India's 4 New Labour Codes: What Foreign Employers Must Prepare For

Introduction: A Fundamental Shift in India's Employment Law

With effect from 21 November 2025, India notified the four consolidated Labour Codes that are set to replace 29 separate central labour laws — the most significant overhaul of employment legislation since independence. Several provisions are still to be fully operationalised once final central and state rules are notified. For foreign companies operating in India through subsidiaries, branch offices, or project offices, this is not a routine regulatory update. It is a structural reset that affects every aspect of the employer-employee relationship, from how you calculate wages to how you terminate employment.

This article is part of our Complete Guide to Hiring Employees in India as a Foreign Company. Here we dive deep into the four new Labour Codes and what they specifically mean for foreign employers.

The four codes are the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety, Health and Working Conditions Code (2020). While these were enacted between 2019 and 2020, their implementation was delayed until central and state rules could be finalised. Draft central rules have been released for consultation and final rules are being finalised by the Ministry of Labour & Employment in coordination with state governments. Foreign employers should begin preparing now rather than waiting for every rule to be notified, since the primary provisions of the codes are already in force.

Code on Wages: The 50% Rule That Changes Every Salary Structure

The New Definition of "Wages"

The single most impactful change for foreign employers is the new statutory definition of wages under the Code on Wages, 2019. Under the old regime, companies had significant flexibility in structuring compensation — basic salary was often set well below half of total CTC (Cost to Company), with the remainder allocated to various allowances like HRA, conveyance, special allowance, and performance bonuses.

Under the new definition, wages include basic pay, dearness allowance (DA), and retaining allowance only. All other components — HRA, special allowance, conveyance, overtime, bonus, commissions — are classified as excluded components. However, if these excluded components collectively exceed 50% of total remuneration, the excess is deemed wages for all statutory calculations.

Practical Impact on Foreign Employers

Take an illustrative employee on INR 100,000 per month — the round figure is chosen to make the arithmetic legible, not because it represents any Indian pay benchmark. Under the old structure, a company might set basic salary at INR 35,000 (35%) with INR 65,000 in allowances. Under the new code, basic pay + DA must be at least INR 50,000 (50% of total remuneration). This directly increases:

• EPF contributions: Statutory EPF contributions are compulsory only on wages up to the INR 15,000 monthly ceiling, so an employer that contributes at the ceiling sees no change at all. Where the employer contributes on actual basic pay — the normal arrangement for salaried staff — the employer's 12% is calculated on INR 50,000 instead of INR 35,000, an increase of INR 1,800 per month per employee
• Gratuity liability: Calculated on last drawn wages (now higher basic), increasing the terminal benefit obligation significantly
• Bonus calculations: Statutory bonus is computed on the wage ceiling notified by the appropriate Government, or the applicable minimum wage if that is higher, and is payable only to employees drawing wages up to the notified eligibility ceiling — so for higher-paid staff a larger basic does not by itself increase the statutory bonus
• Overtime pay: Overtime is paid at not less than twice the normal rate of wages (section 14 of the Code on Wages), which is now tied to the higher basic component

For a foreign company with 100 employees in India, the restructuring adds roughly INR 30 lakh a year on the illustration set out later in this article — but the real figure depends entirely on the current salary structure and on whether the employer contributes EPF at the statutory ceiling or on actual basic pay.

Universal Minimum Wage Coverage

The Code on Wages extends minimum wage protection to all employees across organised and unorganised sectors; previously the Minimum Wages Act, 1948 applied only to scheduled employments. Section 9 of the Code requires the Central Government to fix a floor wage, below which no appropriate Government may fix minimum wages — that floor is not itself the minimum wage. The minimum rates are fixed for each scheduled employment, area and skill category. In the central sphere the Chief Labour Commissioner revises them every 1 April and 1 October: with effect from 1 April 2026 the Area "A" rate for unskilled workers runs from INR 528 per day in agriculture to INR 827 per day in sweeping and cleaning (VDA orders dated 30 March 2026, issued under section 69(2) of the Code on Wages, which saves the pre-Code notifications until fresh rates are fixed under section 7(2)). Most private-sector employers fall in the state sphere, where the state government's own schedule applies — check the rate for your state, scheduled employment and area.

Foreign employers must ensure that no employee — including contract workers, fixed-term employees, and gig workers — falls below the applicable minimum wage threshold. Paying an employee less than the amount due attracts a fine of up to INR 50,000 for a first offence; a repeat conviction within five years carries imprisonment of up to three months, or a fine of up to INR 1 lakh, or both (section 54(1) of the Code on Wages).

Code on Social Security: Expanded Coverage and New Obligations

EPF and ESI Under the New Framework

The Code on Social Security, 2020 consolidates nine separate social security statutes into a single framework. For foreign employers, the key changes are:

EPF (Employees' Provident Fund): The contribution structure remains at 12% each from employer and employee, but the wage base for calculation is now higher due to the 50% basic salary rule. The employer's 12% contribution is split as 8.33% towards EPS (Employees' Pension Scheme) and 3.67% towards EPF. The wage ceiling for EPF contributions remains at INR 15,000 per month for mandatory contributions, and employers that contribute only at that ceiling see no change from the new wage definition. Employers that contribute on actual basic pay — the common arrangement for salaried staff — carry the full effect of the 50% rule.

ESI (Employees' State Insurance): The ESI contribution rates remain at 0.75% (employee) and 3.25% (employer) of gross salary, totalling 4%. The wage threshold for ESI applicability stays at INR 21,000 per month. A critical change is that ESI coverage is now pan-India — the previous requirement that establishments must be in "notified areas" has been eliminated. If your establishment has 10 or more employees and any employee earns below INR 21,000 gross per month, ESI registration is mandatory regardless of location.

Gratuity: No Five-Year Wait for Fixed-Term Workers

Under the previous Payment of Gratuity Act, an employee needed five years of continuous service to qualify for gratuity. The Social Security Code changes this for fixed-term employees: section 53 disapplies the five-year continuous-service condition where employment ends on the expiration of a fixed term, and requires the employer to pay gratuity on a pro rata basis for the term served. The base formula remains 15 days' wages for each completed year of service, with service exceeding six months rounded up to a full year.

For foreign employers that rely heavily on fixed-term contracts — common in IT services, project-based work, and BPO operations — this creates a new financial obligation that must be factored into project costing. A fixed-term employee on a two-year contract now receives gratuity proportional to their service, calculated on the enhanced basic salary.

Extension to Gig and Platform Workers

For the first time in India's history, the Social Security Code extends social security benefits to unorganised, gig, and platform workers under sections 113 (registration of unorganised, gig and platform workers) and 114 (schemes for gig and platform workers). Section 114 allows the Central Government to require aggregators to contribute between 1% and 2% of turnover towards those schemes. While the schemes and rules are still being notified, foreign companies using gig workers, freelancers, or platform-based talent in India should monitor this space closely.

Industrial Relations Code: Fixed-Term Employment and Retrenchment

Statutory Recognition of Fixed-Term Employment

The Industrial Relations Code, 2020 provides statutory recognition to fixed-term employment for the first time. A fixed-term contract must be in writing, specify the duration, and provide the same wages, hours, allowances, and benefits as permanent employees performing similar work. Fixed-term employees are entitled to all statutory benefits including ESI, EPF, bonus, and gratuity on a proportionate basis.

The key advantage for foreign employers is that retrenchment provisions do not apply when a fixed-term contract simply expires without renewal. This provides more flexibility in workforce planning for project-based engagements, provided the contracts are properly structured.

Standing Orders and the 300-Worker Threshold

The IR Code raises the threshold for mandatory standing orders from 100 workers to 300 workers. Establishments with 300 or more workers must prepare standing orders covering classification of workers, work hours, holidays, pay days, wage rates, termination procedures, and grievance mechanisms. Foreign companies with smaller operations in India may find this threshold easier to manage.

Retrenchment Rules

The threshold for requiring government permission before retrenchment, lay-off, or closure has been raised from 100 to 300 workers. Establishments below 300 workers can retrench employees without prior government approval, subject to:

• One month's written notice or equivalent pay
• Retrenchment compensation of 15 days' average pay for every completed year of continuous service
• Following the "last in, first out" principle (unless there are valid reasons to deviate)

For foreign companies with smaller India operations (under 300 employees), this is a significant operational advantage. It allows faster restructuring without the bureaucratic delays that previously plagued even modest workforce reductions.

Grievance Redressal Committees

Every industrial establishment employing 20 or more workers must constitute one or more Grievance Redressal Committees (section 4 of the IR Code). The committee has equal representation from employers and workers, is capped at ten members, and must give women workers representation not less than their proportion of the total workers employed. An aggrieved worker may apply within one year of the cause of action arising, and the committee is to complete its proceedings within 30 days of receiving the application. Foreign employers must integrate GRCs into their existing HR grievance procedures.

Occupational Safety, Health and Working Conditions Code

Applicability and Registration

The OSH Code applies to any establishment with 10 or more workers, replacing 13 central acts including the Factories Act, 1948 and the Contract Labour (Regulation and Abolition) Act, 1970. State Shops and Establishments Acts are separate state legislation and continue to apply alongside the Code. Every covered establishment must register with the relevant authority. Foreign employers must ensure their India office, factory, or development centre is properly registered.

Working Hours and Overtime

Section 25 of the OSH Code caps daily working hours at eight. What constitutes a normal working day, the weekly limit, spread-over and rest intervals are left to be prescribed by the appropriate Government's rules — and it is those rules, not the Code, that determine whether a compressed week (for example a four-day week with longer days inside a 48-hour week) is available and on what conditions. Check the central or state rules notified for your establishment before restructuring shift patterns, obtain written employee consent for any change, and treat daily-hours flexibility as rule-dependent rather than settled. Overtime beyond the prescribed limits must be paid at not less than twice the ordinary rate of wages.

Health and Safety Obligations

Key obligations for employers under the OSH Code include:

• Free annual health examinations at the employer's cost for such employees, and of such age, as the appropriate Government prescribes by rules (section 6(1) of the OSH Code) — the Code itself fixes no age
• Provision of a safe workplace with proper ventilation, lighting, and sanitation
• Reporting of all workplace accidents to the designated authority
• Creche facilities, under rules made for establishments in which more than 50 workers are ordinarily employed, for the use of children under six years (section 24(3) of the OSH Code); shared, pooled or third-party creches are expressly permitted
• No cost to employees for any safety measures, medical examinations, or occupational disease investigations

The general penalty under section 94 of the OSH Code is a fine of not less than INR 2 lakh and up to INR 3 lakh, with a further fine of up to INR 2,000 per day for a contravention that continues after conviction. Section 110 requires the Inspector-cum-Facilitator to give the employer written notice and 30 days to comply before launching a prosecution — but that opportunity is not available where there has been an accident, or where a violation of the same nature is repeated within three years.

Compliance Timeline and Action Items for Foreign Employers

Immediate Actions

Foreign employers with India operations should take the following steps now, while central and state rules under the codes are still being notified:

1. Salary restructuring audit: Review every employee's compensation structure to ensure basic pay + DA equals at least 50% of total remuneration. Model the cost impact of restructuring across your entire India workforce.
2. Employment contract review: Update all employment contracts, appointment letters, and HR policies to reflect the new Labour Code terminology and requirements. Replace references to repealed laws with corresponding Code provisions.
3. ESI compliance check: If you have 10+ employees and any earn below INR 21,000 per month, confirm ESI registration regardless of your office location. The "notified area" restriction no longer applies.
4. Fixed-term contract audit: Review all fixed-term contracts to ensure they provide equivalent benefits to permanent employees. Budget for pro-rata gratuity on contracts exceeding one year.
5. GRC establishment: If you have 20+ workers, constitute a Grievance Redressal Committee with equal employer-worker representation and at least one female member.

Medium-Term Actions

1. Standing orders: If you have 300+ workers, prepare or update standing orders per the IR Code requirements.
2. Health check programme: Establish an annual health check-up programme for employees aged 40+.
3. Payroll system update: Ensure your payroll software or service provider has updated calculation engines to reflect the new wage definition for EPF, ESI, bonus, overtime, and gratuity computations. See our detailed payroll setup guide for specific configuration steps.
4. Internal linking and documentation: Map repealed law references in your compliance calendar to corresponding Labour Code provisions.

Cost Impact Analysis for Foreign Employers

The financial impact of the new Labour Codes varies based on your current salary structures and workforce size. The illustration below takes an employee on INR 100,000 a month whose employer contributes EPF on actual basic pay rather than at the INR 15,000 statutory ceiling; an employer contributing at the ceiling sees no EPF increase at all. Statutory bonus is left out because it is computed on the notified wage ceiling, not on actual basic pay:

The wage assumption behind these figures makes them illustrative planning ranges, not published survey data.

On the same assumptions, a company with 50 employees at an average CTC of INR 100,000 per month sees an annual increase of about INR 15.1 lakh, and one with 200 employees about INR 60.5 lakh. Foreign employers should model these costs against their own salary structures rather than a rule of thumb, and adjust transfer pricing arrangements accordingly.

Penalties for Non-Compliance

The new codes introduce a graded penalty structure:

Unlike the old regime where multiple laws had overlapping and inconsistent penalties, the unified penalty framework makes enforcement more predictable — and prosecution more straightforward.

Key Takeaways

• Restructure salaries immediately: The 50% basic salary rule is the single largest cost and compliance impact. Audit and restructure all employee compensation as a priority.
• Fixed-term employees now get full benefits: ESI, EPF, bonus and pro-rata gratuity apply to fixed-term workers, and the five-year gratuity wait does not — eliminating much of the cost advantage of short-term contracts.
• ESI is now pan-India: The "notified area" requirement is gone. Any establishment with 10+ employees and qualifying wages must register, regardless of city or location.
• Retrenchment is easier below 300 workers: Foreign companies with smaller India operations gain significant flexibility in workforce restructuring without government approval.
• Act now, don't wait for final rules: The codes are law and took effect on 21 November 2025. Central and state rules are still being notified, but the code provisions in force apply now — track the rules notified in each state where you operate. Professional compliance advisory is essential for navigating this transition.