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The four new labour codes that came into effect in November last year mark a significant shift in º¬Ðß²ÝÉçÇø labour law framework. These codes on wages, social security, industrial relations and occupational safety, health and working conditions subsume 29 pieces of legislation with the objective of improving the ease of doing business, simplifying compliance, and ensuring wider social security for the country¡¯s talent base.

One of the key changes relates to compensation structuring. Historically, organisations structured remuneration with a lower basic pay component and higher allowances, as most statutory contributions were linked to basic wages. The Wage Code now defines ¡°wages¡± to include basic pay, dearness (cost of living) allowance, and retaining allowance, which must constitute at least 50% of total remuneration. This change will significantly increase statutory outgoings for employers, requiring them to review their existing compensation structuring.

Several industries ¨C including the information technology/IT-enabled services and banking sectors ¨C are already seeing an impact in their Q3 FY2026 profit due to the implementation of changes under the codes. Additionally, the expanded definition of ¡°employee¡± is expected to cover several individuals who were earlier excluded from statutory benefits, due to titular designations suggesting managerial or supervisory roles, or were regarded as in the non-workmen category with limited and weakly enforced safeguards under the varying state-specific Shops and Establishments Act.

This change will now have implications on social security, safety and welfare benefits on this workforce, which were earlier not made available to non-workmen categories of employees. The codes also provide explicit legal recognition to fixed-term employment (FTE), granting such employees parity in wages, benefits and statutory contributions with permanent employees, proportionate to the period of employment. FTEs are also eligible to receive gratuity on completion of one year of employment. In relation to contract labour, the Industrial Relations Code places restrictions on the engagement of contract workers in the core activities of an establishment, subject to certain exceptions.

While certain state laws and judicial precedents earlier governed the issue of the use of contract labour in core activities, the application of these restrictions at a central national level signals a more structured regulatory regime, particularly affecting industries such as manufacturing that traditionally rely on contract labour.

The codes further recognise gig workers, platform workers and unorganised workers. However, the nature and extent of benefits available to gig and platform workers ¨C who commonly form a large app-enabled labour pool ¨C will be determined through schemes that are yet to be notified.

Significant changes are also introduced in respect of workforce rationalisation. The threshold for prior government permission for layoffs, retrenchment and closure is increased from 100 to 300 workers, offering greater operational flexibility to larger establishments. This notably impacts restructuring exercises and M&A transactions where workforce rationalisation is contemplated. With the introduction of a worker reskilling fund, employers will now also be expected to contribute to it on retrenchment of its workers. Additionally, the revised definitions of wages and employees will require closer scrutiny during due diligence exercises to assess any past liabilities.

On standing orders, the applicability threshold has been standardised and increased to 300 workers, replacing the various thresholds earlier prescribed by states, bringing greater consistency, particularly for multi-state employers. From an enforcement perspective, the codes introduce mechanisms such as compounding of offences and opportunities for rectification, reflecting the legislature¡¯s intent to decriminalise minor offences. At the same time, monetary penalties for substantive non-compliance have been enhanced.

As immediate next steps, organisations must review their existing employee contracts, compensation structures and internal policies to align them with the codes, monitor state notifications and rules, and train HR and payroll teams to effectively manage the transition. While the full impact of the codes will only be evident on the notification ofthe rules and their interplay with state legislations, the codes do seem to be a step in the right direction ¨C by simplifying compliance for the employer and, at the same time, enhancing benefits for employees.

Chandrashekhar D Mulherkar is a partner, Agrima Awasthi is a counsel and Diksha Singh is an associate at Wadhwa Law Offices