📜 Employer Advisory: Impact of New Labour Codes (Effective November 21, 2025)

Critical Compliance Overhaul under India's Four Consolidated Labour Codes

The Government of India has implemented the Four Labour Codes—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—effective from November 21, 2025.

These Codes consolidate 29 existing central labour laws, marking a monumental shift in the regulatory landscape. While the intent is to simplify compliance (Ease of Doing Business) and expand worker welfare, the transition necessitates an immediate and thorough review of all HR, payroll, and compliance practices.

🔑 Key Changes for All Establishments

Here are the most critical, universal changes:

1. Code on Wages (CoW), 2019: Mandatory Payroll Restructuring

●      Uniform Definition of 'Wages': The definition of 'Wages' has been standardised across all codes. It requires that the basic components (Basic Pay, Dearness Allowance) must constitute at least 50% of the total remuneration.

○      Impact: If your current salary structure has a lower basic component, your PF, Gratuity, and ESI contributions will likely increase, as these are calculated based on the new, higher 'Wage' definition.

●      National Floor Wage: The Central Government will set a minimum National Floor Wage, which states cannot set a minimum wage below, ensuring a minimum living standard for all workers.

●      Timely Wage Payment: Mandatory timely payment of wages, with terminal dues for employees exiting the company to be paid within two working days of separation.

2. Code on Social Security (CoSS), 2020: Expanded Coverage

●      Universal Social Security: The Code significantly expands the social security net.

●      Fixed-Term Employees (FTEs): FTEs are now explicitly granted all statutory benefits (PF, Gratuity, ESI, Leave, etc.) on par with permanent workers.

● Gratuity Eligibility: Gratuity is now payable to FTEs after just one year of continuous service (reduced from the previous five-year requirement).

●      Gig and Platform Workers: These new categories of workers are formally recognised for the first time, and the Code mandates welfare funds for them, often through contributions from "Aggregators."

3. Occupational Safety, Health and Working Conditions Code (OSHWC), 2020: Working Norms

●      Working Hours & Overtime: Standard daily working hours are now capped (with provisions allowing up to 12 hours including rest, subject to 48 hours per week), and overtime must be paid at double the normal wage rate.

●      Annual Health Check-ups: Mandatory free annual health check-ups for all workers above 40 years of age.

●      Women's Employment: Women are permitted to work at night (7 PM to 6 AM) across all establishments, subject to their consent and the provision of adequate safety and security measures.

4. Industrial Relations Code (IRC), 2020: Hiring and Firing Flexibility

●      Ease of Layoffs (For Large Firms): The threshold for requiring prior government approval for layoffs, retrenchment, or closure has been increased from 100 to 300 workers for industrial establishments. (This may not affect most MSMEs, as detailed below).

🏭 Specific Impact on MSME Establishments (Micro, Small, and Medium Enterprises)

The new Labour Codes have a multi-faceted impact on MSMEs, which form the backbone of the economy. While the codes aim to simplify processes, they also introduce new costs and obligations.

✅ Positive Impacts (Simplified Compliance)

Area	New Provision for MSMEs	Benefit
Compliance & Paperwork	Single Registration, Licence, and Return (One Stop Portal)	Significantly Reduced Burden: Replaces the need for separate registrations, licences, and multiple returns under 29 old laws, directly addressing a long-standing issue for small businesses.
Inspector Raj	Introduction of Inspector-cum-Facilitator	Focus shifts from punitive enforcement to guidance and compliance support, which is crucial for MSMEs with limited in-house legal expertise.
Higher Thresholds	Higher applicability thresholds for certain laws (e.g., Factories Act)	Eases the regulatory load for micro and small enterprisesby exempting them from certain provisions if their employee count is below the new threshold.

⚠️ Challenges and Compliance Burdens

Area	New Provision	Impact on MSMEs
Wage Costs	Mandatory 50% 'Wages' Rule (Code on Wages, 2019)	Increased Financial Outflow:MSMEs often structure salaries to keep the basic component low. This new rule will necessitate a mandatory increase in the basic pay and, consequently, a rise in employer contributions to PF, ESI, and Gratuity.
Social Security Scope	Universal Coverage for MSME Workers (Code on Social Security, 2020)	New Compliance Obligation:Previously, many small establishments were outside the scope of formal social security schemes. The new Code ensures that all eligible MSME workers are covered, which means the employer must now manage and contribute to these schemes for a wider employee base.
Statutory Benefits	Gratuity after 1 Year for FTEs	Higher Liability: While Fixed-Term Employment offers flexibility (IRC), the liability for gratuity accrues much faster (after one year) compared to the five-year rule for permanent employees under the old system, requiring careful financial provisioning.
Welfare Facilities	Mandates facilities like drinking water, first-aid, washrooms, and potentially canteens/restrooms (depending on establishment size and worker count). (OSHWC Code, 2020)	Infrastructure Investment:Smaller MSMEs may need to incur capital expenditure to upgrade their physical premises to meet the new, standardised safety and welfare norms.
Working Conditions	Mandatory Appointment Letters and Clear Working Hours	Formalisation: While beneficial for the worker, this mandates a more formal, documented HR process for even the smallest enterprises, requiring diligence in maintaining records.

✅ Action Plan for MSME Owners and HR Teams

1.     Review and Restructure Payroll: Immediately engage with your payroll and finance teams to assess the impact of the 50% 'Wages' rule on all salary components (PF, Gratuity, ESI). Revise compensation structures before the implementation date.

2.     Audit Worker Coverage: Verify that all categories of workers, including fixed-term and those previously excluded, are included in statutory social security and benefit schemes (EPF, ESI, Gratuity).

3.     Upgrade Facilities: Conduct a physical audit of your workplace to ensure compliance with the OSHWC Code regarding drinking water, sanitation facilities, first-aid, and safety training.

4.     Update HR Documentation: Ensure every employee, regardless of scale, has a formal Appointment Letter detailing their designation, wages, social security entitlements, and working hours.

5.     Seek Expert Guidance: Due to the complexity of State-level rules and the financial impact, consult a compliance expert to draft a tailored transition strategy.

The immediate priority for any MSME is to align its Payroll and HR Documentation with the new mandates, especially the revised definition of 'Wages' under the Code on Wages, 2019.

📋 Immediate Payroll & Documentation Compliance Checklist for MSMEs

Here is a comprehensive checklist for the mandatory changes you must implement immediately:

1. 💰 Payroll Restructuring & Financial Impact (Code on Wages, 2019)

The core change is ensuring that the statutory definition of 'Wages' (Basic Pay + Dearness Allowance + Retaining Allowance)equals or exceeds 50% of the employee's Gross Remuneration (CTC minus Employer Statutory Contributions).

Action Point	Compliance Requirement	MSME Implementation Steps
A. Redefine Wages (The 50% Rule)	The sum of all allowances (HRA, Conveyance, Special Allowance, etc.) cannot exceed 50% of Gross Remuneration. Allowances exceeding this limit must be reclassified as part of 'Wages'.	1. Audit all existing salary structures. Calculate the 'Allowances to Gross' ratio for every employee. 2. Recalculate CTC: Adjust the salary breakup to increase Basic Pay until it is at least 50% of the Gross Salary.
B. Recalculate PF Contribution	Provident Fund (PF) contributions (Employer & Employee) are calculated at 12% of the new, higher 'Wages'.	1. Update payroll software with the new 50% Basic Pay figure. 2. Expect higher cash outflowas the employer's contribution to PF will increase.
C. Recalculate Gratuity Liability	Gratuity is calculated based on the last drawn 'Wages' (Basic + DA). This higher 'Wages' definition directly increases the gratuity amount.	1. Factor the increased gratuity liability into the company's financial planning/provisions. 2.Be aware that the Fixed-Term Employees are now eligible for gratuity after just one year of service.
D. Final Settlements	Full and final settlement (including outstanding wages and terminal benefits) must be processed within two working days of an employee's separation (resignation/termination).	1. Revise the HR/Payroll exit policy and system to ensure mandatory two-day closure. 2.Train HR/Accounts teams on the strict adherence to this new timeline.

2. 📝 HR Documentation & Contracts (OSHWC & IRC Codes)

The new codes formalise several requirements, demanding meticulous documentation from all establishments, including MSMEs.

Action Point	Compliance Requirement	MSME Implementation Steps
A. Mandatory Appointment Letters	Every employee must be given a formal Appointment Letter(or contract) detailing their designation, wages, social security benefits, and working hours, regardless of the size of the establishment.	1. Create a standardised templatefor the Appointment Letter incorporating all new statutory details. 2. Ensure all existing employees (where a formal letter is missing) and all new hires receive this document.
B. Fixed-Term Employee (FTE) Contracts	FTEs must be explicitly entitled to all statutory benefits (PF, ESI, Gratuity, Paid Leave) on par with permanent employees.	1. Review and amend all FTE contract templates to explicitly include clauses granting equal statutory benefits. 2. Track the one-year mark for FTEs for gratuity eligibility.
C. Digital Records & Registers	Mandatory maintenance of consolidated digital registersfor attendance, wages, leave, and inspection records. (Replacing multiple physical registers).	1. Migrate to a certified, digital HRIS/Payroll system that can generate the unified electronic forms. 2. Stop maintaining multiple paper-based registers to align with the new One Registration/One Return philosophy.
D. Working Hours Policy	Clearly define the workweek (e.g., 5-day, 6-day, or 4-day), the 48-hour weekly limit, and the Overtime rate (Double the normal wage rate).	1. Update the employee handbook/policy with the new overtime rules. 2. Implement a time-tracking system to accurately record working hours beyond the standard daily limit for correct overtime calculation.

3. 🌐 Social Security & Welfare (CoSS & OSHWC Codes)

Action Point	Compliance Requirement	MSME Implementation Steps
A. Universal Social Security Inclusion	All workers (including temporary, fixed-term, and potentially even gig/platform workers if your business uses them) must be brought under the social security net.	1. Register all eligible employees for ESI and EPF immediately, lowering the threshold of exclusion. 2. If your MSME engages Gig or Platform Workers, monitor state rules for mandatory contributions to their welfare fund.
B. Health Check-ups	Mandatory free annual health check-ups for all workers above 40 years of age.	1. Maintain a register of employees' ages. 2. Partner with a local clinic/hospital to schedule and conduct these mandatory annual check-ups.
C. Female Employee Safety	Provisions must be made for the safety, security, and consent of women employees if they are permitted to work in the night shift 7 PM to 6 AM	1. Review and update the Internal Complaints Committee (ICC) and POSH policies. 2. Document the written consent of any woman employee opting for night work and detail the security and transport arrangements provided.

Adopting these measures proactively will ensure your MSME avoids significant financial penalties and streamlines its operations under the new, unified framework.

The financial impact of the new 50% 'Wages' rule (under the Code on Wages, 2019) is arguably the most significant immediate burden on MSMEs.

⚖️ Financial Impact Calculation Example

Here is a simple example that illustrates how the mandated change in salary structure directly increases the employer's statutory contribution and the overall Cost to Company (CTC).

Scenario: Employee A's Current CTC is ₹3,60,000 per annum (₹30,000 per month).

The employer currently maintains a salary structure with a low Basic Pay to reduce statutory liability.

Component	Pre-Code Salary Structure (Basic ≈30% of Gross)	Post-Code Salary Structure (Basic ≈50% of Gross)
A. Gross Monthly Salary	₹25,000	₹25,000
Basic Pay (BP)	₹7,500 (30% of Gross)	₹12,500 (50% of Gross)
House Rent Allowance (HRA)	₹7,500	₹6,000
Other Allowances (OA)	₹10,000	₹6,500
B. New Statutory 'Wages' (BP + DA)	₹7,500	₹12,500
C. Employer's PF Contribution (12% of 'Wages')	0.12 \times 7,500 ={₹900}	0.12 \times 12,500 = {₹1,500}
D. Total Employer Contribution (Monthly)	₹900	₹1,500

Key Financial Consequences:

1. Increased Monthly Contribution

●      Increase in Employer's Monthly Outgo {New Contribution} - {Old Contribution} = ₹1,500 - ₹900 ={₹600}

●      Annualised Increase:₹600 times 12 months ={₹7,200 { per employee, per year}

For an MSME with 50 employees, the minimum annual increase in statutory contribution is: ₹7,200 \times 50 = {₹3,60,000} in additional operational cost, just from PF.

2. Higher Gratuity Liability

●      Gratuity Formula: Gratuity = {Last drawn 'Wages'} {15/26} * Number of completed years of service}

●      Since the 'Wages' (Basic Pay) has increased from ₹7,500 to ₹12,500, the total gratuity payout for the employer will increase proportionately by approximately 1.67 times more.

3. Impact on Cash-in-Hand (for the Employee)

While the employer's cost increases, the employee's take-home pay might decrease slightly, even though their Gross Salary remains the same, because their 12\% Employee PF Contribution is also calculated on the higher ₹12,500 'Wages'.

Component	Pre-Code Pay	Post-Code Pay
Gross Salary	₹25,000	₹25,000
Employee PF Contribution	₹900	₹1,500
Take-Home Pay (Net Salary)	₹24,100	₹23,500

Conclusion: The new codes effectively close the loophole of structuring salaries with a low basic component. The MSME is forced to increase its contribution to statutory funds (PF, Gratuity, ESI), leading to a higher overall Cost to Company (CTC) and requiring immediate financial restructuring.

New EXIT POLICIES

The provision under Section 17 of the Code on Wages, 2019 that mandates the payment of terminal "wages" within two working days of separation (resignation, removal, or dismissal) fundamentally changes the HR exit process for MSMEs.

Previously, the standard practice for the entire Full & Final (F&F) settlement ranged from 30 to 90 days. The new two-day rule requires a radical shift toward a rapid, digitised, and coordinated process.

🚀 Two-Day F&F Settlement: Implementation Strategy for MSMEs

Here is an immediate action plan for MSMEs to achieve a two-day F&F settlement compliance:

1. ⚙️ Pre-Exit Process Automation (Day 0)

The key to a two-day settlement is to ensure all necessary data and approvals are captured almost instantly upon the employee's last working day.

●      Digital Exit Intimation: Implement an immediate, automated HRIS/Payroll notification system. As soon as the resignation is accepted or separation is decided, all concerned departments must receive an automated email/dashboard alert.

●      Mandatory Clearance Checklists: Departments (IT, Admin, Finance) must use a digital checklist to confirm asset return (laptops, IDs, etc.) and clearance. This checklist should be concise and completed within 4 hours of the final working day.

○      Action: If assets are not returned, the pre-calculated and verified value of the asset must be automatically added as a deduction to the F&F calculation without administrative delay.

●      Leave Encashment Ready Reckoner: Ensure all leave balances are accurate and updated daily in the HRIS. The software must automatically calculate the total encashable leave value on the last working day.

2. 🧮 Rapid Calculation & Verification (Day 1)

The entire calculation and necessary approvals must be completed by the end of the first working day following separation.

Component to Finalise	Compliance Requirement	MSME Compliance Strategy
A. Earned Wages	Unpaid salary up to the last working day.	Automate Calculation: Payroll system must run a daily pro-rata calculation of earned wages for all employees, making the final figure available immediately.
B. Leave Encashment	Encashment of accrued paid leave.	Pre-Calculated Value: Use the automated leave balance data (from Day 0) to generate the final encashment amount immediately.
C. Statutory Deductions	Employee PF, ESI, and Income Tax (TDS).	Tax-Ready Setup: The payroll system must be pre-configured to handle TDS deduction on the final payment, including leave encashment (if taxable).
D. Notice Period	Recovery or payment of notice period shortfall.	Clear Policy Enforcement: If the employee has a shortfall, the calculated deduction must be applied immediately. If the company owes the employee pay in lieu of notice, it must be added.
E. Gratuity (If Applicable)	For Fixed-Term Employees (after 1 year) and Permanent Employees (based on old rules/VRS).	Separate Timelines: The Code on Wages primarily covers the timely payment of wages. However, statutory interpretation suggests other terminal dues like Gratuity (mandated under the Code on Social Security) may have up to 30 days for payment, but MSMEs should aim for the fastest possible processing to avoid dispute. Focus the two-day rule strictly on wages and earned leave.
F. Final Approval	HR and Finance Department sign-off.	Digital Approval Workflow: Implement a simple, two-level digital approval chain (e.g., HR Head-> Finance Head) that can be accessed and signed-off on a mobile device to prevent delays.

3. 💳 Payment and Documentation (Day 2)

The final payment transfer and dispatch of necessary documents must be executed by the end of the second working day.

Action	Document/Process	Compliance Target
A. Final Payment	Net F&F amount transferred to the employee's bank account.	Batch Processing: Initiate a separate, dedicated F&F payment batch every day. Do not wait for the monthly payroll cycle. Use instant bank transfer mechanisms (IMPS/NEFT where possible).
B. Final Documentation	Relieving Letter, Experience Letter, F&F Pay Slip.	Print/Email Ready: All these documents must be generated instantly by the HRIS, digitally signed (where feasible), and emailed to the employee on Day 2, confirming settlement closure.
C. Record Keeping	Proof of Payment and F&F Statement.	Audit Trail: Maintain a clear digital record showing the settlement date, amount, calculation sheet, and bank transaction reference ID, ready for inspection by the Inspector-cum-Facilitator.

By streamlining the process, digitising clearance, and ring-fencing the F&F calculation from the main payroll cycle, MSMEs can meet the strict two-day deadline, turning a major compliance risk into an efficient, professional exit process.

A detailed Risk Assessment of the penalties under the new Labour Codes  is essential for MSMEs to understand the financial and legal gravity of non-compliance.

The penalties have been significantly enhanced and include both high monetary fines and potential imprisonment for repeated or serious offences. Crucially, the Codes introduce a process of "Inspector-cum-Facilitator," who will initially provide a 30-day window to comply before prosecution, which is a small relief for first-time offenders.

🛑 Non-Compliance Risk Assessment: Penalties & Fines

Penalties are categorised based on the severity of the violation, with subsequent offences attracting much heavier punishment, including mandatory imprisonment.

1. 💰 Code on Wages (CoW), 2019: Payroll Violations

This Code covers minimum wages, timely payment (including the two-day F&F rule), equal remuneration, and the mandatory 50% 'Wages' rule.

Violation Category	Nature of Offence	Penalty for First Offence	Penalty for Subsequent/Repeated Offence
A. Underpayment of Wages	Paying any employee less than the amount due (e.g., below the National Floor Wage, or less than the correct Overtime rate).	Fine up to ₹50,000	Imprisonment up to 3 monthsand/or fine up to ₹1,00,000
B. Non-Compliance	Contravention of any other provision (e.g., failure to pay the F&F within 2 days, violation of the 50% 'Wages' rule, non-payment of Overtime).	Fine up to ₹20,000	Imprisonment up to 1 monthand/or fine up to ₹40,000
C. Record Non-Maintenance	Failure to maintain or improper maintenance of prescribed records/registers.	Fine up to ₹10,000	Fine up to ₹20,000

2. 🛡️ Code on Social Security (CoSS), 2020: Statutory Contributions

This is highly critical for MSMEs that fail to register employees or deposit contributions (PF, ESI, etc.).

Violation Category	Nature of Offence	Penalty for First Offence	Penalty for Subsequent/Repeated Offence
A. Non-Deposit of Contributions	Failure to deposit employer and/or employee contributions (PF, ESI, etc.) after deducting them from wages.	Fine up to ₹1,00,000	Imprisonment up to 3 yearsand/or fine up to ₹2,00,000
B. Non-Registration	Failure to register the establishment or employees for social security coverage when required.	Fine up to ₹50,000	Fine up to ₹2,00,000
C. Falsification of Records	Knowingly making false statements or producing false records/returns.	Imprisonment up to 3 months and/or fine up to ₹1,00,000	Imprisonment up to 6 monthsand/or fine up to ₹2,00,000

3. 🏭 Occupational Safety, Health and Working Conditions Code (OSHWC), 2020: Safety & Welfare

This Code imposes severe criminal penalties for negligence resulting in serious injury or death, which is a significant risk for manufacturing MSMEs.

Violation Category	Nature of Offence	Penalty for First Offence	Penalty for Subsequent/Repeated Offence
A. General Safety Offences	Contravention of general safety/welfare duties (e.g., non-provision of mandated welfare facilities like first aid, clean restrooms, or free annual check-ups).	Fine up to ₹2,00,000	Imprisonment up to 1 yearand/or fine up to ₹4,00,000
B. Accident Leading to Death	Failure to comply with safety provisions resulting in an accident causing the death of a worker.	Imprisonment up to 2 years and fine up to ₹5,00,000	Imprisonment up to 3 yearsand fine up to ₹20,00,000
C. Accident Leading to Injury	Failure to comply with safety provisions resulting in an accident causing serious bodily injury to a worker.	Imprisonment up to 1 year and fine between ₹2,00,000and ₹4,00,000	Imprisonment up to 2 yearsand fine up to ₹8,00,000

Mitigation Strategy: Decriminalisation & Compounding

To provide relief and promote compliance, the Codes include mechanisms for settling less severe violations:

●      Decriminalisation: Many offences previously punishable by imprisonment have been converted to monetary fines, particularly for first-time contraventions of record-keeping rules.

●      Compounding of Offences: This allows an employer to avoid prosecution by settling the matter administratively through a fine.

○      For offences punishable by fine only, compounding is allowed by paying 50% of the maximum fine.

○      For offences punishable by imprisonment or fine or both, compounding is allowed by paying 75% of the maximum fine.

MSME Takeaway: While the fines are high, the government's dual approach of an "Inspector-cum-Facilitator" and the "Compounding" mechanism suggests an initial focus on achieving compliance through guidance rather than immediate criminal prosecution for minor or first-time faults. However, violations concerning worker safety, minimum wages, and non-deposit of statutory contributions carry severe, non-negotiable risks.

FOR IMPLEMENTATION OF THESE NEW CODES:

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