New Labor Codes: Smooth execution depends upon compliance measures; digitisation crucial in payroll management

August 07, 2021 2:33 PM

As the second-largest labour force in the world, India is all set to embrace the new Labour Codes.

New labor codesLack of finance prevents MSMEs from investing in innovative projects, improving their productivity, and seizing opportunities for expanding to enter new markets.

By Madhu Damodaran

As the second-largest labour force in the world, India is all set to embrace the new Labour Codes. While the new codes, aimed at protecting the interests of both employers and employees, are now delayed on execution due to the ongoing pandemic, corporates should use this additional planning time in closely evaluating their existing processes and making necessary provisions to ensure a smooth transition. As we accelerate towards a digital-first business environment, companies should take stock of what should be done internally with the help of staff and technology, and what will need to be outsourced to experts for better implementation to conserve overall business productivity.

This isn’t the first time that labour law reforms have been tabled and mulled over. The pandemic, which crippled several businesses, also brought to light the plight of migrant workers, who were displaced with inadequate or no social security, and brought to the fore the need for speedy reforms in this regard. However, the success of any reform will only be demonstrated by how well it is implemented, and the smooth execution of these Codes will reveal how good a labour market India can be, bolstering more investments, Foreign as well as Domestic.

With the ease of compliance comes enhanced formality which will have a ripple effect on enterprises and pave the way for a more organised job market. However, ensuring compliance of a large and displaced workforce in a remote work environment can be both cumbersome and exhaustive. Thus, to keep up with the new Labour Codes and streamline operations to be compliant, leveraging technology will be crucial. In fact, accurate, real-time data on workers and their deployment will be key to implementing new rules – consistently and fairly – across the workforce.

How compliance defines employees and workers

At the most fundamental level, it is important for employers to understand the legal definition of employees and workers (and related sub-categories) under the Code. This is essential as all the four Codes have defined obligations either in terms of employee or in terms of worker. The terms carry different obligations from a compliance perspective and thus grasping this basic difference and its various implications under the Code is critical.

As organizations grapple with these new labour codes, they must also deal with other applicable state regulations, which vary from one jurisdiction to the next. With respect to inter-State migrant workers (hereinafter referred to as ISMW) employers must be cognizant that now ISMW are given parity with contract labour. The provisions relating to ISMW are going to be strictly enforced in contrast to those under the ISMW Act and therefore it is prudent for employers to be aware of their obligations. Hence, deployment of a tech-enabled solution will play a crucial role in implementing new rules that are consistent and unbiased across a company’s workforce. This will also help firms take well informed and data-driven decisions.

Invest in the right technology right from onboarding for the gig and unorganized workforce

Seeding of AADHAR for social security benefits to gig/platform/unorganized workers is a crucial aspect of formalizing the labour sector in the country. Employers must ensure their employees and workers are educated and instructed on how to complete the processes seamlessly. This also calls for an issue redressal mechanism to be put in place. Clearly drafted roles, responsibilities and maintenance of a legal status delineating permanent workforce and contract/temporary workforce and further ISMW among them, is crucial for employers.

Furthermore, aggregators, as defined under the Code, are mandated to donate 1-2% of their annual turnover towards a social security fund for their gig and platform workers. This is to ensure that such gig and platform workers have social security. All this requires technology intervention that will ease the functioning of the HR and legal departments of enterprises.

Thus, a software driven tool used to onboard and identify workers as contract labour, fixed term employees, or gig/platform workers, will ensure that the onboarding process is aligned with the new Labour Codes. A solution that allows businesses to easily configure these regulatory compliance requirements, tailored to an organization, will go a long way in complying with the social security net mandated by the Labour Codes. Furthermore, it will standardize compliance processes, enable companies to manage the regulatory changes as applicable, and eliminate any compliance variations in the long run.

Streamlining the payroll process with automation

Closely linked to social security requirements is payroll management. There are interpretational and operational challenges created by the wage definition from a payroll processing perspective. There are new forms of employment and also new criteria for determining what constitutes wages. While the formula for wages itself is not too complex, it is the interpretational challenges relating to allowances that are excluded and the scope of variable pay, that require organizational scrutiny. The manner in which wage elements are structured and modified will determine liability towards social security, and hence employers need to determine the structure that would be beneficial to their organization and employees.

To illustrate, EPF (Employees Provident Fund) and ESI (Employees State Insurance) will be impacted with the new wage definition. With regard to the new ESI structure, many individual workers who were not part of the scheme will now be eligible for ESI coverage, as certain allowances such as wage elements being excluded leaves their wages below the threshold for coverage.

Hence payroll computation and processing tools will need to adapt to changes with respect to salary structure, compensations, and benefits. These solutions will not only help simplify the entire payroll process and eliminate errors, but also reduce processing time and ensure compliance, thus enabling improved strategic business decisions with real-time visibility and comprehensive insights into payroll data. By automating the entire process, firms can drive process efficiency, boost data accuracy, and enhance overall employee engagement for improved operational performance and bottom-lines.


With digitization becoming the backbone of the Fourth Industrial Revolution, the management of labour in all respects cannot be left behind, bereft of the benefits that it will bring to this segment of the economy. This is where solutions armed with superior labour compliance capabilities can ensure seamless transition to the new labour codes, without risking any violations. An intelligent technology solution that helps drive positive business outcomes by engaging with employees, optimising labour costs, increasing productivity and minimising compliance risk, is something that every enterprise should look at deploying.

(Madhu Damodaran is Group Head – Legal, Quess Corp. Views expressed are the author’s own.)

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