What Has Changed for Employers as India Moves Toward New Labour Codes?

India’s long-awaited new Labour Codes, which came into force on November 21, mark one of the most sweeping reforms of the country’s employment framework in decades. While the intent is to simplify and unify multiple labour laws, employers across sectors say the transition has been abrupt, leaving them with little time to recalibrate internal systems, payroll structures, and compliance mechanisms.

As organisations scramble to review policies and realign processes, several critical shifts are already becoming clear. Legal and HR experts outline how these changes will impact employers in practical, financial, and operational terms.

Employer vs Employee: Rethinking Workforce Classification

One of the most fundamental changes under the new Labour Codes is the sharper distinction between a “worker” and an “employee”. According to Madhu Damodaran, Regional Managing Partner at AM Legals, this classification will now play a decisive role in downstream compliance.

“Companies will have to rethink their entire workforce strategy—especially who qualifies as a worker and who is an employee,” Damodaran explains. This distinction directly affects how wages, overtime, gratuity, bonuses, and other statutory benefits are calculated.

Under the Codes, individuals in management, administrative, or supervisory roles are generally classified as employees, while those engaged in manual, technical, or operational work fall under the definition of workers. Employers must now carefully reassess job descriptions using updated legal definitions, including whether a role involves decision-making authority or supervisory control.

This exercise is not merely semantic. A misclassification could expose companies to compliance risks, penalties, and disputes.

Statutory Benefits: A Major Cost Recalibration

One of the most consequential financial changes for employers relates to how statutory benefits are calculated. The Labour Codes mandate that basic pay must constitute at least 50% of total remuneration, and statutory payouts such as gratuity, overtime, and bonuses must be computed on this revised wage base.

“Gratuity, in particular, is retrospective in nature,” says Damodaran. “Companies will have to recalculate gratuity on the new wage base for an employee’s entire tenure and recognise the increased liability in their profit and loss statements.”

To manage escalating costs, many organisations may opt to cap basic pay at exactly 50% rather than exceed it. However, this creates a strategic dilemma—whether to absorb the higher costs or pass some of the burden on to employees.

Damodaran stresses that such decisions must be supported by a clear communication strategy. “If handled poorly, it can create dissatisfaction, erode trust, and even lead to higher attrition,” he warns.

Employees need to understand why these changes are being made, how they affect take-home pay, and what the long-term implications are for benefits like retirement and gratuity. Transparent communication at both the organisational and individual levels is critical.

Contract Labour and the Ban on Core Activities

The Occupational Safety, Health and Working Conditions (OSH) Code introduces a significant shift in how contract labour can be deployed. With limited exceptions, the Code restricts the use of contract labour for core activities of an establishment.

Ankita Ray, Partner at Cyril Amarchand Mangaldas, points out that similar restrictions existed in some states such as Telangana and Andhra Pradesh, but the Labour Codes now extend this principle nationwide.

Employers must therefore reassess whether contract workers are engaged in core or non-core activities and whether they fall within statutory exclusions. Unlike the earlier regime, companies are also required to provide welfare facilities to contract workers.

Ray advises businesses to carefully review manpower supply agreements and ensure that clauses safeguarding statutory rights and compliance obligations are clearly built in. Failure to do so could expose employers to liability, even where third-party contractors are involved.

Fixed-Term Employment Gets Legal Recognition

The Labour Codes formally recognise fixed-term employment, granting such employees parity with permanent workers in wages, working hours, allowances, and other benefits.

Importantly, fixed-term employees are now entitled to gratuity if they complete at least one year of service under a contract—something that was not uniformly applicable earlier.

“Given this change, employers will need to carefully evaluate the cost-benefit equation of engaging fixed-term employees,” says Ray. While fixed-term hiring offers flexibility, the increased statutory obligations could narrow the cost advantage over permanent employment.

Digital Compliance and Infrastructure Challenges

Another major shift under the new Labour Codes is the push toward digital compliance. According to Aditya Narayan Mishra, MD and CEO of CIEL HR, employers will need stronger digital infrastructure for registrations, filings, returns, and workforce data reporting.

This requirement is particularly challenging for organisations managing large, geographically dispersed, or contract-heavy workforces. Coordinating phased rollouts, ensuring data accuracy, and aligning with varying state-level implementation rules add layers of complexity.

MSMEs and labour-intensive industries may find the transition especially demanding due to limited internal compliance capacity and technology readiness.

Long-Term Impact: More Formalisation and Transparency

Despite short-term disruption, experts believe the new Labour Codes could deliver long-term benefits if implemented thoughtfully. Greater workforce formalisation, improved transparency, and clearer statutory frameworks could enhance sustainability for both employers and employees.

However, success will depend on structured planning, skill-building within HR and compliance teams, and investment in robust governance systems.

For employers, the message is clear: the Labour Codes are not just a legal update—they represent a fundamental shift in how workforces are structured, compensated, and managed in India’s evolving labour market.