India's 4 New Labour Codes: Impact on Foreign Employers

The Biggest Labour Reform in India's History — And Why Foreign Employers Cannot Ignore It

On 21 November 2025, India implemented the most sweeping labour law overhaul since independence — replacing 29 fragmented central labour statutes with four consolidated codes. The Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions Code (2020) are now in force. The Ministry of Labour and Employment gazetted draft Central Rules on 30 December 2025, with a consultation period of 30 days for the Industrial Relations Code rules and 45 days for the other three; check the Ministry's gazette for the current status of the final Central Rules before relying on any rule-level detail.

For foreign companies operating in India through a wholly owned subsidiary, branch office, or liaison office, these codes mandate immediate action on payroll restructuring, benefit recalculation, and compliance system upgrades. A one-year transition window runs to 20 November 2026 for migrating registrations held under the repealed laws to the unified registration system the codes introduce.

The Four Codes at a Glance

Change #1: The 50% Wage Rule — A Payroll Restructuring Mandate

The single most impactful change for foreign employers is the new universal definition of "wages." Section 2(y) of the Code on Wages defines wages as basic pay, dearness allowance and retaining allowance, then excludes a list of components in clauses (a) to (i) — HRA, conveyance allowance, overtime, commission, the employer's provident fund contribution and others. The proviso does the real work: if those excluded payments exceed one-half of all remuneration, "the amount which exceeds such one-half ... shall be deemed as remuneration and shall be accordingly added in wages". The practical effect is a floor — basic plus dearness allowance has to be at least half of remuneration, or the excess is pulled back into the wage base for every statutory calculation.

What This Means in Practice

Indian salary structures have long been built the other way round — a small basic pay carrying the statutory contributions, with the bulk of the package delivered through allowances that fell outside the old wage definitions. The proviso to section 2(y) closes that off. How each component is treated:

The arithmetic follows from that proviso, not from any standard package: whatever your current split, basic plus dearness allowance is treated as at least half of remuneration for every statutory calculation, and the gap between your existing wage base and that half is the size of the restructuring you face.

Impact on Statutory Contributions

Because PF, ESI, gratuity, and bonus are all calculated on the wage component, a higher wage base means higher employer costs:

• Provident Fund (PF): Employer contributes 12% of wages. Where the employer contributes on full wages, every rupee added to the wage base by the section 2(y) proviso costs 12 paise a year in employer PF. An employer that contributes on the statutory pensionable-salary ceiling of INR 15,000 a month sees no change at all, because the base is already above the ceiling on either structure — so the exposure turns entirely on which of the two bases your payroll uses.
• Employee State Insurance (ESI): Employer contributes 3.25% of wages for employees earning up to INR 21,000 a month. The wage-definition change alters what counts as wages rather than the gross package, so check whether employees sitting near the ceiling move into or out of coverage once the structure is redrawn.
• Gratuity: Calculated as (last drawn wages x 15 x years of service) / 26. Gratuity moves in direct proportion to the wage base, so for any employee whose basic plus dearness allowance has to rise to reach the one-half floor, the accrued and future gratuity liability rises by the same proportion, whatever the tenure.
• Bonus: Bonus is computed on wages, so the higher wage base feeds through to bonus too, subject to the wage ceiling notified for bonus purposes under the Code on Wages.

The aggregate increase in statutory cost turns on how far the existing structure sits below the new floor and on whether the employer already contributes above the statutory PF and ESI ceilings, so it has to be modelled on your own payroll data rather than taken from a rule of thumb. Either way it requires advance budgeting and board-level discussion, particularly for foreign subsidiaries whose parent companies set compensation budgets centrally.

Change #2: Hire-Fire Flexibility — The 300-Worker Threshold, and Who It Covers

The Industrial Relations Code raises the threshold for government permission to lay off, retrench, or close an establishment from 100 workers to 300 workers. Read section 77 before assuming it applies to you: the chapter that requires permission covers only an industrial establishment that is a factory, a mine or a plantation, in which not less than 300 workers were employed on an average per working day in the preceding twelve months. An office, an R&D centre or a shared-services centre sits outside that chapter entirely, whatever its headcount. Within its scope, the change is a major liberalisation:

• Factories, mines and plantations below 300 workers — and every establishment outside those three categories: Can lay off or retrench without prior government approval. Section 70 still requires one month's written notice stating the reasons for retrenchment (or pay in lieu), notice to the appropriate Government, and compensation of fifteen days' average pay for every completed year of continuous service or part of a year in excess of six months, for workers with at least one year of continuous service.
• Factories, mines and plantations with 300 or more workers: Still need government permission for lay-off, retrenchment and closure. That permission is discretionary and is not given as a matter of course, so workforce reduction in a covered establishment remains slow and uncertain.

For multinational manufacturers that need to scale up or down with business cycles, this change provides significantly greater operational flexibility. Foreign companies whose Indian operations are offices rather than factories, mines or plantations were never inside the permission regime to begin with — but they remain bound by the notice, compensation and documentation requirements that attach to every retrenchment.

Standing Orders

The Industrial Relations Code also revises standing order requirements. Under section 28 the standing-orders chapter applies to every industrial establishment employing 300 or more workers, which must have certified standing orders (rules governing employment conditions). Those below 300 can adopt model standing orders issued by the government, reducing the compliance burden of drafting and getting custom standing orders certified.

Change #3: Fixed-Term Employment Gets Full Legal Recognition

The new codes formally recognize fixed-term employment contracts across all sectors — a significant development for foreign companies that rely on project-based staffing or need to test the Indian market before committing to permanent hiring.

Key provisions:

• Equal treatment: Fixed-term employees are entitled to the same wages, allowances, and benefits as comparable permanent employees, proportionate to their tenure
• Gratuity after 1 year: The entitlement sits in the definition of fixed term employment in section 2(o) of the Industrial Relations Code — a fixed-term worker "shall be eligible for gratuity if he renders service under the contract for a period of one year" — down from the previous five-year requirement, with the Code on Social Security requiring gratuity for fixed-term employees to be paid on a pro-rata basis. This increases the cost of project-based staffing.
• No conversion obligation: There is no automatic conversion from fixed-term to permanent status, giving employers clarity on the employment relationship's duration

For companies evaluating hiring employees in India, fixed-term contracts are now a legitimate and well-defined staffing tool — but the gratuity cost must be factored in from day one.

Change #4: Contract Labour Restrictions on Core Activities

The Occupational Safety, Health and Working Conditions Code restricts the use of contract labour for "core activities" of an establishment. While the code provides exceptions for sudden increases in demand, time-bound work, and seasonal operations, foreign employers must carefully assess whether their current use of contract workers falls within permitted categories.

Establishments covered: Section 45 applies the contract-labour part to every establishment in which fifty or more contract labour are employed, or were employed on any day of the preceding twelve months — up from twenty under the Contract Labour (Regulation and Abolition) Act, 1970. The Code's definition of "establishment" reaches any place where ten or more workers are engaged in an industry, trade or business.

Foreign companies in IT, ITES, and manufacturing sectors — which have historically relied on significant contract labour — must audit their workforce composition and determine whether contract workers are engaged in "core" versus "non-core" activities. Misclassification can result in deemed permanent employment status and back-payment of benefits.

Change #5: Social Security for Gig and Platform Workers

India's Social Security Code extends coverage to gig workers and platform workers for the first time. Platform aggregators — ride-hailing apps, food delivery platforms, freelance marketplaces — are to contribute between 1% and 2% of their annual turnover, capped at 5% of the amounts paid or payable to gig and platform workers, toward a Social Security Fund. The rate sits in the Code itself, but the obligation only bites once the Central Government notifies the scheme.

The fund will cover life and disability cover, accident insurance, health and maternity benefits, and old-age protection. For foreign companies operating digital platforms in India, this creates a new category of statutory obligation that did not previously exist.

The schemes that operationalise this are to be notified by the Central Government, so track the notification rather than assuming a start date — and provision for the contribution in the meantime.

Compliance Deadlines and Transition Plan

Action Items for Foreign Employers

1. Payroll audit: Analyze current salary structures against the 50% wage rule. Model the financial impact of restructuring.
2. Benefits recalculation: Recalculate PF, ESI, gratuity, and bonus liabilities under the new wage definition.
3. Contract review: Audit all fixed-term and contract labour arrangements for compliance with new provisions.
4. Policy updates: Revise HR policies, employee handbooks, and standing orders to align with the new codes.
5. Registration migration: Transition existing registrations under legacy laws to the new code framework before November 2026.
6. Legal counsel: Engage Indian employment law specialists to review your specific exposure — state-level rules may impose additional requirements.

Foreign companies with annual compliance obligations in India should integrate these new requirements into their existing compliance calendar. The annual compliance process now includes additional reporting requirements under the new codes.

State-Level Variations: Why One Size Does Not Fit All

While the four codes are Central legislation, many provisions require state-level rules for operationalization. As of March 2026 most states had published draft rules, but finalisation timelines vary widely; our state-by-state implementation tracker carries the current position. States like Karnataka, Maharashtra, Gujarat, and Tamil Nadu — where most foreign companies operate — are at different stages of rule notification.

This means that a foreign company with offices in Mumbai, Bengaluru, and Gurugram may face slightly different compliance requirements across locations. Work with state-specific legal counsel to understand local variations, particularly around:

• Minimum wage rates (set at state level)
• OSH inspection frequencies
• Contract labour licensing requirements
• Standing order certification processes

For companies managing corporate tax and regulatory compliance across multiple Indian states, adding labour code compliance to the existing multi-state framework is essential.

Impact on Annual Health Check-Ups and Worker Welfare

Section 6 of the OSH Code makes it a duty of the employer to "provide such annual health examination or test free of costs to such employees" as the rules prescribe — the classes of employee covered and the scope of the examination come from the rules, not from the Code itself. Foreign employers must budget for and organise these examinations for the classes the applicable rules cover, and the cost falls entirely on the employer.

Additionally, the codes mandate improved welfare facilities including crèche facilities in establishments where more than fifty workers are ordinarily employed, adequate lighting and ventilation standards, clean drinking water, and separate washrooms. Companies housed in co-working spaces or serviced offices should verify that their workspace provider meets these minimum standards, as the compliance obligation rests with the employer — not the premises owner.

Dispute Resolution: What Changes for Foreign Employers

The Industrial Relations Code introduces a structured dispute resolution framework with mandatory conciliation before adjudication. Key changes affecting foreign employers:

• Grievance Redressal Committee: Under section 4, every industrial establishment employing twenty or more workers must constitute one or more Grievance Redressal Committees with an equal number of members representing the employer and the workers
• Conciliation process: Disputes go through conciliation before reaching the Industrial Tribunal, and section 53 requires the conciliation officer to report within forty-five days from the date the conciliation commences
• National Industrial Tribunal: Established for disputes involving establishments across multiple states — relevant for foreign companies with operations in multiple Indian cities
• Notice requirements for strikes: Workers must provide 14 days' notice before going on strike (up from no notice requirement in many sectors). This gives foreign employers more time to prepare for and potentially resolve issues before work stoppages occur.

Foreign companies accustomed to at-will employment in jurisdictions like the US should note that Indian labour law — even post-reform — provides significantly stronger worker protections. Termination remains a regulated process requiring proper documentation, notice periods, and in many cases, retrenchment compensation. Engaging experienced Indian employment counsel for any workforce reduction is strongly recommended to avoid unfair dismissal claims.

Key Takeaways

• Payroll restructuring is mandatory: The wage-definition floor raises the base on which PF, ESI, gratuity and bonus are computed. Model the financial impact on your own payroll data immediately — the size of the increase depends on your current structure and on whether you already contribute above the statutory ceilings.
• Hire-fire flexibility has improved — for factories: The 300-worker permission threshold applies only to factories, mines and plantations. Every other establishment was always outside it, and every employer still owes notice and retrenchment compensation.
• Fixed-term employment is now mainstream: Legally recognized with clear rules — but gratuity after 1 year changes the cost calculation.
• Contract labour needs auditing: Restrictions on core activity engagement require a thorough review of your current workforce composition.
• Dispute resolution has a new framework: Mandatory conciliation, grievance committees, and strike notice requirements create a more structured — but also more process-heavy — approach to workplace disputes.
• Act before November 2026: Registrations held under the repealed laws must be migrated to the unified system by 20 November 2026. Complete the migration well before the deadline.