New Labour Code: What Employees and Employers Need to Know

One of the most important changes in the employment laws in recent times in India is the new labour code framework. The reforms are designed to streamline and rationalise the current labour laws into a more consistent series of codes, which will include wages, industrial relations, social security and workplace safety. While the implementation timeline has shifted multiple times, the changes will impact employment contracts, working hours, payroll, compliance and employee benefits.

For employees, the new labour code may influence salary structures, leave policies, working conditions, and social security coverage. For employers, it introduces revised compliance requirements and operational adjustments across human resources, payroll, and workforce management.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

What Is the New Labour Code?

The new labour code refers to four labour codes passed by the Indian Parliament to replace 29 central labour laws. The objective is to create a more standardised and easier-to-administer labour framework.

The four codes are outlined below:

The government has stated that these reforms are intended to reduce legal overlap and improve ease of compliance for employers while extending certain protections to more categories of workers.

Why Were the Labour Codes Introduced?

India’s previous labour law system was often criticised for being fragmented and difficult to navigate. Different laws applied to different sectors, business sizes, and employee categories, leading to overlapping obligations and administrative complexity.

The new labour code framework seeks to address several issues:

• Consolidation of multiple laws into a unified structure
• Standardisation of definitions across labour regulations
• Wider social security inclusion
• Digitisation of compliance processes
• Improved transparency in wage and employment practices

For employers operating across multiple states or industries, standardised rules may reduce interpretational differences. For employees, the changes could improve clarity around wages, benefits, and employment rights.

Key Changes Employees Should Understand

Several provisions under the new labour code may directly affect employees across sectors.

Revised Salary Structure

One of the most discussed changes relates to the definition of wages. Under the Code on Wages, basic pay is expected to constitute at least 50% of total compensation in many cases.

This may alter salary structures in the following ways:

The exact effect depends on the employer’s compensation structure and implementation approach.

Four-Day Work Week Discussions

The new labour code allows flexibility in working hours, subject to state-level rules and employer policies. This has led to discussions around a possible four-day work week model.

However, the code does not mandate a four-day week. Instead, it permits employers to structure work schedules differently while maintaining the total weekly working hour limits.

For example, employees may work longer daily shifts in exchange for additional weekly off days if approved under applicable rules.

Social Security Expansion

The Code on Social Security includes provisions that may extend benefits to gig workers and platform workers.

This is particularly relevant for sectors such as:

• App-based transportation
• Food delivery
• Freelance digital services
• E-commerce logistics

While implementation details continue to evolve, the framework signals broader recognition of non-traditional employment arrangements within formal social security systems.

Annual Leave Provisions

The Occupational Safety, Health and Working Conditions Code includes revised rules around earned leave eligibility.

Under earlier provisions in many establishments, employees became eligible for earned leave after working 240 days in a year. Some interpretations under the new framework may reduce this threshold in specific situations, although implementation depends on state notifications and sector-specific rules.

Key Changes Employers Should Prepare For

Employers may need to make operational and compliance-related adjustments once the new labour code is implemented fully across states.

Payroll and Compensation Adjustments

Businesses may need to revise salary structures to align with the updated wage definition requirements.

Areas likely to be affected include:

• Provident fund calculations
• Bonus eligibility
• Gratuity computation
• Overtime calculations
• Cost-to-company structures

For organisations with large workforces, these changes may require payroll system updates and employee communication planning.

Compliance Digitisation

The labour code framework places emphasis on digital filings, electronic registers, and standardised documentation.

This may help reduce paperwork, but businesses may still need to invest in:

• HR compliance systems
• Payroll software upgrades
• Digital attendance tracking
• Centralised employee records

Smaller businesses may face a temporary adjustment period while transitioning to revised compliance processes.

Changes in Hiring and Workforce Management

The Industrial Relations Code introduces updated rules related to layoffs, retrenchment, and fixed-term employment.

Fixed-term employment provisions allow employers to hire workers for a defined period while providing benefits comparable to permanent employees during the contract term.

This could increase workforce flexibility in industries with seasonal or project-based staffing requirements.

Workplace Safety Obligations

The Occupational Safety, Health and Working Conditions Code consolidates safety-related regulations across industries.

Employers may need to strengthen compliance around:

The extent of obligations may vary based on establishment size and sector classification.

Challenges and Concerns Around Implementation

Although the new labour code framework aims to simplify labour regulation, several concerns remain regarding implementation and interpretation.

State-Level Rule Variations

Labour is a concurrent subject in India, meaning both central and state governments play a role in implementation. States must notify their respective rules before the codes become operational.

As a result, implementation timelines and interpretations may differ across states.

Cost Implications for Employers

Revised wage definitions and social security contributions may increase employment-related costs for some businesses.

Industries with large employee bases or thin operating margins may need time to adapt to revised payroll obligations.

Employee Concerns About Working Hours

Discussions around flexible work schedules have also raised concerns about extended daily working hours in some sectors.

While the framework includes safeguards regarding maximum weekly hours and overtime, actual workplace practices may vary depending on industry and employer policies.

How Employees and Employers Can Prepare

Both employees and employers can take practical steps ahead of broader implementation.

For Employees

• Review salary structures and understand wage components
• Track updates issued by employers and state labour departments
• Understand changes related to provident fund and gratuity
• Maintain employment documentation and records

For Employers

• Conduct payroll structure assessments
• Review employment contracts and HR policies
• Strengthen labour law compliance systems
• Monitor state-specific notification updates
• Train HR and payroll teams on revised provisions

Preparation may help reduce disruption once implementation timelines are finalised.

Key Takeaways for Employees and Employers

The new labour code represents a broad restructuring of India’s employment and labour regulation framework. While the full impact will depend on state-level implementation and sector-specific application, the changes are likely to affect wages, compliance, social security, and workforce management across industries. Employees and employers who understand the framework early may be better positioned to adapt to the evolving regulatory environment.