hours
While retaining the standard eight-hour workday, the labour codes clarify rules for modern and flexible work environments.
Operational Implications
- Clear caps on weekly working hours and standardised overtime calculation rules
- Need for shift-based, retail, and field-heavy businesses to reassess workforce scheduling
Areas of Continuing Uncertainty
Despite legislative clarity, several implementation details remain unresolved, creating challenges for HR leaders and founders.
Key Open Questions
- How strictly the 50 percent wage rule will be enforced for variable pay and incentive-based compensation
- Implementation timelines, which depend on individual state government notifications
- Operational guidelines for contributions and reporting related to gig and platform workers
- Compliance requirements for remote and hybrid work models
- Gratuity applicability for short-term fixed-duration contracts
Recommended Preparatory Steps for SMBs
Early preparation can significantly reduce compliance risks and transition challenges.
Actionable Steps
- Restructure compensation to ensure allowances remain within the 50 percent limit
- Update offer letters, employment contracts, and HR policy manuals
- Ensure complete digitisation of HR and payroll records
- Review freelancer and contractor agreements for gig worker implications
- Adopt HR technology to automate payroll, attendance, and documentation management
Conclusion
The new labour codes are designed to bring clarity, consistency, and efficiency to India’s labour law framework. While certain operational details are still awaited, SMBs that prepare early will be better positioned to manage payroll transitions, streamline hiring processes, and strengthen long-term compliance and employer credibility.