BUSINESS

New Labour Codes in India: Benefits for Employees and Challenges for Employers

India’s workforce is set for a historic transformation with the introduction of new labour codes, considered one of the country’s most significant reforms in decades. These codes aim to strengthen wage protection, broaden social security coverage, formally recognise gig and platform workers, and establish clearer rights and responsibilities for both employers and employees.

However, alongside these promising reforms, businesses, HR teams, and workers face a series of challenges as they navigate the implementation phase.

Dr Rajeev Thakur, Director at Grassik Search, highlights that the codes reflect a forward-looking approach, aligning with the government’s goal of a more formal and protected workforce. He emphasizes that timely wages, minimum wage floors, improved workplace safety, and social security for gig workers are critical steps toward India’s socio-economic development.

Rising Payroll and Compliance Costs

The new labour codes introduce significant shifts in payroll structures. One key change mandates that basic pay plus dearness allowance constitute at least 50% of total compensation, which disrupts allowance-heavy salary systems common in many industries. As a result, statutory contributions such as provident fund (PF), gratuity, employee state insurance (ESI), and leave encashment will rise, increasing overall payroll expenses.

Additionally, more categories of workers—including contract, fixed-term, and gig employees—will fall under social security coverage. Annual health check-ups for employees above 40 and a reduced gratuity eligibility threshold for fixed-term staff further add to operational costs. Gig economy companies, including food delivery and e-commerce platforms, will contribute a portion of turnover to a dedicated social security fund, intensifying financial pressure.

Impact on Take-Home Salary

Employees are also likely to notice changes. While the codes enhance job security, wage protection, and benefits, increased basic pay means higher PF and gratuity deductions, potentially lowering take-home salaries, particularly for workers below the PF wage ceiling or in sectors with complex allowance structures.

Benefits for Workers

Despite short-term adjustments, workers stand to gain considerably. The universal minimum wage ensures fair pay for nearly 40 crore unorganised sector employees. Retrenchment rules for large companies have become stricter, offering better compensation and reskilling support. Safety and health protections are strengthened, and gig workers receive formal recognition and social security for the first time.

Challenges for Small Businesses

Small and medium-sized enterprises (MSMEs) may face the greatest hurdles. The new rules require revisions to salary structures, updates to HR systems, contract reviews, and employee retraining, creating compliance challenges for businesses operating on tight margins. Experts anticipate that the first year of implementation will involve significant restructuring before stability is achieved.

Looking Ahead

Long-term, the labour codes have the potential to create a more predictable, modern, and worker-friendly labour market. Effective implementation could promote formal job creation, reduce wage exploitation, and enhance social security across India’s workforce. However, the transition will demand time, adjustment, and cooperation from both employers and employees.