India’s Labour Code Overhaul: Beyond Compliance to a New Employment Contract 

The article examines India’s new labour codes as more than just a compliance update, arguing they fundamentally reshape the employer-employee relationship through changes like the 50% wage rule that increases statutory costs and long-term savings for workers, the formalisation of fixed-term employment that balances flexibility with parity, and the recognition of gig workers whose benefits remain uncertain pending future schemes. It highlights how the increased threshold for layoff permissions offers businesses operational flexibility while introducing reskilling fund obligations, and concludes that organisations must strategically adapt through wage audits, workforce reclassification, and proactive engagement with evolving regulations to navigate this new employment contract that attempts to balance economic flexibility with worker dignity.

India’s Labour Code Overhaul: Beyond Compliance to a New Employment Contract 

The implementation of India’s four new labour codes marks a watershed moment for business and employment in the country. But beyond the legal jargon of definitions and thresholds lies a fundamental reshaping of the relationship between employers and their workforce. 

It has been just over a year since the operationalisation of India’s ambitious new labour codes, and the ripples are beginning to feel like waves. For decades, India’s labour landscape was a complex patchwork of 29 central laws, often conflicting state rules, and definitions that had become relics of a pre-liberalisation economy. The amalgamation of these into four comprehensive codes—on Wages, Social Security, Industrial Relations, and Occupational Safety, Health and Working Conditions—was heralded as a long-overdue reform. 

While the initial commentary has focused on the technicalities—the 50% wage definition, the 300-worker threshold for layoffs, and the recognition of fixed-term employment—the true story is more profound. This isn’t merely a compliance update; it is the forging of a new social contract for India’s modern workforce. For business leaders, HR heads, and in-house counsel, understanding the human and strategic impact of these codes is now just as critical as understanding the letter of the law. 

The 50% Rule: When Payroll Philosophy Meets Profit & Loss 

Perhaps the most financially seismic shift introduced by the Wage Code is the redefinition of “wages.” The code mandates that the basic pay and dearness allowance must constitute at least 50% of an employee’s total remuneration. For years, organisations cleverly structured compensation with a high allowance component and a low basic pay to minimise provident fund (PF) and gratuity liabilities, which were calculated on this base. 

The new rule effectively slams the door on this practice. The immediate, and most discussed, impact is the spike in statutory outgoings. As noted in recent quarterly reports, sectors with large, highly-paid workforces, such as IT and banking, are already feeling the pinch. 

But the human insight here goes deeper. This change forces a fundamental question: What is the true cost of an employee? 

Consider a mid-level manager in Pune who was hired with a CTC of ₹20 lakhs, structured with a basic pay of only ₹6 lakhs. Under the new norms, the employer must now rejig this package. To maintain the same take-home pay, the total CTC might need to increase, or the employee might see a shift in their net income as allowances are absorbed into the basic pay. For the employee, this isn’t just an accounting change. A higher basic pay increases their PF contribution (reducing immediate cash in hand) but also boosts their long-term retirement savings and gratuity entitlement. For the first time, the codes force a transparent conversation about long-term savings versus short-term liquidity, aligning employer contributions more closely with employee welfare. 

Furthermore, the expanded definition of “employee” brings a vast pool of “non-workmen”—team leads, supervisors, and managers—under the protective umbrella of the law. Previously, many of these employees were excluded from overtime pay and stringent safety norms. Now, they are entitled to the same welfare benefits and social security as blue-collar workers. This blurs the traditional hierarchical lines and creates a more inclusive, if more expensive, safety net. 

The Rise of the “Fixed-Term” Employee: A Boon or a New Form of Precarity? 

The explicit legal recognition of Fixed-Term Employment (FTE) is another double-edged sword. On one hand, it formalises a practice that was already widespread, especially in e-commerce, retail, and project-based industries. For employers, it offers flexibility. They can now hire workers for a specific period or project without the long-term commitment of a permanent role. 

The code mandates that an FTE must be treated at par with a permanent employee in terms of wages, working hours, and statutory benefits like PF and ESI, proportionate to their tenure. They are also entitled to gratuity after one year of service. This is a monumental win for the “gig-adjacent” worker—think of the customer support agent hired for a six-month festive season surge, or the designer brought on for a specific product launch. 

However, the human reality is more nuanced. While FTEs now have better financial protections, they still lack the ultimate security of permanency. The code, by formalising this track, may inadvertently encourage companies to maintain a large, rotating pool of FTEs for core, ongoing work, circumventing the need to create permanent positions. The strategic challenge for HR is to ensure that this new tool is used for genuine flexibility and not as a mechanism to create a permanent underclass of workers who, despite equal pay, lack the psychological safety and career progression of permanent staff. 

The Gig Worker Question: A Promise Deferred 

For the millions of workers powering India’s app-based economy—the delivery partners, ride-share drivers, and freelance taskers—the codes offered a glimmer of hope. For the first time, they were legally recognised as a distinct category: “gig workers” and “platform workers.” 

However, this recognition is currently more symbolic than substantive. The codes empower the central and state governments to frame schemes for their welfare, including provident fund, health insurance, and other benefits. It also establishes a Social Security Fund, to which contributions may be made by the aggregators (the platforms), among others. 

A year in, the key word remains “may.” The lack of notified schemes has left gig workers in a state of limbo. The promise of social security is dangled, but the mechanisms to deliver it are still on the drawing board. This is the next great frontier for Indian labour law. The business models of unicorns are built on the flexibility of this workforce. The codes now challenge them to build a sustainable model of social protection. How this unfolds—whether through a contribution model based on transactions, a government-subsidised scheme, or a combination—will define the future of work in urban India. 

Redefining the “Factory” and the “Fight”: Layoffs and Unions 

The Industrial Relations Code brings two significant shifts that alter the balance of power within an establishment: the threshold for layoffs and the threshold for standing orders. 

1. The Layoff Threshold (from 100 to 300 Workers):For companies with up to 300 workers, the government’s permission is no longer required for layoffs, retrenchment, or closure. This provides immense operational flexibility. In a volatile market, a manufacturing unit can now rightsize its workforce more swiftly without navigating bureaucratic red tape. For businesses engaged in M&A, this reduces a major hurdle in post-acquisition restructuring. However, this flexibility comes with a cost: the introduction of a “worker reskilling fund.” Employers must now contribute to this fund when retrenching workers, acknowledging a corporate responsibility to help displaced workers transition to new roles. It’s a move that injects a sense of corporate social responsibility into the very act of letting people go.
2. The Standing Orders Threshold (standardised at 300 Workers):Standing orders are the rulebook that governs day-to-day life in an industrial establishment—attendance, leave, conduct, disciplinary procedures, etc. Previously, the threshold for when a company had to formally define these orders varied by state. By standardising and raising this threshold to 300 workers, the code frees smaller organisations from a significant compliance burden, allowing them to operate with more informal, agile HR policies. For multi-state employers, this uniformity is a godsend, simplifying policy creation and reducing the risk of state-level variations.

The Road Ahead: From Litigation to Strategy 

For far too long, labour law in India was seen as a reactive, defensive function—something to be managed when a dispute arose or when a factory inspector visited. The new codes, with their emphasis on compounding of minor offences and opportunities for rectification, signal a shift from a punitive to a more compliance-oriented regime. 

But the real shift must happen within the organisation. The days of using clever salary structuring to bypass statutory dues are numbered. The practice of classifying workers as supervisors to deny them benefits is over. 

The strategic imperative for businesses is clear: 

• Conduct a “Wage Audit”: Immediately review all compensation structures. Identify employees whose basic pay falls below 50% of the total CTC and model the financial impact of restructuring. This isn’t just an HR exercise; it’s a finance and strategy imperative. 

• Reclassify Your Workforce: Scrutinise job titles and descriptions. Employees previously considered “non-workmen” may now fall under the purview of the codes, entitling them to overtime and other benefits. 

• Rethink the Contract Labour Strategy: With restrictions on using contract labour in core activities, manufacturing and industrial units must evaluate which functions are truly “core” and plan for a potential direct-hire model for those roles. 

• Prepare for the Gig Economy Framework: Platform companies must proactively engage with policymakers to help shape the welfare schemes. Waiting for a top-down mandate could result in an unworkable or financially crippling framework. 

India’s new labour codes are not the end of a journey, but the beginning of a new one. They represent a mature attempt to balance the flexibility that a modern economy demands with the dignity and security that a just society owes its workers. The ink on the rules may be dry, but the real story will be written in the boardrooms, on the factory floors, and in the lives of millions of Indian workers as this new contract is tested, challenged, and ultimately, lived.