Explainer: New Labour Codes Promise Better Worker Protection, Cleaner Compliance
Here's a look at some of the major changes that the Labour Codes will bring about for employees as well as employers.
The new Labour Codes, notified last week, are being touted as the biggest overhaul of labour regulation in decades as these merge 29 laws into four simplified codes, promising stronger worker protection, cleaner compliance, and greater flexibility for businesses.
Here's a look at some of the major changes that the Labour Codes will bring about for employees as well as employers.
CHANGES IN TAKE-HOME PAY FOR EMPLOYEES:
The new, uniform definition of 'wages' caps allowances at 50 per cent of total compensation. This means basic pay will rise, increasing provident fund (PF) and gratuity contributions. Take-home salary may fall slightly, but retirement benefits grow significantly.
Currently, a large number of employers offer split allowances to reduce tax and other liabilities. Experts said this will reduce take-home pay of employees but also increase compliance burden and costs for employers.
FOR EMPLOYERS:
Higher employer contributions to PF and gratuity. They may need to restructure CTCs to remain compliant. This will be effective due to change in definition of wages that caps the quantum of allowances at 50% of the total gross pay.
This means that 50% of the gross pay is basic wages on which social security benefits and contributions like gratuity and provident fund are calculated.
A senior official told PTI that the definition of wages has come into effect immediately after notification of The Code on Wages 2019 on November 21, 2025.
WHAT HAPPENS TO JOB SECURITY:
Fixed-term workers get the same statutory benefits as permanent employees, including gratuity (if tenure conditions are met). Clearer dispute-resolution mechanisms may improve job security and reduce arbitrary action.
FOR EMPLOYERS:
They can now hire talent on fixed-term contracts without long-term liabilities. Threshold for layoffs/closures raised to 300 workers, giving them more flexibility in manpower planning.
WORK HOURS:
Standardisation of working hours (48 hours weekly cap) improves predictability. Overtime rules and leave provisions are clearer and more enforceable. Stricter safety and welfare norms enhance workplace conditions.
SOCIAL SECURITY:
Gig, platform, and unorganised workers are now formally recognised. Also, access to EPF, ESI, maternity benefits, and injury compensation widens. Digital registration makes benefits easier to claim. Platforms may need to contribute to dedicated social security funds for gig workers.
COMPLIANCE: For employees, simplified rules mean benefits and rights are easier to track and enforce. Employers also benefit due to fewer registers and returns.
Another senior official said employers have been splitting wages into numerous allowances to reduce employees' tax as well as their outgo towards various social security schemes and benefits such as PF, ESIC, and gratuity.
However, they explained that since the threshold of basic wage for contribution into the Employees' Pension Scheme 1995 is Rs 15,000 per month, employers will continue to contribute 8.33 per cent of this amount into the scheme.
But the remaining balance contribution will go into the Employees' Provident Fund, they added, explaining that this will increase employees' EPF benefit.
Earlier, on many occasions, the EPFO had cautioned firms to adhere to the norm of keeping 50% of the gross pay as basic wage for the purpose of calculating social security contributions.
One of the most significant issues is the mandate for annual health check-ups for all employees aged 40 and above.
