Impact of Recent Labour Law Changes on Existing Companies

India’s new labour codes, which took effect on 21 November 2025, represent one of the most significant updates to employment laws in decades. For many long established businesses, the change goes far beyond adjusting paperwork or updating policies, it’s a complete shift in the way wages, provident fund, gratuity, working hours, and employee contracts are managed. Companies now need to take a close look at their payroll setups and HR ways of working, revising them to match the new laws and avoid any legal issues.

What has changed?

• The Indian labour law framework has been comprehensively restructured through four Labour Codes, replacing nearly 29 earlier central labour laws. These Codes are: Code on Wages 2019, Industrial Relations Code 2020, Code on Social Security 2020, and the OSH (Occupational Safety, Health and Working Conditions) Code 2020—all effective nationwide from 21 November 2025.
• Existing companies now need to update and adjust their older practices for PF, bonus, gratuity, overtime, contract workers, and even how they give notice of termination so that these match the new definitions and rules, even if their internal policies and some state-level rules are still being updated step by step.

Wage structure, PF and gratuity liabilities

The most disruptive change for ongoing businesses is the uniform definition of wages, which now directly drives PF, gratuity, bonus, overtime and other cost heads.

• 50% wage rule and CTC design
• “Wages” must be at least 50% of total remuneration (CTC), i.e., basic + DA + retaining allowance must be at least half of pay; if excluded components (HRA, allowances, bonus, etc.) exceed 50%, the excess is added back to wages.
• For existing companies that historically loaded CTC with allowances to keep PF and gratuity bases low, this will increase statutory contribution bases and, therefore, recurring cost.
• PF impact
• PF will now be calculated on the new wage definition, so higher “wages” translate into higher employer PF contributions and a lower in-hand salary for many employees.
• Existing PF practices tied to older wage definitions (basic capped, special allowances inflated) will be vulnerable in inspections and litigation if not restructured.
• Gratuity and fixed-term/contract staff
• Gratuity rules have changed for fixed-term and contract staff. Under the new Social Security Code, these employees get gratuity on a pro-rata basis after just one year of service, instead of the previous five years needed for regular staff.
• Companies relying on contract or project workers will need to rework their gratuity calculations and provisions to avoid surprising liabilities that could come up during audits or disputes down the line.
• Other statutory payments
• Statutory bonus continues, but the effective wage base and eligibility interplay with the new definition of wages, requiring a relook at eligibility and computations for staff around the wage thresholds.

Key compliance and process changes for existing companies

New labour codes are not confined to payroll, they demand end-to-end process changes across HR, finance, operations and legal.

• Employers now have to meet much stricter deadlines for wage payments. Salaries must be disbursed by the 7th of the following month, and final settlements for resignations, termination or retrenchment should be complete within two working days. Companies with high staff turnover in particular must ensure HR, payroll, and management teams work in lockstep to avoid fines or disputes.

• Standard working hours are 8 per day and 48 per week. Overtime requires the employee's clear consent and double pay, putting an end to casual, unrecorded practices. Businesses will need to plan shifts thoughtfully, maintain solid records, and respect these limits to keep costs manageable and legal risks low.

• Single registration and uniform documentation
• A single online registration/ licence replaces multiple older registrations for many establishments, and appointment letters for all workers become mandatory.
• This simplifies administration in the long term but requires cleansing of legacy registrations, consistent designation structures, and updated employment templates in the transition.
• Expansion of social security and coverage
• Social security is extended to wider categories, including gig and platform workers through aggregator contributions (1–2% of turnover, capped at 5% of gig payouts, to a social security fund).
• Existing companies that rely on platform-based or gig models must map which engagements fall within these definitions and budget for contributions accordingly.

Sector focus: IT/ITeS, manufacturing and telecom

The broad framework is uniform, but impact profiles differ sharply across sectors because of workforce composition and operating models.

IT and IT-enabled services

• Salary structuring
• IT/ITeS employers that historically used complex allowance-heavy CTC structures must rationalise pay to comply with the 50% wage rule, increasing PF and gratuity outgo while reducing take-home for many employees.
• Contractors, fixed-term engagement and moonlighting
• The broader definition of “employee” and social security coverage means many “consultant” or “freelancer” arrangements could be recharacterised, bringing PF/gratuity exposure and making clean documentation critical.
• Fixed-term employment is an attractive tool for project-based roles but comes with pro-rata gratuity and benefit parity, which must be priced into client contracts and internal budgets.

Manufacturing

• Shopfloor, safety and welfare obligations: The OSH Code ramps up employer responsibilities for safe and healthy work environments. Companies must form safety committees, provide annual health check-ups, and install basics like canteens and creches after reaching specific staff levels. Factories typically end up rethinking layouts, shift patterns, and budgets as a result. Shortfalls in safety or welfare now mean stricter penalties, even criminal charges for major incidents. That's why meticulous records and routine internal audits are critical to avoid problems.

• Shift work, overtime and contract labour
• Manufacturing units that run multiple shifts or continuous process plants must recast shift patterns, breaks and overtime allocation within statutory caps and build stronger time-keeping systems.
• Contract labour in “core activities” is significantly restricted, so over-reliance on contractors for production lines can invite reclassification as direct employees, with all attendant PF/ESI and gratuity liabilities.

Telecom

• Core vs non-core contract labour
• Under the OSH Code, contract labour is prohibited in core activities, such as telecom service provision, network operations and essential maintenance, except in narrow circumstances (temporary surge, seasonal work, or where outsourcing is industry standard and permitted).
• Roles like tower climbing, network maintenance and site installation, historically outsourced, may need to be shifted to direct or fixed-term employment, altering cost structures and industrial relations on the ground.
• High attrition, exits and overtime
• Telecom is characterised by high turnover among field staff and call-centre employees; the two day deadline to clear final dues will strain existing payroll/HR processes and require robust exit workflows.
• Field technicians handling emergency repairs and outages frequently cross standard working hours; employers must now document consent and ensure overtime at double the wage rate, failing which underpayment and non-compliance claims are likely.

Why labour law audits are now critical

For established companies, a structured labour law audit is the only practical way to identify and fix misalignments between legacy practices and the new codes before they become disputes, penalties or reputational issues.

A well-designed audit typically covers:

• Payroll and CTC design review
• Testing current salary structures against the 50% wage rule, PF and gratuity bases, bonus eligibility, and overtime computations, and simulating financial impact of revised structures.
• Identifying categories where “consultant”, “retainer” or “contract staff” might, in substance, be employees requiring social security coverage.
• Employment documentation and HR processes
• Reviewing appointment letters, HR policies, standing orders, POSH policies, exit procedures, and disciplinary frameworks for alignment with the new Codes’ requirements on classification, notice, misconduct and dispute redressal.
• Testing compliance around timelines for wage payments, leave encashment, F&F, and documenting approvals and consents (especially for overtime and fixed-term arrangements).
• Contractor and gig arrangements
• Mapping all contractors, vendors and aggregators to assess exposure on contract labour restrictions, principal employer liabilities (PF, gratuity, ESI), and aggregator contributions for gig/platform workers.
• Re-drafting contracts and SLAs to allocate statutory risks appropriately and ensure data and documentation for inspections are available without friction.
• OSH, safety and welfare compliance
• OSH Code heightens employer accountability for safe workplaces, mandating safety committees, annual health checks, and facilities like canteens or creches beyond set staff thresholds. Factories often adjust layouts, rosters, and budgets accordingly. Breaches invite rigorous enforcement, including criminal liability for grave incidents, so strong records and routine audits prove vital.

OSH audits—by firm size and sector, spanning hours, women's night work, committees, check-ups, facilities, and records—uncover gaps early. Without them, issues lurk until inspections, disputes, accidents, or complaints arise, when fixes turn costly and constrained.

How we can help you?

Given the interplay of central codes, pending state rules, and sector-specific nuances, working with a law firm that combines litigation experience with day-to-day compliance advisory is often the most efficient way for existing companies to transition.

Our labour and employment team can:

• Design and implement transition roadmaps
• Conduct enterprise wide labour law audits, prioritise high risk areas (PF and gratuity exposure, contractor models, wage payment timelines), and prepare a phased compliance plan aligned with business constraints.
• Support redrafting of HR policies, appointment letters, standing orders, contractor and vendor agreements, and engagement terms for gig or platform workers.
• Sector-specific structuring for IT, manufacturing and telecom
• For IT/ITeS: rework CTC structures, flexible working models and moonlighting/dual employment clauses to remain compliant while retaining competitiveness in a tight talent market.
• For manufacturing: align plant-level shift patterns, safety standards, contract labour usage and union/works committee engagement with the Codes and upcoming state rules.
• For telecom: recalibrate field-force models, core vs non-core outsourcing, and attrition-heavy workforce processes, with appropriate documentation and dispute management strategies.
• Represent and defend in contentious matters
• Advise and appear in inspections, showcause notices, prosecutions and labour disputes arising under the new regime, using current regulatory and judicial trends to minimise exposure.

For existing companies, the new labour law regime is a one-time opportunity to clean up historical inconsistencies and put a defensible, employee friendly and regulator ready framework in place. A carefully planned labour law audit, can convert what appears to be a compliance burden into a strategic advantage in talent retention, industrial peace and long-term cost predictability