India’s Four New Labour Codes 2026: What Employees and Employers Need to Know

On November 21, 2025, India took a landmark step in labour law reform by bringing into force four consolidated Labour Codes, replacing 29 legacy enactments that had governed employment relationships for decades. Whether you are an employer restructuring payroll or an employee evaluating your new entitlements, these changes affect virtually every workplace in the country. This guide breaks down the four codes, highlights the provisions with the greatest practical impact, and outlines the compliance steps that organisations must now follow.

What Are the Four Labour Codes?

The Code on Wages, 2019 consolidates the Payment of Wages Act 1936, Minimum Wages Act 1948, Payment of Bonus Act 1965, and Equal Remuneration Act 1976. It establishes a universal definition of "wages" and sets a floor for minimum wages across all sectors. The Industrial Relations Code, 2020 merges the Trade Unions Act 1926, Industrial Employment (Standing Orders) Act 1946, and Industrial Disputes Act 1947, introducing a simplified framework for dispute resolution, standing orders, and retrenchment thresholds.

The Code on Social Security, 2020 replaces nine social security laws, including the Employees' Provident Funds Act 1952 and the ESI Act 1948. For the first time, it extends social security coverage to gig workers and platform workers. The Occupational Safety, Health and Working Conditions Code, 2020 subsumes thirteen laws, including the Factories Act 1948 and the Contract Labour Act 1970, standardising safety norms, working hours, and overtime provisions.

The 50% Wage Rule: How It Changes Your Salary Structure

One of the most consequential changes is the redefined concept of "wages" under the Code on Wages. Under the new framework, basic pay plus dearness allowance (DA) must constitute at least 50% of an employee's total cost to company (CTC). All other components, such as house rent allowance (HRA), bonuses, commissions, and reimbursements, are classified as allowances and cannot exceed the remaining 50%.

This rule has a cascading effect. Since provident fund (PF), gratuity, and ESI contributions are calculated on "wages," a higher wage base means higher statutory contributions from both employers and employees. For employers, this translates to an estimated increase of roughly 3.2% of gross CTC in statutory cost. Employees will see higher PF accumulation and larger gratuity payouts, although monthly take-home salary may decrease in the short term. Companies that have not yet registered as an apprenticeship establishment should also review their training programme obligations, as the wage definition affects apprentice stipends.

Full and Final Settlement Within Two Working Days

Section 17(2) of the Code on Wages introduces a strict timeline for full and final (F&F) settlement. When an employee leaves an organisation, whether by resignation or termination, the employer must clear all pending dues within two working days of the last working day. This includes unpaid salary, leave encashment, bonuses, and any other amounts owed. This is a significant departure from the earlier practice, where F&F settlements routinely took 30 to 45 days. Delayed settlement is now a legal violation, and employees can file a case in labour court to seek redress.

For employers, this requires overhauling exit processes. Payroll systems must be configured to calculate and disburse final settlements on a near-immediate basis, and HR teams must coordinate with finance departments to ensure timely clearance. Where dues remain unpaid, employees may also consider filing a debt recovery application before the DRT in cases involving substantial sums.

Overtime Pay at Twice the Ordinary Rate

The Occupational Safety, Health and Working Conditions Code standardises overtime pay at twice the ordinary rate of wages for any work beyond 9 hours in a day or 48 hours in a week. Unlike the earlier regime, where different laws prescribed varying overtime rates for different categories of workers, the new rule applies uniformly. Overtime is now calculated on the redefined "wages" (the 50% base), which means the overtime payout itself is higher than under the previous framework.

Most states cap overtime at 50 hours per quarter, though project-specific exemptions may be obtained from state labour authorities. Employers operating in special economic zones should verify whether the zone's specific rules provide additional flexibility. The Supreme Court has also recently directed employers to honour their obligations in matters of worker welfare, reinforcing the judiciary's alignment with the spirit of these reforms.

Social Security for Gig and Platform Workers

The Code on Social Security, 2020 recognises gig workers and platform workers as distinct legal categories for the first time in Indian law. Aggregators are required to contribute 1% to 2% of their annual turnover (capped at 5% of amounts paid to gig and platform workers) toward a Social Security Fund. The Central Government is empowered to frame schemes covering life and disability cover, accident insurance, health and maternity benefits, and old age protection for these workers.

A National Social Security Board has been constituted to recommend and oversee such schemes. This provision is particularly significant for workers in ride-hailing, food delivery, logistics, and freelance services sectors, who were previously outside the ambit of any social security legislation. Workers seeking government identity documentation such as a passport under the revised 2026 rules should note that their employment classification may affect certain application processes.

Key Compliance Steps for Employers

Employers must take the following steps to align with the new framework. First, restructure salary components to ensure basic pay plus DA is at least 50% of CTC. Second, reconfigure payroll software to calculate PF, ESI, and gratuity on the revised wage base. Third, update exit procedures to complete F&F settlements within two working days. Fourth, audit overtime practices and ensure all eligible workers receive twice the ordinary wage rate. Fifth, if you operate as an aggregator, register on the e-Shram portal and begin contributing to the Social Security Fund. Sixth, review and update employment contracts and standing orders to align with the Industrial Relations Code. Employers should also be aware that contractual disputes arising from the restructuring process may require a suit for specific performance of contract to enforce revised terms.

Key Takeaways

The four Labour Codes, effective from November 21, 2025, replace 29 earlier laws with a unified compliance framework. Basic pay plus DA must now be at least 50% of CTC, increasing PF, gratuity, and ESI contribution bases. Full and final settlement must be completed within two working days of an employee's exit under Section 17(2) of the Code on Wages. Overtime is payable at twice the ordinary rate for work beyond 9 hours per day or 48 hours per week. Social security coverage has been extended to gig and platform workers for the first time, with aggregators required to contribute to a Social Security Fund. Employers must undertake immediate salary restructuring, payroll system updates, and process overhauls to ensure compliance.