Karan's payroll vendor sent him a one-liner: "FYI — labour codes notification coming. Plan for higher PF, mandatory appointment letters, gig-worker registration." No context. No timeline.
Meanwhile his employee Manesh keeps reading "labour codes" headlines about bigger take-home. Both of them want clarity. Let's give it to them — side by side.
- Four codes replace 29 central labour laws: Wages (2019), Industrial Relations (2020), Social Security (2020), OSH (2020).
- 50% rule: "wages" must be at least 50% of total CTC → larger PF base, larger gratuity.
- Gig & platform workers: brought into social security net. Aggregators contribute 1-2% of turnover.
- Hire/fire: establishments with < 300 workers can lay off / retrench / close without prior govt approval (up from 100).
- Appointment letters mandatory. Single national social security number proposal in motion.
The four codes, in one sentence each
Wages Code
2019
Uniform definition of "wages" — at least 50% of CTC. Replaces Payment of Wages, Minimum Wages, Bonus, Equal Remuneration Acts.
IR Code
2020
Industrial Relations. Fixed-term employment legitimised with same benefits as permanent. Hire/fire threshold raised to 300 workers (was 100).
Social Security Code
2020
PF, ESI, gratuity, maternity, employee comp consolidated. Gig + platform workers brought in. Aggregators contribute 1-2% of turnover.
OSH Code
2020
Occupational Safety, Health, Working Conditions. Mandatory appointment letters. Free annual health check-ups (factories > 250). Standardised welfare measures.
Status (as of 2026)
Phased rollout
Notified at centre; states are issuing rules. Some provisions live; others pending state notifications. Plan now, comply when state notifies.
The 50% rule — the headline change
New "wages" definition = basic + DA + retaining allowance. This must be ≥ 50% of total CTC. Allowances (HRA, conveyance, special, etc.) are capped at 50%. Today most companies have basic at ~30-40% of CTC — this jumps to 50%+.
What it means — three perspectives
For employees (Manesh)
👉 Higher PF. Today: 12% of basic (₹6L → ₹72,000). New: 12% of bigger basic (₹7.5L+ → ₹90,000+). Locked in PF, but useful at retirement.
👉 Higher gratuity at exit. Calculated on basic — bigger basic = bigger gratuity payout at 5+ years.
👉 Lower in-hand in the short term (more deducted to PF).
👉 HRA exemption shrinks if HRA component shrinks proportionally.
👉 Gratuity becomes available to fixed-term employees from year 1 (proportional).
👉 Mandatory appointment letter — better legal footing.
👉 Free annual health check-up (large establishments).
For employers (Karan)
👉 Higher payroll cost. Employer PF also grows ~25% on the bigger base. For 10 employees at ₹6L CTC, that's ~₹20k/month extra.
👉 Hire/fire simpler if you stay under 300 workers — no govt approval for layoff / retrenchment / closure.
👉 Fixed-term employment legitimised — useful for project-based hiring. But must offer same benefits as permanent (PF, gratuity prorated).
👉 Single social security number proposal — reduces multi-state compliance overhead.
👉 Gig / platform aggregators (Swiggy, Zomato, Urban Company, Ola, Uber, etc.) pay 1-2% of turnover to a Social Security Fund.
👉 Mandatory appointment letters — formalise even contract staff.
For CAs / payroll consultants
👉 Re-design every CTC structure for compliance with 50% rule. New offer letters, revised payslips, updated salary registers.
👉 Compute the cost delta for each client and plan the transition (often staggered with appraisals).
👉 Gig worker compliance — register aggregators with the new Social Security Fund.
👉 Update statutory registers — consolidated under new codes. Many state-specific registers retired.
👉 Train HR teams on appointment letter formats, registers, returns.
The cost delta — worked example
Karan's employee at ₹6L CTC. Old structure: Basic ₹2.4L (40%) + HRA ₹1.2L + Special ₹2.4L. Employer PF ≈ ₹28,800/yr.
New structure: Basic ₹3L (50%) + HRA ₹1.5L + Special ₹1.5L. Employer PF ≈ ₹36,000/yr.
For Karan with 6 employees: ~₹43k/yr extra employer cost. Manesh's in-hand drops by ₹7,200/yr but his PF balance grows ₹14,400/yr — better long term.
What to do now (before state notifies)
What percentage of CTC is current basic? If < 50%, you have work to do.
Per-employee cost delta. Plan whether to absorb (employer pays more) or rebalance (employee in-hand shrinks).
Most companies move at next appraisal cycle. Communicate transparently.
Standard appointment-letter format. Salary register format under new codes.
Platform companies: identify your gig worker base, register, plan 1-2% turnover contribution.
Common myths to ignore
👉 "4-day work week is mandatory" — false. Codes permit upto 12-hour days with weekly cap of 48 hours (so 4×12 is now allowed). Not mandated.
👉 "Hire/fire becomes one-sided" — false. Notice/compensation rules remain. Just the prior govt approval requirement is removed under 300 workers.
👉 "All allowances become taxable" — false. Tax-side rules unchanged. Only the labour-law-side wages definition changed.
👉 "Codes are already in force" — partially. Centre has notified; state rules are coming. Implementation date varies by state.
The labour codes are a once-in-a-generation reset. Plan the CTC restructure now, on your timeline. Don't wait for the state notification and scramble.
What this means for business persons
👉 Service businesses with 50-300 employees get the biggest relief — hire/fire becomes manageable.
👉 Cost of hiring goes up by 3-6% per employee due to higher PF base.
👉 Gig-economy founders (delivery, ride, on-demand services) need to factor 1-2% turnover into pricing as social security contribution.
👉 Multi-state operators benefit from consolidated registers (less paper across states).
👉 Family business owners hiring informal labour need to formalise — appointment letters, social security numbers.
Quick answers
Depends on your state's notification. Most have published rules; some are mid-2026. Plan now; comply on state-notified date. Don't wait to start the CTC restructure.
Yes, once codes are notified in your state — non-compliance = PF / gratuity under-deposit which the EPFO can claw back retroactively. Resist the temptation to "interpret" the wage definition.
Independent. Tax regime decides which deductions you get. Labour codes decide the structural CTC split. Both apply.
No. Fixed-term = direct employment on your rolls for a defined period, same benefits as permanent prorated. Contract labour = via a contractor. Both legitimised but different compliance.
Not gratuity per se, but social security benefits via the Social Security Fund — accident insurance, healthcare, old-age. Funded by aggregator contribution (1-2% of turnover or 5% of payments to gig workers — whichever lower).
When you might want help
CTC restructuring is high-stakes — get it wrong and EPFO claws back. Where help pays off: per-employee delta modelling, transition communication, new offer-letter templates, registering aggregators with the Social Security Fund, and the state-by-state notification tracking.
Plan your labour-codes transition
End-to-end: CTC modelling, employee communication, new offer letters, payroll system update. One engagement, fixed fee.