New Labour Codes & Your Business: What Every Employer Needs to Know About Upcoming Payroll Changes (AY 2025-26)

India’s labour law landscape is on the cusp of a major transformation. Four new Labour Codes aim to simplify and consolidate existing laws. These codes cover Wages, Industrial Relations, Social Security, and Occupational Safety, Health & Working Conditions. While implementation has been deferred, employers must understand their upcoming impact. Readiness is crucial.

This guide explores the New Labour Codes India Impact. It details what every employer needs to know about potential payroll and HR changes. Prepare your business now for a smooth transition.

Understanding India’s New Labour Codes: A Brief Overview

The Indian Parliament passed four new Labour Codes:

• The Code on Wages, 2019: Consolidates laws related to wages, bonus, and minimum wages.
• The Industrial Relations Code, 2020: Simplifies laws on trade unions, industrial disputes, and standing orders.
• The Code on Social Security, 2020: Amalgamates various social security legislations, including PF, ESI, Gratuity, etc.
• The Occupational Safety, Health and Working Conditions Code, 2020: Aims for uniform standards for health, safety, and working conditions.

These codes aim for ease of doing business. They also intend to provide social security to more workers.

Key Impacts on Payroll & Employee Benefits

The ‘Code on Wages’ and ‘Code on Social Security’ will significantly impact your payroll structure:

• Definition of ‘Wages’ & the 50% Basic Pay Rule:
  • The new definition mandates that ‘Basic Wages’ must constitute at least 50% of an employee’s total gross remuneration.
  • This means allowances (HRA, conveyance, etc.) cannot exceed 50%.
  • Impact: For many companies, this increases the ‘Basic Wage’ component. This directly leads to higher Provident Fund (PF) and Gratuity contributions, as these are linked to Basic Wages.
  • Result: Employees’ ‘take-home pay’ might reduce, while employer’s statutory costs could rise.
• Increased Social Security Contributions:
  • With a higher ‘Basic Wage,’ contributions to PF and Employee State Insurance (ESI) will likely increase.
  • Impact: Both employer and employee contributions to these social security schemes may see an uptick.
• Changes to Leave Policy:
  • The earned leave accumulation limit may increase.
  • Specific rules for leave encashment might also see changes.
  • Impact: Businesses need to review and potentially revise their leave policies.
• Full and Final Settlement (FFS):
  • The codes propose a shorter timeline for FFS. Companies must settle dues within two days of an employee’s last working day in certain cases.
  • Impact: Employers need highly efficient exit management and payroll processing.
• Formalization of Fixed-Term Employment (FTE):
  • FTE employees will now be eligible for Gratuity, PF, and ESI benefits, proportionate to their service period.
  • Impact: Provides greater social security to FTE workers, increasing costs for employers utilizing such contracts.

Broader Implications for HR & Business Operations

Beyond direct payroll, the New Labour Codes India Impact extends to broader HR and operational aspects:

• Working Hours: While 8 hours a day/48 hours a week remains standard, the codes allow for a 4-day working week (12 hours/day for 4 days) with mutual agreement, provided the 48-hour weekly limit is adhered to.
• Gig and Platform Workers: For the first time, the Code on Social Security includes provisions for gig and platform workers. This extends some social security benefits to them, although specific implementation rules are awaited.
• Industrial Relations: New rules govern strikes, retrenchment, and standing orders. These aim to streamline industrial relations but require businesses to review their internal policies.
• Occupational Safety & Health: Uniform standards for workplace safety, health, and working conditions will apply. Employers must ensure compliance with these new norms.

Preparing Your Business for the New Labour Codes

The implementation of these codes is highly anticipated. While the exact date is pending, proactive preparation is vital:

1. Review Salary Structures: Analyze your current salary components. Adjust them to comply with the 50% ‘Basic Wage’ rule.
2. Assess Financial Impact: Calculate the potential increase in statutory contributions (PF, Gratuity) for your current workforce. Budget accordingly.
3. Update HR Policies: Revise leave policies, FFS procedures, and fixed-term employment contracts to align with the new code’s provisions.
4. Leverage Technology: Ensure your payroll software is updated. It must handle the new calculations and compliance requirements accurately.
5. Seek Expert Advice: Consult with HR and compliance professionals. Get specific guidance on implementing these changes for your unique business.

The New Labour Codes India Impact will be significant. Employers who prepare early will navigate the transition smoothly. This ensures seamless payroll, robust compliance, and continued employee satisfaction.

For expert guidance on HR compliance, payroll management, or navigating the complexities of the New Labour Codes, get in touch with CA Sweta Makwana & Associates today. As trusted compliance specialists and a leading CA in Mumbai, our firm helps businesses prepare for and adapt to evolving regulatory landscapes.

Explore our Payroll Management Services to understand how CA Sweta Makwana & Associates, your compliance specialists for SMEs, startups & NRIs, can support your business’s seamless transition.