What NOT to do in India's New Labor Paradigm

What NOT to do in India's New Labour Paradigm

The questions listed below are as asked by the companies to Social Compact and by the participants during the live session (see the recorded video above). The responses provided are from BTG Advaya as of 26th February 2026.

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For any queries or further clarifications on any of the questions given below, please feel free to email us at support@socialcompact.co

What has substantially changed in Labour codes?
Four Labour Codes consolidate 29 central labour laws, introducing a uniform wage definition, universal social security coverage, fixed-term employment as a statutory category, simplified compliance through single registration and unified returns, and expanded thresholds for applicability, altering how employers engage, pay, and exit workers.
Are you seeing labour laws becoming unified across all states?
Partial unification is underway, as the four Codes provide a common central framework, but states retain rule-making powers and most state rules are still in draft or transition phase. In practice, significant state-level variation persists, and all state-level legislations including Shops and Establishments Acts continue to remain in force until superseded by state-specific notifications under the new Codes.
What are the financial implications on employers & the impact on the employees?
The broader wage definition under the Labour Codes increases employer costs on PF, gratuity, and bonus, while employees see higher long-term statutory benefits but a possible dip in monthly take-home pay; effectively shifting value from immediate cash to long-term entitlements.
For establishments with departments/branches in more than one state, our current understanding is that such entities fall under the jurisdiction of the Central Government for purposes of COSS. Please confirm whether this interpretation is correct and, if so, clarify any exceptions) that may alter Central vs. State applicability.
The SS Code states that any establishment with departments or branches in more than one State falls under Central Government jurisdiction. There are no exceptions currently prescribed for multi-state establishments. However, exceptions may be notified by the appropriate Government at a later stage.
Do OSH obligations apply only after crossing the number of workers threshold limit?
No. Most OSH provisions apply irrespective of any minimum worker threshold, and compliance with such provisions will be required. Any contravention may be punishable with a fine of up to INR 3,00,000.
Under the Social Security Code what budgetary allocations have been made by the Centre and what portion are States expected to fund?
The Code on Social Security, 2020 does not prescribe specific budgetary allocation percentages for the Centre or States. The actual quantum of contribution by the Central or State Government to any scheme is left to be specified through scheme notifications, meaning specific funding shares are determined scheme-by-scheme rather than fixed in the statute itself.

Can an employer rename salary components (e.g., “student component,” “special allowance”) to exclude them from statutory benefit calculations and ensure benefits are computed only on basic pay rather than total remuneration?
No, the Social Security Code expressly prohibits an employer from restructuring wages with the intention of reducing social security contributions. Accordingly, remaining or creating artificial salary components to supress the computation base is not permissible. Any contravention is punishable with a fine of INR 50,000.
Is the central government’s floor wage sufficient even if the state’s minimum wage is higher?
No, the floor wage set by the Central Government is the baseline for State Government’s to notify. The minimum wage notified by the States must be adopted. Any contravention is punishable with a fine of up to INR 50,000.
Can you clarify the wage definition with an example which includes Basic, HRA, Special allowance, Statutory Bonus, variable pay and retirals like PF, NPS, Superannuation.
If a worker’s CTC is higher than the notified minimum wage, can the employer structure the wages in such a way that basic falls below minimum wage assuming allowances makeup the difference?
While this may be permissible, doing this to calculate statutory contributions on a lower base is prohibited. Additionally, allowances that are being used to meet the minimum wages in the CTC must be a fixed and certain payment. Reimbursements, expense allowances, and payments that are conditional, variable, or linked to actual expenditure cannot form a part of minimum wages. Any contravention is punishable with a fine of up to INR 50,000.
Please specify the determinants (such as periodicity, performance linkage, conditionality, and whether it forms part of “remuneration” under terms of employment) that influence inclusion/exclusion for the 50% test, and any recommended language/structuring to mitigate risk.The 50% rule is relevant specifically in relation to excluded components under the definition of "wages". If the aggregate of all certain exceeds 50% of the total remuneration, the excess amount is mandatorily added back into "wages" for the purpose of social security contributions and payments. This rule cannot be “excluded”, as it operates automatically on the aggregate of excluded components regardless of how individual components are structured or labelled.
If an employer does not pay dearness allowance or retaining allowance, must statutory benefits (gratuity, leave encashment, provident fund contributions) be computed solely on basic pay?
No, the Labour Codes excludes only 11 listed allowances. If DA and retaining allowance are not paid, that does not simply reduce the wage base as every other non-excluded allowance will need to be included for calculating statutory benefits. Any contravention is punishable with a fine of INR 50,000.
If basic and DA comes to 70% of total remuneration, can we restrict statutory benefits to 50% without restructuring to make inclusions and exclusions as 50-50%
No, this is not possible. The 50% rule is only relevant for adding excluding allowances back into wages when they exceed 50% of total remuneration. It does not allow employers to cap the wage base at 50% where basic and DA already form a higher proportion. If basic and DA are 70% of total remuneration, statutory benefits must be computed on 70%.
How do we treat allowances like one time allowance and some employment based recurring allowances. Would they be considered under exclusions?
Only those components expressly listed under the Wages Code should be excluded from “wages”; the exclusions are exhaustive. Any other allowance, including one-time or variable payments, must be assessed on a case-by-case basis, with reference to whether it is payable as a condition of employment and whether it is genuinely contingent in nature or, in substance, a component of fixed pay.
Does PF have to be paid on the 50% Basic or on INR 15K max?
The Labour Codes (and the erstwhile law) requires employers, at a minimum, to calculate PF contributions on the prescribed wage ceiling of INR 15,000 per month, resulting in a capped monthly contribution of INR 1,800 (being 12% of INR 15,000). However, the Labour Codes allows employers and employees to jointly elect to make contributions on the actual salary, in which case, PF has to be calculated on Basic, dearness allowance, retaining allowance and other allowances that are not expressly excluded in the Wages Code. The 50% rules is relevant for adding excluding allowances back into wages when they exceed 50% of total remuneration.
Due to the change in ESIC eligibility calculation from Gross wages to wages, coverage of employees will increase. Does the ESIC portal allow backdated registrations for newly eligible employees?
Yes, the ESIC had published a circular in December 2025 instructing all applicable establishment to register newly eligible employees immediately. Accordingly, the portal allows for registration of new eligible employees.
Employer can avoid payment of PF/ ESIC contributions if workers sign a waiver?
No, any letter/contract/agreement where an employee relinquishes their right to social security contributions or payments in null and void under the labour codes. Any contravention is punishable with INR 20,000 Employees may also initiate litigation to the effect that they were coerced into signing such letters.
For skilled piece-rate workers earning above the ESIC wage limit, is ESIC coverage applicable? If not, is there any equivalent social security option recommended for such workers?
Yes, ESIC coverage is determined solely based on the wage threshold. It is immaterial whether the individual is a permanent employee, piece-rate worker, daily wager, or contract labour. If the wage threshold is met and the establishment is covered, ESIC applies, regardless of the nature or label of the engagement.
If registered contract labour is engaged and the contractor is maintaining PF and ESIC for their workers independently, does the principal employer still remain liable in case of any non-compliance?
Yes, the principal employer remains liable even when the contractor independently maintains PF and ESIC for their workers. The law treats the principal employer's liability as vicarious and residual; it does not extinguish simply because the contractor has their own registration codes.
Is overtime compensation payable only to factory workers on permanent rolls? Are non-factory workers, contractual workers, and fixed-term employees exempt from overtime provisions?
No, all workers, irrespective of their place of work (factory or shops and establishments) or type of engagement (fixed term, contract workers) are entitled to overtime provisions. Any contravention is punishable with of up to 1,00,000 and/or imprisonment for up to three months for subsequent contravention.
As per Section 32 of the OSH Code, leave encashment for workers (not regular employees) is payable on wages. Please confirm and clarify its applicability.
Section 32 of the OSH Code applies to every worker employed in an establishment. However, the term worker is broad and could cover majority of the organization’s employees.
For ‘employees’ who have left the organization from 21st November,2025, should the base for leave encashment be changed to wages? (today its calculated on basic by most organizations)
Yes. With effect from 21 November 2025, being the date on which all four Labour Codes came into force, the base for leave encashment must align with “wages” as defined under the Code on Wages. This requirement is mandatory and applies to all separations and leave encashment events occurring on or after that date. Any contravention may be punishable with a fine of up to INR 3,00,000.
Leave for Sales promotion employees - Do we follow the provisions of Shops and establishments Act or OSH and working conditions code?
There is a conflict in terms of application. While the Sales Promotion Employees (Conditions of Service) Act, 1976 has been subsumed into the OSH Code, 2020, sales promotion employees engaged in establishments covered under State Shops and Commercial Establishments Acts remain in a grey area as to which law governs their leave entitlements. Until this conflict is resolved through judicial interpretation or a State notification, the safest compliance position is to apply the more beneficial of the two.
Can contract labour be required to sign a waiver letter renouncing statutory entitlements to provident fund, leave encashment, ESIC, and other benefits?
No, any letter/contract/agreement where a contract worker renounces/relinquishes their right to social security contributions or payments in null and void under the labour codes. Any contravention is punishable with INR 20,000. Contract workers may also initiate litigation to the effect that they were coerced into signing such letters.
For bonus eligibility FY 2025–26, what will be the base to be considered for calculation - basic salary or wages (< 21000 per month limit)? Will it be different for the period until 20th Nov and post 21st Nov, please clarify?
Although the new wage definition under the Labour Codes has come into force, it will have a substantive impact on bonus computations only once the Government revises the ₹21,000 eligibility ceiling and the ₹7,000 calculation cap. As no such revision has been notified to date, the actual bonus payout for most employees remains unchanged.
COSS Rules indicate that, for determining gratuity, “wages” exclude payments that are:
(a) payable on an annual basis,
(b) linked to performance or productivity, and
(c) not part of remuneration under the terms of employment.
Queries:Do one-time allowances or Performance Linked Remuneration / Variable Pay / Incentive, when mentioned in the offer/appointment letter, risk being treated as part of “wages” for gratuity if they are contractual in nature?
If the variable pay is of the nature of a fixed entitlement, it risks being treated as part of wages. This will have to be analysed on a case-to-case basis.
Should any transfer-driven allowances (e.g., location/site allowances) be expressly classified to strengthen their inclusion/exclusion treatment for gratuity “wages”?
Gratuity wages may increase or decrease multiple times over the employment period on transfer from one location to another, or on transfer from office to site and back.
Transfer-driven allowances such as location or site allowances that vary on transfer present a nuanced question, as their treatment for the purpose of "wages" under the SS Code will depend entirely on the facts and circumstances of each case, including the specific language used in the appointment letter, transfer orders, and the actual pattern of payment over the employment period. While the fluctuating and location-specific nature of such allowances may support an argument for exclusion, it would be difficult to give a definitive position on their classification without examining how these allowances have been administered in practice.
Can employees be terminated by providing notice without statutory payments beyond wages for the notice period and final settlement, thereby avoiding gratuity, leave encashment, severance, or retrenchment compensation?
No, all terminal benefits such as gratuity, leave encashment, PF, retrenchment compensation will need to be paid and cannot be withheld. Serving notice period does not discharge employer’s from this obligation. Any contravention may be punishable with a fine of up to INR 3,00,000 and imprisonment of up to 3 months for subsequent contraventions.

Clarity on definitions- Employee/ Workers/ Industry/ Wages
The Codes harmonise definitions across all four statutes. "Employee" is broader and all includes all categories of workers including supervisory and managerial staff up to prescribed wage ceilings. There is no change in the definition of “industry". "Wages" moves from a fragmented, statute-specific meaning to a single unified definition under the Code on Wages anchored on an exhaustive exclusion list.
What constitutes an employment relation for workers who are not permanent employees, for example:
Someone earning piece rate and has been for over 11 months – they also receive benefits such as ESIC and PF through the employer
Someone being a daily wage earner for over 11 months – also receiving benefits
Someone working with us now and then – we pay them directly but they work through a contractor – roughly 9 months out of 12 – only receiving a piece rate.
Under the Labour Codes, an employment relationship is determined by substance and not by the mode of payment or the label assigned to the engagement. Further, the period of engagement is relevant mainly with respect to payment of statutory benefits and not to determine employment relationship.
Does engaging workers as daily wage workers, contractual monthly wage workers, piece-rate workers, or apprentices automatically exclude them from coverage under minimum wage laws, overtime provisions, social security, paid leave, and other statutory protections under the labour codes?
No, the Labour Codes extend statutory protections based on the nature of the work performed and the employment relationship, not on the label assigned to the engagement. Regardless of whether an employee is paid on a daily, monthly, or piece-rate basis, or engaged as a contractual worker, minimum wage, overtime, and social security obligations apply equally under the Code on Wages, 2019 and the Code on Social Security, 2020. Any contravention may be punishable with a fine of up to INR 3,00,000.
Can employers freely outsource any activity by classifying them as ‘non-core’ activities?
No, the law defines core activities as those essential to the business of a company. Classifying a core-activity as a non-core activities in internal documentation does not change this. Any contravention is punishable with a fine of up to INR 1,00,000.
Job functions I don’t need through the year are non-core.
No. An intermittent function does not automatically qualify as a non-core activity. While activities that do not require full-time workers may fall within the exception permitting engagement of contract labour for core activities, the applicability of such exception must be assessed strictly on the basis of the specific facts and circumstances. The exception is not intended to be interpreted broadly so as to permit routine classification of activities as non-core. Any contravention is punishable with a fine of up to INR 1,00,000.
Does Fixed Term Employment have core & non-core function linkage?
No, the core and non-core classification is relevant in the context of contract labour.
What are the restrictions on fixed term contracts, esp during peak load and short-term work?
There are no specific restrictions on engagement of FTEs. All FTEs are entitled to receive social security contributions and payments. While there is no minimum or maximum period prescribed for engagement, continuous renewal of fixed-term contracts to avoid granting permanent status is likely to be looked at as a sham arrangement.
What is the maximum limit (in terms of cycle time) a fixed-term employment contract can be renewed in one organization?
There is no maximum limit prescribed under the law for a fixed-term employment contract. However, repeated back-to-back renewals is likely to be seen as a sham arrangement.
Can employer onboard FTC for 11 months contract to avoid Gratuity liability?
No, under the Code on Social Security, 2020, a fixed-term employee is entitled to gratuity on a pro-rata basis upon completion of 240 days of continuous service, or 190 days where the establishment operates less than six days a week. Any contravention is punishable with imprisonment of one year and/or fine of up to INR 50,000.
Are fixed-term employees classified as contract workers and therefore entitled to no employment benefits under the labour codes?
No, a fixed-term employee is an employee on the payroll of the employer for a fixed duration, while a contract worker is engaged through a third-party contractor top perform non-core activities. FTEs have always been eligible for social security benefits such as PF. The Labour Codes further clarify that FTEs are also entitled to gratuity on a pro-rata basis, without the requirement of completing five years of continuous service. Any contravention is punishable with imprisonment extending up to 2 years and/or fine extending up to INR 50,000.
Will FTE eligible for proportionate gratuity if employed for 8 months or employed for 1 year 5 months etc.
FTEs are entitled to gratuity on a proportionate basis upon expiry of their fixed-term contract, provided they complete one year of continuous service, i.e., between 190 to 240 days depending on the nature of the establishment and the number of working days in a week. Any contravention is punishable with imprisonment of one year and/or fine of up to INR 50,000.
Clarity on Fix term employees & is it a new normal? What will change in industry? Especially for site employees and contractual workers in Manufacturing setups.
Fixed-term employment has always existed in industry practice. The Labour Codes simply give it formal statutory recognition under the Industrial Relations Code, bringing clarity and uniformity to what was earlier governed by contract terms and ad hoc arrangements. The most significant change is that fixed-term employees are now expressly entitled to gratuity on a pro-rata basis after one year of service, on par with permanent employees, a benefit that was previously unavailable or contested for this category.
Are only employees performing manual jobs or directly involved in manual activities classified as "workers" and eligible for statutory protections? Are office-based, supervisory, and administrative staff excluded from workers classification?
No, the classification of an employee into worker and non-worker is based on multiple factors. Designation of employee is generally irrelevant for the determination. The employer will have to consider job responsibilities along with multiple other considerations to categorise an employee into workers/non-workers.
What are the key definitions from the new Labour Codes that apply to home based workers?
The concept of home-based work is not directly or comprehensively dealt with under the new Labour Codes. However, the Code on Social Security, 2020 defines a "home-based worker" as a person engaged in the production of goods or services for an employer in their home or other premises of their choice, other than the employer's workplace, for remuneration, irrespective of whether the employer provides the equipment, materials, or other inputs. Such workers are classified under the broader category of "unorganised workers", making them eligible for social security benefits notified by the Central or State Government, though a distinct and comprehensive framework for home-based workers remains to be notified.
Is there clarity on the provisions for MSEs?
The new Labour Codes provide meaningful relief to MSEs by raising key thresholds — factory licensing now applies from 20 workers (power-operated) and 40 workers (non-power), contract labour licensing from 50 workers, and standing orders from 300 workers, reducing compliance burden significantly. However, the Code on Social Security empowers the Central Government to extend certain provisions even to single-employee establishments.
If a contractor holds a CLRA licence for 60 contract workers, can the principal employer engage 80 workers for a short or temporary duration without violating licence conditions, assuming the excess engagement is time-bound or due to operational exigencies?
No, the number of workers specified in a CLRA licence under the OSH Code, 2020 operates as a strict cap. Deploying workers in excess of the licensed strength, even on a temporary basis or due to operational exigencies, constitutes a breach of the licence conditions. Any contravention may be punishable with a fine of up to INR 3,00,000.
How is the contract for service changed?
The Labour Codes do not specifically alter the legal nature of a pure contract for service (independent consultant or freelancer engagement), as such arrangements fall outside the employer-employee relationship and thus outside the primary scope of the Codes. However, if the engagement involves supply of labour through a contractor to a principal employer, it falls under the contract labour framework of the OSH Code, 2020.
Are the contractors’ workers entitled only to wages, or also parity with hours, rest, canteen, welfare and safety facilities with directly employed workers?
No, contract workers are entitled to parity on not just wages but also on working hours, rest intervals, welfare and safety facilities such as canteen, rest rooms, and protective equipment. Under the OSH Code, 2020, the principal employer bears a primary obligation to ensure these facilities are provided to contract workers deployed at their establishment. Any contravention may be punishable with a fine of up to INR 3,00,000.
Where can I find the govt format of service rules?
The Central Government's Model Standing Orders (for Manufacturing, Mining, and Service sectors), which serve as the government-prescribed format for service rules, are available on the Ministry of Labour and Employment website and through the Central Rules notified in the Official Gazette.
Are the new rules and the law applicable also to interns?
The Labour Codes do not define or specifically regulate "interns".
What are the key takeaways for CSO or registered non-profits? their nature of work being more flexible hours, roles and limited finances?
There are no specific exemptions offered to CSOs or NGOs under the four Labour Codes, and all statutory compliances apply to them equally. Given that fixed-term employment is now formally recognised under the Industrial Relations Code, 2020, CSOs and NGOs may consider using this route for project-based or flexible hiring. However, all compliances including payment of proportionate gratuity upon completion of one year of continuous service must be adhered to.

What are the challenges for Trade Unions by this new labour codes?
The IR Code raises the threshold for a union to be recognised as the sole negotiating union to 51% of workers on the muster roll, which could be arithmetically unachievable in large establishments with multiple unions, effectively weakening collective bargaining. The increased retrenchment threshold from 100 to 300 workers, restrictions on strikes (mandatory notice period and conciliation proceedings), and the formalisation of fixed-term employment are all seen as tilting the balance toward employers
What are the key objections by labour Unions, and why working hours are an important issue?
The primary objections seem to be the 12-hour daily shift provision under the OSH Code, relaxed retrenchment norms, and changes to leave encashment and gratuity structures. Unions argue the 12-hour workday violates ILO Convention No. 1 (Hours of Work, 1919) ratified by India, could lead to job losses (employers achieving more output with fewer workers), and constitutes exploitation without proportionate overtime protection.
More generally, what is the view on unions? What are the trends as a result of these labour law changes?
The overall trend is a decline in trade union influence. The Codes shift the framework from adversarial collective bargaining to employer-managed "negotiating councils”.