India’s new labour codes mark a decisive shift toward a modern labour framework that balances business flexibility with worker protection. The aim is to simplify compliance, formalise employment and create a predictable environment for growth, explains Puneet Gupta
Productivity gains expected
The biggest productivity boost comes from simplification. Employers no longer need to juggle multiple registrations and filings under different laws; the labour codes allow single registration and consolidated return, supported by digital compliance platforms. This reduces administrative effort and inspection delays, freeing time for core operations. For example, contractors can now operate under one central licence instead of separate approvals for every project. Flexibility in daily working hours—while retaining the 48-hour weekly cap—helps manufacturers and service providers align shifts with demand peaks, improving utilisation.
The Industrial Relations Code raises the threshold for prior government approval for layoffs and retrenchment from 100 to 300 workers, giving employers confidence to scale without rigid exit barriers. Employees benefit too: structured overtime at double pay creates opportunities for higher earnings, and fixed-term employment offers clarity on tenure and benefits, including gratuity after one year.
Changes in gratuity rules
Gratuity is a lump-sum payment that employees get upon retirement, resignation, or termination. Under the Payment of Gratuity Act of 1972, employees became eligible for gratuity only after completing five years of continuous service. The gratuity amount was calculated as 15 days’ worth of basic salary and dearness allowance for each completed year of service.
With the introduction of the new labour codes, the calculation of gratuity will now be based on a revised definition of “wages,” which includes all salary components, with certain exceptions such as House Rent Allowance and conveyance allowance. This change is expected to result in higher gratuity payouts for employees, while also increasing costs for employers. As a result, employers will need to assess the financial impact on account of the increase in Gratuity, make necessary provisions and update the payroll processes, to effectively manage the changes to the gratuity provisions.
Overtime pay double of wages
Overtime pay for workers is governed by the Occupational Safety, Health and Working Conditions (OSH) Code. The term “worker” includes individuals engaged in various roles, such as manual, unskilled, skilled, technical, operational, clerical, or supervisory work, while explicitly excluding those in supervisory, managerial, or administrative positions.
Under the OSH Code, the standard working hours are set at 8 hours per day and a maximum of 48 hours per week. However, State Rules allow organisations some flexibility in adjusting daily working hour limits, provided that the overall weekly limit is adhered to.
For any work performed beyond the established normal working hours, workers are entitled to overtime pay at twice the ordinary rate of wages. This rate is calculated based on the new definition of “wages” as outlined in the code.
Fixed-term employment
The labour codes have recognised fixed-term employment as a legitimate employment model, marking a significant shift in the landscape of workforce management. This framework allows employers to hire workers for specific projects or defined periods, providing much-needed flexibility in hiring practices. However, the codes also establish clear conditions that employers must adhere to when engaging fixed-term employees.
Notably, these regulations mandate that fixed-term workers receive wages, working hours, and benefits comparable to those of permanent employees performing similar roles. The legislation also stipulates that fixed-term employees will be eligible for gratuity after just one year of continuous service, as compared to the five-year service requirement for regular permanent employees. By facilitating the hiring of fixed-term employees, the codes aim to encourage direct hiring practices and enhance overall employability. At the same time, they ensure that these workers receive appropriate social security benefits.
What states should be doing?
While the central labour codes are effective, they grant state governments the authority to formulate specific rules and notifications regarding various operational aspects under these codes. To facilitate this, state governments must finalise and notify these rules, adapting central guidelines to meet the unique needs of their jurisdictions, while maintaining compliance with the overarching framework. Additionally, it is essential for states to proactively identify and address potential challenges in implementing the new codes. A key action step for state governments will be to review existing state laws and regulations, such as the Shops and Establishments Act, that have not been subsumed under the new labour codes. By identifying overlapping provisions and resolving any conflicts, state governments may align these regulations with the central labour codes, ensuring harmonisation and simplification of compliance for employers.
The writer is partner, People Advisory Services – Tax, EY India
