New Labour Codes: What HR Should Know

Key Changes Summary

The Code on Wages, Code on Social Security, Industrial Relations Code and OSH (Occupational Safety, Health and Working Conditions) Code have all been notified as effective from 21 November 2025, replacing a patchwork of older Acts.

A uniform definition of "wages" and the 50% rule requires that Basic + DA + retaining allowance form at least half of total remuneration, with excess allowances added back for statutory calculations.

Social security coverage is extended to gig, platform and more categories of contract workers, increasing employer obligations under PF, ESIC and other schemes.

Industrial relations procedures, including fixed‑term employment, layoffs and dispute resolution, are modernised with higher thresholds and new requirements such as a reskilling fund.

Workplace safety and welfare provisions are consolidated under the OSH Code, demanding stronger documentation, risk assessment and compliance across establishments.

The Four Codes at a Glance

1. Code on Wages, 2019

The Code on Wages merges laws related to minimum wages, payment of wages, bonus and equal remuneration. Key features include:

• A national floor wage below which no state can fix its minimum wage, pushing states to revise their rates upward over time.
• Universal coverage for all employees, removing distinctions between scheduled and non‑scheduled employment.
• Mandatory overtime at twice the normal rate and clearer norms on permitted deductions.

For payroll, the most critical change is the uniform wage definition and 50% rule.

2. Code on Social Security, 2020

This Code integrates EPF, ESIC, gratuity, maternity benefits and other social security laws into a single framework. Highlights:

• Broader coverage of gig, platform and unorganised workers through registration and social security schemes.
• Uniform principles for contributions across PF, ESIC, gratuity and other benefits based on the new wage definition.
• Scope for setting up social security boards and funds at central and state levels.

This means organisations must re‑evaluate who is covered and ensure contract workers are handled correctly.

3. Industrial Relations Code, 2020

The Industrial Relations Code reworks laws on trade unions, standing orders and industrial disputes. Key changes include:

• Fixed‑term employment with full parity in wages and benefits with permanent workers, including gratuity after one year of service.
• Higher threshold (generally from 100 to 300 workers) for prior government approval in retrenchment, lay‑off or closure, while introducing reskilling obligations.
• Recognition procedures for negotiating unions and clearer frameworks for strikes, lockouts and dispute resolution.

HR will need to revisit contracts, standing orders and termination processes.

4. Occupational Safety, Health and Working Conditions (OSH) Code, 2020

The OSH Code consolidates laws on health, safety, working conditions and welfare facilities. It introduces:

• Rationalised thresholds and a unified registration and licensing regime for establishments.
• Stronger requirements for risk assessment, safety training, working hours, leave, and welfare facilities, including for women in night shifts under specified safeguards.

This pushes HR, administration and EHS teams to coordinate more closely and maintain robust documentation.

The New Wage Definition and the 50% Rule

What the Rule Says

Under the new Codes, "wages" broadly mean Basic Pay + Dearness Allowance + retaining allowance, while most allowances, bonuses and commissions are excluded—but with a crucial safeguard. If the total value of excluded components (like HRA, special allowance, conveyance, bonus, employer PF/NPS) exceeds 50% of all remuneration, the excess must be added back into wages.

In effect, this ensures that at least half of an employee's CTC forms the basis for statutory benefits such as PF, ESIC, gratuity and leave encashment.

Impact on Salary Structures

For many organisations that historically kept Basic low and allowances high:

• Basic + DA will need to increase so that they are at least 50% of total CTC.
• This will automatically raise PF and ESIC contributions, as they are calculated on wages.
• Long‑term liabilities like gratuity and leave encashment will increase because they are linked to wages instead of total CTC.
• Employees may see a slight reduction in take‑home pay, but higher accumulation in retirement benefits and social security.

Example (Conceptual)

If an employee's CTC is ₹10 lakh and current Basic + DA is only ₹3 lakh, the 50% rule requires wages to be at least ₹5 lakh. The extra ₹2 lakh must either be shifted from allowances to Basic/DA or treated as "added back" for statutory calculations, increasing PF, gratuity and other benefits.

Social Security: PF, ESIC and Gratuity Under the Codes

Provident Fund and Pension

With the new wage definition:

• PF contributions will be computed on a higher wage base, unless organisations deliberately cap PF at the statutory wage ceiling where permitted.
• This may significantly increase employer PF outgo, especially for mid‑ and senior‑level employees with highly allowance‑heavy structures.

HR should model cost impact under different structuring options and align policy (for example, PF on full basic vs capped wage).

ESIC Contributions

For ESIC‑covered employees, the same 50% wage rule indirectly raises the wage base on which ESIC contributions are calculated. With the wage ceiling unchanged for now, more regular components will fall under "wages", slightly increasing ESIC contributions but improving the benefit base for employees.

Gratuity and Leave Encashment

Gratuity is computed as 15 days' wages per year of service, and leave encashment calculations in many organisations reference last drawn wages. As wages increase due to the 50% rule, so do these terminal benefits and the related provisioning on the company's books.

Fixed‑term employees now qualify for gratuity after one year, further increasing the pool of employees for whom gratuity needs to be calculated.

Industrial Relations, Contracts and Policies

Fixed‑Term Employment and Exits

The Industrial Relations Code legitimises fixed‑term employment with parity in pay and benefits vis‑à‑vis permanent employees. HR must:

• Update contract templates to reflect fixed‑term clauses and end‑dates.
• Ensure that PF, ESIC, gratuity and leave benefits are provided proportionately, including gratuity for contracts exceeding one year.

For layoffs and closures, the threshold for prior government approval moves up to 300 workers in many contexts, but compensation and notice requirements remain stringent.

Standing Orders, Trade Unions and Disputes

The Codes streamline recognition of negotiating unions and modify provisions related to strikes and lockouts. Larger establishments will need updated standing orders that align with new definitions of worker, misconduct, disciplinary procedures and grievance redressal. HR and IR teams should review:

• Disciplinary policies and domestic enquiry procedures.
• Notice requirements for strikes/lockouts.
• Documentation for retrenchment, compensation and reskilling contributions.

OSH, Working Conditions and Documentation

The OSH Code rationalises requirements around hours of work, overtime, weekly rest, leave, safety training and welfare facilities. Key implications for HR:

• Working‑hour rules and overtime policies must align with the new wage Code's requirement of double wages for overtime.
• Establishments must ensure statutory registers, inspections, safety committees and incident reporting are properly implemented and documented.
• Women can work night shifts in more sectors, subject to appropriate safety, transport and consent safeguards as specified by state rules.

These changes need close coordination between HR, admin, safety and legal functions.

Impact on Payroll and HR Operations

Immediate Action Items for HR

For HR and payroll leaders, the new Codes translate into a concrete transition checklist:

• Salary structure redesign to comply with the 50% wage rule across all levels and entities.
• Policy and contract updates covering wages, working hours, overtime, leave, fixed‑term employment and termination.
• System configuration changes for PF, ESIC, gratuity, leave encashment and bonus calculations based on the new wage definition.
• Change management and communication so employees understand changes to their take‑home pay and benefits.

Long‑Term Compliance

Beyond the transition, organisations must:

• Track ongoing state‑level rules and notifications issued under each Code.
• Strengthen documentation, digital registers and audit trails to withstand more data‑driven inspections.
• Periodically review salary structures and benefits to stay aligned with evolving interpretations of the wage rule and social security coverage.

How HR Pearls Helps

Configuring the New Wage Definition

HR Pearls can help you implement the 50% rule by:

• Allowing you to classify each pay component as "wage" or "exclusion" and set up rules so that Basic + DA + retaining allowance always constitute at least 50% of total remuneration.
• Automatically adding back excess allowances into wages for statutory calculations when the exclusion side exceeds 50%, ensuring PF, ESIC and gratuity are calculated on compliant wage bases.

Recalculating Statutory Benefits

Once wage rules are configured, HR Pearls can:

• Recompute PF and ESIC contributions on the updated wage base.
• Update gratuity and leave‑encashment projections in line with the new wages, helping finance plan for higher long‑term liabilities.
• Provide "before vs after" reports so HR and management can see the cost and benefit impact across employee groups.

Policy, Workflow and Documentation Support

HR Pearls can also support broader labour‑code compliance by:

• Storing and publishing updated HR policies, employment contracts and standing orders for employees via the ESS portal.
• Capturing fixed‑term employment details, contract end‑dates and reskilling/exit processes through configurable workflows.
• Providing robust audit logs, statutory registers and exportable reports that align with the Codes' digital‑compliance and inspection requirements.

By combining policy clarity with system automation, HR Pearls helps HR teams navigate the new Labour Codes confidently, while employees see transparent wages, stronger social security and more predictable workplace rules.