If you haven’t touched your payroll structure since November 2025, you may already be out of step with the law. The detailed rules that would tell you exactly how to comply are still being finalized.
The four new Labour Codes — Wage Code, Industrial Relations Code, Social Security Code, and Occupational Safety, Health and Working Conditions Code — came into force on 21 November 2025. They replace 29 existing central labour laws. Central and most state-level implementing rules are still pending.
Not sure if your payroll structure is already non-compliant? WhatsApp us and we’ll review your wage structure against the new definition.
Quick Summary — Key Employer-Facing Changes
| Area | What Changed |
| Basic pay requirement | Must be at least 50% of total compensation (caps allowances) |
| Fixed-term employee gratuity | Eligible after 1 year of service, down from 5 years |
| Gig and platform workers | Now covered under social security (life, health, maternity, PF benefits) |
| Contract labour threshold (OSH Code) | Applies at 50+ contract workers, down from 20 |
| Overtime | Payable at 2x ordinary wage rate, subject to worker consent |
| Standing order/retrenchment approval threshold | Raised to establishments with 300+ workers |
The Labour Codes simplify India’s labour laws into four Codes, introduce a new wage definition, expand social security coverage, revise contract labour provisions and affect payroll, PF and gratuity calculations. Employers should review their HR policies and payroll structures even as detailed rules continue to evolve.
Which Businesses Should Review Their Payroll Immediately?
Employers should prioritise a payroll review if they:
- Have more than 10 employees.
- Use large special allowances to reduce PF liability.
- Employ fixed-term employees.
- Hire contract workers.
- Engage gig or platform workers.
- Have operations in multiple states.
- Expect labour inspections or statutory audits.
These businesses are more likely to be affected by the Labour Codes than very small employers.
The Wage Definition Change Hits Payroll Immediately
The Wage Code requires basic pay to be at least 50% of total compensation. That caps allowances, in aggregate, at 50%. Many existing compensation structures weren’t built with this constraint — especially ones leaning on large special allowances or flexible benefits components. This single change ripples into PF contributions, gratuity calculations, and overtime computations, since all three use basic pay as their reference point. A higher basic pay means higher PF and gratuity costs, even if total CTC stays the same.
“In Force” Doesn’t Mean “Fully Enforceable Yet”
This detail creates real confusion. The Codes became legally effective on 21 November 2025. But the detailed Central and State rules that specify exactly how to implement them are still being finalized. The government published draft Central rules in late December 2025 for stakeholder comment, with final rules expected to follow. Until those rules land, employers operate in a genuine grey zone. The law is in force, but the operational specifics aren’t fully settled. Authorities generally won’t penalize reasonable, good-faith continuation of prior practices during this transition — but that’s not the same as having clear guidance.
Gig and Platform Workers Now Have a Real Social Security Claim
The Social Security Code extends coverage — life, health, maternity, and PF-equivalent benefits — to unorganized, gig, and platform workers for the first time at this scale. If your business engages workers through gig or platform arrangements, this isn’t a future consideration. The coverage obligation exists now, even though states are still finalizing the registration and contribution mechanics.
Contract Labour: The Threshold Moved, and So Did the Definition
Under the OSH Code, contract labour provisions now apply at establishments engaging 50 or more contract workers, down from 20. This pulls more mid-sized businesses into scope than before. The Code also bars contract labour for an establishment’s defined “core activity,” with exceptions for work that’s ordinarily outsourced, doesn’t need full-time roles, or covers a temporary spike. Review your current contractor arrangements against this definitional change specifically.
A Practical Starting Checklist for Employers
- Run your current compensation structure against the 50% basic-pay rule. Model the cost impact on PF and gratuity before assuming nothing changes.
- Audit fixed-term employee contracts for gratuity eligibility under the new 1-year threshold. This is a real, immediate financial obligation shift.
- If you engage gig or platform workers, confirm what social security registration steps apply to your business as state rules get finalized.
- Review contractor headcount against the new 50-worker OSH Code threshold if you’re a mid-sized employer who previously sat below the old 20-worker line.
- Keep a standing watch on Central and State rule notifications. This is a moving target through 2026, not a one-time update.
Frequently Asked Questions
Are the old 29 labour laws completely gone now?
The four Codes replace them in substance. The transition includes provisions to avoid disrupting matters already in progress under the old laws. Treat the Codes as governing going forward, with some transitional continuity for existing arrangements.
Do I need to update employment contracts immediately?
No single hard deadline forces immediate contract rewrites. But reviewing and updating contracts to reflect the new definitions — employee/worker classifications, wage structure — is a reasonable near-term priority given the Codes are already in force.
Does this affect Provident Fund contribution rates?
Not the rates themselves, but the wage base they’re calculated on. Since basic pay must now be at least 50% of total compensation, PF contributions calculated on basic pay will generally increase even without a rate change.
When will the detailed Central rules actually be finalised?
Government officials indicated rules were expected around April 2026. This kind of timeline has shifted before. Treat it as a target, not a guarantee, and keep checking for updates.
Do I need to change my salary structure immediately?
Not necessarily. Employers should first evaluate whether their current salary structure complies with the new wage definition and then implement changes after considering the applicable Central and State rules. Sudden restructuring without proper review may have unintended effects on PF, gratuity and payroll costs
Will existing employees need fresh appointment letters?
Generally, existing appointment letters remain valid. However, many employers are reviewing employment contracts, HR manuals and salary structures to align them with the Labour Codes and future implementing rules.
Which Businesses Should Review Their Payroll Immediately?
Employers should prioritise a payroll review if they:
- Have more than 10 employees.
- Use large special allowances to reduce PF liability.
- Employ fixed-term employees.
- Hire contract workers.
- Engage gig or platform workers.
- Have operations in multiple states.
- Expect labour inspections or statutory audits.
These businesses are more likely to be affected by the Labour Codes than very small employers.
References
- Code on Wages, 2019
- Industrial Relations Code, 2020
- Code on Social Security, 2020
- Occupational Safety, Health and Working Conditions Code, 2020
- Ministry of Labour and Employment notification, effective 21 November 2025
Last Updated: 26 June 2026
Reviewed By: TaxKitab Team
⚠️ Central and State implementing rules are actively being finalised as of this writing. Confirm the current rule status for your specific state and establishment type before making structural payroll changes based on this post alone.
This wage-structure shift connects directly to two other compliance areas we’ve covered. Statutory Bonus calculations and PF contribution mechanics both use basic pay as their reference point, so a change here affects both. Call or WhatsApp: +91 7448200422Email: info@taxkitab.comWebsite: taxkitab.com See our Payroll & HR Compliance service, or visit Contact.
