The four Labour Codes came into force on 21 November 2025. They replace 29 central labour laws with the Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions (OSH) Code.
Most employers have updated their policies on paper. Fewer have redone the salary structures, appointment letters and exit processes that the Codes actually change. The changes below are the ones that cost money or carry risk, in the order to tackle them.
Central rules or state rules?
Labour is a subject on which both the Centre and the states make law. The Centre notified its rules under the Codes in May 2026. They apply where the Centre is the "appropriate government": railways, mines, banks, insurance companies and central public sector undertakings, among others. Most other employers follow the rules of the state they operate in.
States are at different stages. As of November 2026, only a minority have final rules under all four Codes, and the rest have a mix of final and draft rules. If you operate in several states, track each one. The Codes themselves are already law everywhere, so the work below does not need to wait for your state.
The wage definition
This is the change with the largest cost. The Code on Wages counts all pay as wages, including basic pay, dearness allowance and retaining allowance, and then lists what is excluded. House rent allowance, conveyance allowance, overtime, commission, bonus and the employer's provident fund contribution are among the exclusions.
Then comes a 50% test. If the excluded items add up to more than half of total pay, the amount above half counts as wages anyway.
- Basic + DA ₹30,000
- HRA ₹40,000
- Conveyance ₹30,000
- Basic + DA ₹30,000
- Added back ₹20,000
- Excluded ₹50,000
HRA and conveyance are excluded from wages, but together they come to ₹70,000, which is ₹20,000 more than half of pay. That ₹20,000 counts as wages, so the wage base rises from ₹30,000 to ₹50,000.
Many Indian salary structures keep basic pay low and put most of the pay into allowances. Under the Codes, that no longer keeps the wage base small. Gratuity and social security contributions are worked out on wages, so a higher wage figure raises the employer's cost. Model it for each salary band before you change anything, and decide how you will explain the change to employees.
Fixed-term staff and gratuity
The Codes recognise fixed-term employment. A fixed-term employee must get the same hours, wages and benefits as a permanent employee doing similar work, with statutory benefits in proportion to the period served.
Gratuity is the notable change. A fixed-term employee becomes eligible after one year of service under the contract, paid pro rata, where permanent staff still need five years. If you use one-year or two-year contracts, gratuity now belongs in the cost of each hire.
Other changes for HR
| Area | What the Codes say |
|---|---|
| Appointment letters | Every employee must be given a letter of appointment |
| Monthly wages | Paid by the 7th of the following month |
| Full and final settlement | Within two working days of removal, dismissal, retrenchment or resignation |
| Working hours | Eight hours a day; the Central Rules set 48 hours a week |
| Overtime | Paid at twice the normal rate of wages |
| Health check-ups | Free annual check-ups for the categories of workers the government prescribes |
| Women at night | Allowed in all establishments, with their consent and prescribed safety conditions |
The two-working-day settlement is the one most companies are not set up for. A typical exit takes weeks: asset returns, leave encashment, approvals, then payroll. Meeting the Code means running those steps before the last working day.
Larger employers, contractors and platforms
- 300 or more workers: standing orders apply, and lay-off, retrenchment and closure need prior permission from the government.
- Retrenchment: the employer pays 15 days' last-drawn wages for each retrenched worker into a re-skilling fund.
- Contract labour: the OSH Code's contract labour provisions apply where 50 or more contract workers are employed. Contract labour in core activities is prohibited, with exceptions such as work normally done through contractors or a sudden rise in volume.
- Gig and platform workers: aggregators must contribute 1 to 2% of annual turnover to social security, capped at 5% of what they pay gig and platform workers. The exact rate is set by notification, so check the current position before you budget.
Penalties
Under the Code on Wages, paying an employee less than is due can draw a fine of up to ₹50,000. A repeat within five years can mean imprisonment of up to three months, a fine of up to ₹1 lakh, or both. The other three Codes carry their own penalties.
What to do now
- 1Run the 50% test
Put every salary band through it and cost the change.
- 2Redesign pay structures
Decide what changes before the next appraisal cycle, and how you will explain it.
- 3Issue appointment letters
To every employee, including long-serving staff who never had one.
- 4Fix the exit process
So full and final settlement can be paid within two working days.
- 5Review fixed-term contracts
Add gratuity after one year, and match hours, wages and benefits to permanent staff.
- 6Audit contractors
Count contract workers by site, check core and non-core work, and check the contractor's own compliance.
- 7Track each state
Note which rules are final where you operate, and update registers and returns.
Common mistakes
Waiting for state rules before doing the numbers. The wage definition is in the Code, not the rules. The cost can be modelled today.
Changing payroll but not paperwork. Appointment letters, fixed-term contracts and standing orders need to match the new salary structure.
Treating contract staff as the contractor's problem. The principal employer carries duties too, and core-activity rules decide whether the arrangement is allowed at all.
Telling employees late. People notice a change in take-home pay on the payslip. A short note from HR before the first changed payslip saves weeks of questions.
