New Labour Codes 2026 Explained: 4 Codes, Key Changes & Employer Action Plan
What Are the New Labour Codes in India?
The New Labour Codes are four consolidated labour legislations that replace 29 existing central labour laws in India. These codes were passed by Parliament between 2019 and 2020 and became effective on November 21, 2025, through notifications issued by the Ministry of Labour and Employment. They represent the biggest overhaul of Indian labour law in 75 years.
The objective behind these codes is to simplify and modernise India’s complex, often overlapping, and outdated labour law framework. By consolidating 29 laws into just 4 codes, the government aims to make compliance easier for employers, improve enforcement, expand social security coverage to previously uncovered workers, and create a more flexible yet protected labour market.
For employers, HR professionals, and payroll managers across India, understanding these codes is not optional. Non-compliance carries steep penalties, including fines up to Rs 10 lakh and imprisonment for repeat offences. This guide breaks down every major change and gives you a clear action plan.
The 4 Labour Codes: What They Replace
Before the new codes, Indian employers had to comply with 29 separate labour laws, each with its own registration, filing, and inspection requirements. Now, everything is grouped under four broad categories.
1. Code on Wages, 2019
This code creates a universal definition of “wages” that applies across all four codes. It replaces four old laws:
- Payment of Wages Act, 1936
- Minimum Wages Act, 1948
- Payment of Bonus Act, 1965
- Equal Remuneration Act, 1976
The Code on Wages applies to all employees, regardless of wage ceiling. It introduces statutory timelines for full and final settlement and mandates equal pay for equal work across genders.
2. Industrial Relations Code, 2020
This code governs the relationship between employers and workers, including trade unions, standing orders, layoffs, retrenchment, and closure. It replaces three laws:
- Industrial Disputes Act, 1947
- Trade Unions Act, 1926
- Industrial Employment (Standing Orders) Act, 1946
Key highlight: the retrenchment permission threshold has been raised from 100 to 300 workers, and fixed-term employees now get the same benefits as permanent workers.
3. Code on Social Security, 2020
The most expansive of the four codes, this one consolidates nine existing laws governing provident fund, ESI, gratuity, maternity benefits, and employee compensation:
- Employees’ Provident Fund (EPF) Act, 1952
- Employees’ State Insurance (ESI) Act, 1948
- Payment of Gratuity Act, 1972
- Maternity Benefit Act, 1961
- Employees’ Compensation Act, 1923
- Building and Other Construction Workers Act
- Unorganised Workers’ Social Security Act
- Employment Exchanges Act
- Cine Workers Welfare Fund Act
For the first time, this code recognises gig workers and platform workers and makes provisions for their social security coverage.
4. Occupational Safety, Health and Working Conditions (OSH) Code, 2020
This code consolidates 13 laws related to factory safety, working conditions, contract labour, and welfare of workers in various industries:
- Factories Act, 1948
- Mines Act, 1952
- Contract Labour (Regulation and Abolition) Act, 1970
- Building and Other Construction Workers Act, 1996
- Inter-State Migrant Workmen Act, 1979
- And 8 other occupation-specific laws
The OSH Code introduces the legal framework for a 4-day work week (with longer daily shifts), modernises safety standards, and raises the threshold for contract labour licensing.
Old Laws vs New Codes: Complete Mapping
| Old Law | Replaced By |
| Payment of Wages Act, 1936 | Code on Wages |
| Minimum Wages Act, 1948 | Code on Wages |
| Payment of Bonus Act, 1965 | Code on Wages |
| Equal Remuneration Act, 1976 | Code on Wages |
| Industrial Disputes Act, 1947 | Industrial Relations Code |
| Trade Unions Act, 1926 | Industrial Relations Code |
| Standing Orders Act, 1946 | Industrial Relations Code |
| EPF Act, 1952 | Social Security Code |
| ESI Act, 1948 | Social Security Code |
| Payment of Gratuity Act, 1972 | Social Security Code |
| Maternity Benefit Act, 1961 | Social Security Code |
| Employees’ Compensation Act, 1923 | Social Security Code |
| Factories Act, 1948 | OSH Code |
| Contract Labour Act, 1970 | OSH Code |
| Mines Act, 1952 | OSH Code |
Key Change 1: The 50% Wage Rule and Salary Restructuring
This is arguably the most impactful change under the new labour codes. The Code on Wages introduces a universal definition of “wages” that applies uniformly across all four codes, and it comes with a strict floor that will force most employers to restructure their salary components.
What Counts as “Wages” Now?
Wages are defined as: Basic Pay + Dearness Allowance (DA) + Retaining Allowance. That is it. Everything else is an “exclusion.”
What Is Excluded from Wages?
- House Rent Allowance (HRA)
- Conveyance allowance
- Overtime pay
- Employer PF contributions
- Gratuity payable on discharge
- Commission
- Bonus (statutory or otherwise)
- Any other allowances or reimbursements
The Critical 50% Rule
Here is the catch: if the total of all exclusions exceeds 50% of total remuneration, the excess amount is automatically reclassified as “wages.” In other words, your basic pay component must be at least 50% of your total gross pay.
| Example If an employee’s CTC is Rs 10 LPA and their basic is only Rs 3 LPA (30%), the employer must restructure the salary so that basic is at least Rs 5 LPA (50%). The remaining Rs 5 LPA can be split across allowances. |
Impact on Employers and Employees
Because PF, gratuity, bonus, and overtime are all computed on “wages” (i.e., basic pay), increasing the basic component has cascading cost implications:
- Employer PF contributions increase: 12% of a higher basic means larger monthly PF outflows
- Gratuity liability increases: Gratuity is calculated as (15/26) x last drawn wages x years of service
- Bonus liability may increase: Statutory bonus is calculated on wages or Rs 7,000, whichever is higher
- Employee take-home decreases: Higher PF deduction from employee side reduces in-hand salary
Salary Restructuring: Before vs After
| Component | Before (Old Structure) | After (New Code) |
| Basic + DA | Rs 15,000 (30%) | Rs 25,000 (50%) |
| HRA | Rs 10,000 | Rs 8,000 |
| Special Allowance | Rs 15,000 | Rs 7,000 |
| Conveyance | Rs 5,000 | Rs 5,000 |
| Other Allowances | Rs 5,000 | Rs 5,000 |
| Gross Salary | Rs 50,000 | Rs 50,000 |
| Employee PF (12%) | Rs 1,800 | Rs 1,800 (capped at Rs 15,000) |
| Employer PF (12%) | Rs 1,800 | Rs 3,000 (on Rs 25,000 basic) |
| Gratuity Provision | Rs 720/month | Rs 1,200/month |
| Net Take-Home | Higher | Lower (higher deductions) |
Note: PF contribution is still capped at a basic salary of Rs 15,000 for mandatory contributions. However, if basic exceeds Rs 15,000, the employer may choose to contribute on the full basic voluntarily, or restrict PF to the statutory ceiling.
Key Change 2: Working Hours and the 4-Day Work Week Option
The OSH Code introduces flexibility in how working hours are structured, while keeping the maximum of 48 hours per week unchanged. The headline change is the possibility of a 4-day work week with 12-hour daily shifts.
How the 4-Day Work Week Works
- Maximum weekly hours: 48 hours (no change)
- Maximum daily hours: 12 hours including breaks
- 4-day model: An employer can allow 4 days of 12-hour shifts, giving employees 3 consecutive days off
- Employee consent: The 4-day model requires individual employee consent; it cannot be imposed unilaterally
- Weekly off: Minimum 1 day per week mandatory, but the arrangement can provide up to 3 days off
Overtime Under the New Codes
Overtime pay has been standardised at 2x the normal wage rate. Under the old laws, overtime rates varied between 1x to 2x depending on the applicable statute. Now, all employers must pay double wages for any hours worked beyond the daily or weekly limit.
Compensatory Off
If an employee works on a holiday or rest day, the employer must grant a compensatory day off within the same calendar month. This replaces the earlier practice of rolling over compensatory offs indefinitely.
| Practical Tip The 4-day work week is not mandatory. It is an option that employers can offer. Most organisations in India are expected to continue with the 5-day or 6-day models. However, IT companies, startups, and knowledge-sector firms may find this model attractive for talent retention. |
Key Change 3: Full and Final Settlement Within 2 Working Days
One of the most employee-friendly provisions in the new codes is the strict deadline for full and final (F&F) settlement.
Old Rule vs New Rule
- Old rule: No statutory deadline existed. Companies routinely took 30 to 90 days (sometimes longer) to process F&F settlements.
- New rule: F&F must be completed within 2 working days of the employee’s last working day.
What Must Be Settled Within 2 Days?
- Pending salary for days worked
- Leave encashment for earned leave balance
- Pro-rata bonus (if applicable)
- Gratuity (if eligible)
- Pending reimbursements and expense claims
- Any other amounts owed to the employee
Penalties for Delay
First offence: Fine up to Rs 50,000.
Repeat offence (within 5 years): Fine up to Rs 1 lakh and possible imprisonment up to 3 months.
| Action Required Employers must automate the F&F process and pre-calculate settlement amounts during the notice period. Manual calculations on the last day will no longer be feasible within the 2-day window. Payroll software like SalaryBox can auto-generate F&F statements instantly. |
Key Change 4: Retrenchment Threshold Raised to 300 Workers
The Industrial Relations Code has significantly eased the retrenchment process for medium-sized companies.
What Changed?
- Old threshold: Establishments with 100 or more workers needed prior government approval to retrench, lay off, or close.
- New threshold: Only establishments with 300 or more workers need government permission.
- Practical impact: Companies with fewer than 300 workers can now retrench employees without government approval, subject to proper notice and compensation.
Retrenchment Compensation
The compensation formula remains unchanged: 15 days’ average pay for every completed year of continuous service. The employee must have served at least one year to be eligible.
Notice Requirements
Employers must provide one month’s written notice (or one month’s wages in lieu of notice) to any employee being retrenched, regardless of establishment size. The notice must also be sent to the appropriate government authority.
Key Change 5: Fixed-Term Employment and Pro-Rata Gratuity
The new codes formally recognise fixed-term employment and bring parity between fixed-term and permanent employees.
Equal Benefits for Fixed-Term Employees
- Same wages: Fixed-term employees must receive the same wages as permanent employees doing similar work
- Same PF and ESI: Employer must make statutory contributions just like for permanent staff
- Same bonus eligibility: Statutory bonus applies if the employee has worked for at least 30 days in the accounting year
- Same leave entitlements: Proportional to the contract duration
Pro-Rata Gratuity: The Big Change
Under the old Payment of Gratuity Act, an employee needed to complete 5 years of continuous service to become eligible for gratuity. Under the new codes, fixed-term employees receive gratuity proportional to their service period, even if it is less than 5 years. This is a significant cost factor for employers who rely heavily on contract or project-based staffing.
| Example A fixed-term employee hired for 2 years at a basic salary of Rs 30,000/month will receive gratuity of approximately Rs 34,615 at the end of the contract [(15/26) x Rs 30,000 x 2 years], even without completing 5 years. |
Key Change 6: Gig and Platform Workers Now Covered
For the first time in Indian labour law history, gig workers and platform workers have been formally recognised under the Code on Social Security, 2020.
Who Are Gig and Platform Workers?
- Gig worker: A person who performs work or participates in a work arrangement outside of a traditional employer-employee relationship (e.g., freelancers, independent contractors)
- Platform worker: A gig worker who accesses organisations or individuals through an online platform (e.g., Uber, Ola, Swiggy, Zomato, Urban Company drivers and delivery partners)
What the Code Provides
- Government to frame and notify social security schemes for gig and platform workers
- Coverage may include life insurance, disability insurance, health insurance, old-age protection, and maternity benefits
- Aggregator contribution: Platform companies (aggregators) must contribute 1-2% of their annual turnover to a Social Security Fund
- Central government to set up a National Social Security Board for unorganised workers, gig workers, and platform workers
Current status: As of mid-2026, the central government has notified the broad framework, and specific scheme rules are being finalised. Aggregators should budget for the contribution requirement and watch for scheme notifications.
Key Change 7: Strike and Trade Union Rules
The Industrial Relations Code tightens the rules around strikes and lockouts and introduces the concept of a sole negotiating union.
Strike and Lockout Notice
- 14-day advance notice: Now mandatory before any strike or lockout in ALL industries. Previously, this requirement applied only to public utility services.
- No strikes during proceedings: Strikes and lockouts are prohibited while conciliation or adjudication proceedings are pending before a tribunal.
- Penalty: Illegal strikes can attract fines up to Rs 5 lakh for the first offence.
Negotiating Union
The code introduces the concept of a sole negotiating union. A trade union that has 51% or more of the workers as members becomes the sole negotiating body for the establishment. If no union has 51% membership, a negotiating council is formed with representation from unions having at least 20% membership.
Key Change 8: Social Security Expansion
The Social Security Code expands coverage significantly, particularly for ESI and gratuity.
ESI Changes
- Pan-India applicability: ESI now applies across the entire country, not just in notified areas as before
- Threshold: Establishments with 10 or more employees (down from 20 in many states), and establishments with even 1 employee in hazardous industries
- Wage ceiling: Employees earning up to Rs 21,000 per month are covered under ESI
Gratuity Changes
- 5-year rule retained: For permanent employees, the 5-year minimum service requirement for gratuity eligibility continues
- Pro-rata for fixed-term: Fixed-term employees receive proportional gratuity regardless of service duration
- Calculation: (15/26) x last drawn wages x completed years of service
Maternity Benefit
The maternity benefit provisions remain largely unchanged: 26 weeks of paid leave for the first two children and 12 weeks for subsequent children. The code also retains provisions for adoption leave (12 weeks) and the creche facility requirement for establishments with 50 or more employees.
Penalties for Non-Compliance Under the New Labour Codes
The new codes significantly increase penalties for violations. Here is a comprehensive breakdown:
| Offence | First Offence | Repeat (Within 5 Years) |
| Non-payment of wages | Fine up to Rs 50,000 | Rs 1 lakh + 3 months imprisonment |
| Not maintaining registers/records | Fine up to Rs 50,000 | Rs 1 lakh |
| Not issuing payslips | Fine up to Rs 50,000 | Rs 1 lakh |
| F&F delay beyond 2 working days | Fine up to Rs 50,000 | Rs 1 lakh |
| Illegal retrenchment (300+ workers) | Fine up to Rs 5 lakh | Rs 10 lakh + imprisonment |
| Violation of safety norms (OSH) | Fine up to Rs 2 lakh | Rs 5 lakh + imprisonment |
| Contravening strike/lockout rules | Fine up to Rs 5 lakh | Higher fine + imprisonment |
| Non-contribution to PF/ESI | Fine up to Rs 1 lakh | Rs 5 lakh + imprisonment |
Compounding of Offences
One welcome change is the introduction of compounding for first-time offences:
- Fine-only offences: Can be compounded (settled) by paying 50% of the maximum fine
- Fine + imprisonment offences: Can be compounded by paying 75% of the maximum fine
- Repeat offences within 5 years: Cannot be compounded. The offender must face prosecution.
This is a pragmatic approach that encourages compliance without burdening the judicial system with minor first-time violations.
Inspection and Compliance: What Has Changed
Web-Based Inspection System
The new codes replace the old inspector-raj model with a modern, technology-driven inspection system:
- Random, algorithm-driven inspections: Inspections are assigned randomly by a centralised system, reducing inspector discretion and corruption
- Inspector-cum-Facilitator: The inspector role is redefined as an “Inspector-cum-Facilitator” who provides guidance alongside enforcement
- Time-bound reports: Inspection reports must be uploaded within 72 hours of the inspection
Single Registration
Instead of obtaining separate registrations under each labour law, employers now need one unified registration that covers all four codes. Registration is done through the Shram Suvidha Portal (shramsuvidha.gov.in), which serves as the single-window clearance for labour compliance.
State Implementation Status (as of Mid-2026)
Labour is a concurrent subject under the Indian Constitution, meaning both the central and state governments can legislate on it. While the central rules have been notified and are in effect since November 2025, states must also notify their own rules for state-specific provisions.
- Central rules: Notified and in effect since November 21, 2025
- Major states compliant: Maharashtra, Karnataka, Tamil Nadu, Uttar Pradesh, Gujarat, Rajasthan, Madhya Pradesh, and Telangana have notified state-specific rules
- In progress: Some smaller states and union territories are still finalising their rules
- Key principle: Where both central and state rules exist, employers must comply with whichever rules are more favourable to the employee
| Important Do not wait for state rules if your state has not yet notified them. The central rules are already in force and fully enforceable. Any additional state rules will only supplement (not replace) the central framework. |
Employer Action Plan: 12-Step Compliance Checklist
Here is a practical, prioritised checklist for employers and HR teams to achieve full compliance with the new labour codes:
1. Restructure Salary Components
Ensure basic pay is at least 50% of total CTC. Review every employee’s salary structure and update accordingly. This is the single most impactful change.
2. Recalculate PF and Gratuity
Recompute employer and employee PF contributions, and gratuity provisions, based on the new wage definition. Budget for the increased costs.
3. Update Employment Contracts
Revise all offer letters, appointment letters, and employment agreements to reflect the new wage structure, F&F timelines, and fixed-term employment provisions.
4. Revise Standing Orders
If your establishment has 300 or more workers, review and update certified standing orders. Smaller establishments should adopt model standing orders.
5. Update Payslip Format
Payslips must clearly show all mandatory components including basic, DA, allowances, deductions, and employer contributions. Non-issuance attracts a Rs 50,000 fine.
6. Implement 2-Day F&F Settlement Process
Build a system that pre-calculates F&F during the notice period and disburses within 2 working days of the last working day. Automate where possible.
7. Register on Shram Suvidha Portal
Complete your unified registration on shramsuvidha.gov.in. This single registration replaces the earlier requirement of multiple registrations under different laws.
8. Review Contract Labour Arrangements
The licensing threshold is now 50 contract workers (up from 20). Review whether your contract labour arrangements need licensing, and ensure principal employer liability compliance.
9. Update Leave and Working Hours Policy
Decide whether to offer a 4-day work week option. Update your leave policy to reflect compensatory off rules and overtime pay at 2x wages.
10. Train HR Team on New Compliance
Conduct training sessions for your HR, payroll, and legal teams on the new codes, penalties, and processes. Compliance awareness is the foundation.
11. Audit PF and ESI Registrations
Verify that your PF and ESI registrations are up to date. Check if ESI applicability has expanded to cover your establishment under the new thresholds.
12. Update HRMS and Payroll Software
Your payroll software must handle the new wage definition, restructured salary calculations, pro-rata gratuity for fixed-term employees, and 2-day F&F processing. If it cannot, switch to one that can.
How SalaryBox Helps You Comply with the New Labour Codes
Navigating 4 new labour codes, restructuring salaries, and meeting strict compliance deadlines is challenging, especially for small and medium businesses without large HR teams. SalaryBox is built specifically for this.
- Automatic Salary Restructuring: SalaryBox flags non-compliant salary structures and helps you restructure to meet the 50% wage rule
- Accurate PF and ESI Calculations: Contributions are calculated on the correct wage definition automatically, including the new thresholds
- Instant F&F Settlement: Generate full and final statements in one click, well within the 2-day deadline
- Compliant Payslips: Every payslip includes all mandatory components as required under the Code on Wages
- Pro-Rata Gratuity: Automatic gratuity calculation for fixed-term employees, proportional to their tenure
- Attendance and Working Hours Tracking: Track daily hours, overtime (at 2x rate), and compensatory offs as per OSH Code requirements
