9 minute read 17 Sep 2021
Labour codes in India

Changing landscape of labour laws in India: what businesses should do to be future ready

By Sonu Iyer

EY India Partner and Regional Leader, People Advisory Services - Tax

Experienced in tax and regulatory aspects encompassing personal tax, employment law, immigration, employee rewards (including ESOP) and HR consulting. Passionate about Diversity & Inclusiveness.

9 minute read 17 Sep 2021
Related topics Tax CHRO Insights Workforce

Labour law changes 2021 are likely to usher in social equity and social security in India.

India is in the process of introducing changes to the labour laws. There are multiple drivers for these reforms. First is the recognition that economic development of the country is predicated on well-articulated and well-administered labour laws. Social equity, social security and ease of doing business are some of the other policy objectives which are driving these reforms.

Labour laws in India were due for review for a long period. The journey for these reforms started about 20 years ago. These reforms are expected to finally culminate into four labour codes covering wages, social security, occupational safety, health and working conditions, and industrial relations. These new labour codes are authored basis International Labour Organization (ILO) standards and a consultative process involving various stakeholders.

Some international best practices are also factored in, which include introduction of inspector-cum-facilitator to encourage compliance. Once effective, these new labour codes will replace 29 central government labour laws currently in force. This, in turn, may have a cascading impact on state government labour laws.

Some of the themes that run through these codes are augmentation of employee benefits basis change in reference wages for computation, protection of workers’ rights, balancing of employer duties and employee rights, recognition to fixed term contract hiring, digitization of compliance and enforcement and introduction of social security for self-employed.

Augmentation of employee benefits

Various socio demographic studies have suggested that a significant portion of the Indian population will live longer (than in the past) and will therefore eventually need to fall back on a reliable social security system to live a reasonable quality of life when no longer economically productive. This explains the attempt being made by the government via these reforms to provide wider social security coverage to all citizens of the country and also increase the quantum of social security benefits.

The proposed new labour codes in India require all employee benefits to be calculated on new reference ‘wage’ as defined under the labour codes as against the current practice of calculating only on basic salary. Under the new definition of ‘wages’, all salary components except specific exclusions are covered. Also, there is a 50% ceiling on exclusions, meaning at least 50% of gross remuneration will now be covered under wages for all employee benefits calculations.

The new definition will mean higher quantum of benefits such as higher gratuity, overtime pay and leave encashment in the hands of employees, and is considered to be the largest benefit of the new labour codes. However, in a cost to company (CTC) structure, where benefits form part of salary, higher benefits will mean reduced monthly take home salary for employees.

However, even where benefits such as provident fund and gratuity form part of CTC of an employee, benefits such as leave encashment and overtime, which are over and above CTC, will increase cost for employers – both recurring and retrospective. There may be a significant retrospective impact on gratuity costs for employers in the labour codes, which may impact accounting provisions for the past service period. The increase in employee costs would impact hiring plans and future increments thereby impacting creation of employment opportunities.

The new definition of wages is open to interpretation on what is included and what is excluded as wages. For example, ‘any bonus payable under any law for the time being in force, which does not form of the remuneration payable under the terms of employment’ as excluded from the definition of wages suggests that while statutory bonus is excluded in determining wages, there is no clarity on whether annual performance bonus or similar variable incentive payments may be excluded or not. Variable payments if not excluded from the definition of wages will lead to phenomenal increase in costs and also create challenges in monthly calculations for overtime and other contributions.

The emerging trends in Indian labour laws point toward a more equitable future.

Protection of workers’ rights

Under the labour codes, all organizations will need to classify their employee population as ‘employees’ or ‘workers’. While all individuals employed in an organization will be employees, individuals who do not have managerial or supervisory roles may potentially be workers. With this, even individuals in so-called white collared jobs working in an office may qualify as workers if they are not managers or supervisors.

While a similar definition of ‘workman’ exists under the current Industrial Disputes Act, it is applicable for limited purposes such as retrenchment or in cases of disputes with an employer.

If an individual is a worker, under the labour codes, he will be eligible for additional benefits from employers such as overtime for working beyond 8 hours on any day or 48 hours in any week and leave encashment for un-availed leave at the end of the year. Employers will also need to set up a grievance redressal committee where workers can file complaints on any matter.

From an employer’s perspective, it may be quite challenging to identify workers given that the definition lacks clarity and has been a matter of extensive litigation in the past. Terminologies such as managerial or supervisory role have not been defined and may have very different meaning in today’s digital world than that interpreted by the courts in the past. For instance, if someone is supervising work done by robots or other artificial intelligence tools, will it mean they are supervisors and therefore not workers?

Tracking of overtime specially in alternative work arrangements may be challenging for employees. Annual leave encashment will be counter-productive, as workers may not avail leave to receive a higher payout at the year end. Further, in service organizations where there is no categorization of blue-collared and white-collared jobs, companies may face a huge dilemma on how to communicate different leave encashment policies for employees and workers.

Balancing of employer duties and employee rights

Labour codes have not lost sight of challenges faced by employers because of multiple trade unions. The labour codes have given recognition to a negotiating union or negotiation council in establishments that have multiple trade unions. Such a negotiating union or negotiation council will have representatives from all trade unions in the establishment and will negotiate benefits and service conditions with the employer.

Addressing the issue faced by employers where unplanned strikes affect business continuity, the new labour codes provide that no employee will be allowed to go on strike without a mandatory 14 day notice to the employer.

Labour codes have enhanced the threshold number of employees from 100 to 300 for an employer to seek approval from the central government for retrenchment of workers.

Fixed term contract hiring

Hiring through third parties has been a common approach to flexi hiring in India. The labour codes open doors for a different approach to flexi hiring called fixed term employees. There are no restrictions under the labour codes on the number of or period for which fixed term employees can be employed.

While hiring of contract labour through third parties is not permitted in core functions in an organization, there is no such restriction on hiring fixed term employees for core functions. However, fixed term employees should be offered the same benefits as permanent employees for similar roles. Also, fixed term employees are eligible for gratuity after one year of service.

For employers looking at agility in hiring, fixed term employees may be a good option.

Digitization of compliance and enforcement

Employers are permitted to maintain all registers and records digitally under the labour codes albeit prescriptive formats for these registers and records have been provided in the proposed rules supporting the labour codes. The Government also plans to do random web-based inspections under the online inspection scheme.

There is a specific requirement for employers to do full and final settlement of wages within two working days of employees leaving. This will require employers to automate compliance and strengthen internal processes to reduce the full and final settlement time.

Multiple aspects in human resource and payroll policy framework and processes will undergo changes to ensure compliance with labour codes.

Focus on enforcement

One of the drivers for new labour codes is to ensure effective enforcement. Attempt has been made to achieve this in many ways. By rebranding labour inspectors as ‘inspectors-cum-facilitators’, the government has tried to give a friendly face to the labour code inspection regime. These inspectors-cum-facilitators have been made responsible for not just inspecting but also advising employers and employees on matters relating to compliance.

Employees have been given more voice – they can directly approach courts on any matter under the Code on Wages. This may lead to labour law litigation.

For enforcement of compliance, monetary penalties have been prescribed for first non-compliance under the labour codes but imprisonment proceedings kick-in for any second non-compliance by the employer.

Social security for self employed

Work arrangements outside the traditional employer-employee relationship have been given recognition under the new labour codes. The central government has been authorized to notify specific social security schemes for gig workers and platform workers. Such social security schemes may provide life and disability cover, accident insurance, health and maternity benefits, old age protection, creche and other benefits to such individuals.

An onus has been put on aggregators who are digital intermediaries and run online marketplaces, who make use of services of these gig and platform workers, to contribute a certain percentage of their annual turnover (between 1% to 2%) towards social security schemes for such workers.


Implementation of labour codes is a laudable step forward. However, the impact of new labour codes is immense, like it requires huge change management for employers. Employers will need to start preparing for these codes by first analyzing the impact and then creating internal policies, processes and governance structures which are aligned with the various requirements under the labour codes. All functional groups in an organization will need to come together for successful implementation of a framework that is future-ready.

From the government’s perspective, a clear roadmap on the implementation of labour codes, timely notification of central and state rules, taking away the retrospective cost impact and providing clarity on certain aspects will go a long way to ensure adoption by the industry.

Implementation of labour codes may be seen as a journey for the next two to three years. As the law evolves, further clarity on some provisions of the labour codes may come in and industry best practices may emerge.

(Puneet Gupta, Director, People Advisory Services – Tax, EY India also contributed to this article).


Implementation of labour codes may be seen as a journey for the next two to three years. As the law evolves, further clarity on some provisions of the labour codes is expected, which may lead to emergence of best practices in due course of time.

About this article

By Sonu Iyer

EY India Partner and Regional Leader, People Advisory Services - Tax

Experienced in tax and regulatory aspects encompassing personal tax, employment law, immigration, employee rewards (including ESOP) and HR consulting. Passionate about Diversity & Inclusiveness.

Related topics Tax CHRO Insights Workforce