A New Era for India’s Workforce: Unpacking the Comprehensive Labour Codes of 2025

By
Adv Sherry Samuel Oommen

For over a century, India’s labour landscape was a complex mosaic of fragmented laws, often criticized for their ambiguity and redundancy. On November 21, 2025, this framework underwent its most radical transformation since Independence. The Central Government brought into effect four Labour Codes, consolidating multiple erstwhile central laws into a single, modernized legal architecture. This landmark reform, years in the making, aims to redefine the relationship between employer and employee, balancing the twin goals of enhancing “Ease of Doing Business” and bolstering worker welfare and social security. As India steps into 2026, the initial shockwaves of this change are being felt across boardrooms and factory floors, prompting a necessary recalibration of business models and employment practices. This article delves into the details of these new codes, exploring their advantages, disadvantages, key changes, and the profound impact they are having on the Indian economy.

THE FOUR PILLARS OF REFORM: AN INTRODUCTION TO THE NEW LABOUR CODES

The government’s reform exercise was monumental: 29 central laws were subsumed into four comprehensive codes. This consolidation was not merely an act of simplification but a complete overhaul of definitions, compliance mechanisms, and worker entitlements. The four codes are:

1. The Code on Wages, 2019: This code universalizes the provision of minimum wages and timely payment of wages to all workers, regardless of the sector or wage ceiling. Its most significant feature is the introduction of a uniform definition of “wages,” which has far-reaching implications for calculating provident fund (PF), gratuity, and bonus payments.
2. The Industrial Relations Code, 2020: By amalgamating laws on trade unions, industrial employment, and disputes, this code seeks to streamline the process of hiring, retrenchment, and dispute resolution. It introduces fixed-term employment as a formal category and raises the threshold for government permission in layoffs and closures.
3. The Code on Social Security, 2020: This is a groundbreaking piece of legislation that aims to universalize social security. For the first time, it extends coverage to workers in the unorganized sector, including gig workers and platform workers (like those in quick-commerce and ride-hailing services).
4. The Occupational Safety, Health and Working Conditions (OSH) Code, 2020: This code sets uniform standards for safety, health, and working conditions across all establishments. It introduces provisions for annual health check-ups, mandatory appointment letters, and the expansion of what constitutes an inter-state migrant worker.

THE WINDS OF CHANGE: KEY TRANSFORMATIONS IN THE LABOUR ECOSYSTEM

The new codes have brought about several pivotal changes that are reshaping the employer-employee dynamic.

1. The Redefinition of “Wages”

The most disruptive and widely discussed change is the standardization of the term “wages.” The new rule mandates that basic pay, dearness allowance (DA), and retaining allowance must constitute at least 50% of an employee’s Cost to Company (CTC). Previously, companies often structured salaries with a low basic pay and high allowances to keep statutory contributions (PF, gratuity) low. Now, if allowances exceed 50% of the CTC, the excess is added back to “wages” for the purpose of calculating these benefits. This has led to a significant increase in the base on which PF and gratuity are calculated.

2. Universal Social Security and Recognition of Gig Workers

In a historic move, the codes bring gig and platform workers under the social security net. The government is mandated to set up Social Security Funds to formulate schemes for these workers, funded through contributions from aggregators (platforms), which may be up to 1-2% of their turnover. This extends benefits like PF, ESI, and gratuity to a previously unprotected, rapidly growing segment of the workforce.

3. Enhanced Worker Protections and Rights

The codes strengthen worker protections in multiple ways. The definition of an inter-state migrant worker has been expanded to include those who migrate on their own, entitling them to benefits like an annual travel allowance. Women are now permitted to work in all establishments and during night shifts, provided they consent and adequate safety measures are in place. Furthermore, the timeline for final settlement of dues for a resigned or retrenched employee has been drastically reduced to just two working days, a move designed to ensure worker liquidity.

4. Increased Thresholds for Layoffs and Closures

To provide operational flexibility to businesses, the Industrial Relations Code has increased the threshold for prior government permission for layoffs, retrenchment, and closures in industrial establishments. The threshold has been raised from establishments employing 100 workers to those with 300 workers. This allows companies with fewer than 300 employees to manage their workforce in response to market conditions without seeking state approval.

STRIKING A BALANCE: THE ADVANTAGES OF THE NEW FRAMEWORK

The new Labour Codes are designed with a dual objective: fostering industrial growth and ensuring worker dignity.

For Workers: A New Deal

• Expanded Coverage: The most significant victory for workers is the universalization of social security. For the first time, India’s vast unorganized sector, including the millions in the gig economy, has a legal claim to benefits like PF and health insurance.
• Dignity and Transparency: The mandatory issuance of appointment letters, provision for annual health check-ups, and parity for fixed-term employees are steps toward formalizing employment and ensuring basic dignity for all workers.
• Enhanced Benefits: The new wage definition, while initially impacting take-home pay, ensures a higher corpus for retirement savings (PF) and a larger gratuity payout upon leaving service, securing the long-term financial future of employees.

For Employers and the Economy: A Push for Growth

• Ease of Doing Business: By distilling 29 laws into four codes and streamlining over 1,400 compliances into about 400, the new framework drastically reduces the regulatory burden. The introduction of a single online registration and license further simplifies administrative process.
• Operational Flexibility: The ability to hire fixed-term employees for project-based work and the increased threshold for government permission in layoffs give businesses, particularly in manufacturing, the flexibility to align their workforce with market demands and global competition.

THE GROWING PAINS: DISADVANTAGES AND CHALLENGES IN THE TRANSITION

Despite its progressive intent, the implementation of the codes has not been without its challenges and criticisms.

Pressure on Employee Take-Home Pay

To comply with the 50% wage rule without increasing their overall CTC, many companies have commenced the process of restructuring salaries.  This could result in a direct consequence for employees owing to a reduction in monthly in-hand salary, as a larger portion is now diverted to long-term savings like PF. 

The “Hire and Fire” Debate

Trade unions have vociferously opposed the provisions related to fixed-term employment and the increased threshold for layoffs. Critics argue that the formalization of Fixed Term Employment (“FTE”) allows employers to bypass permanent hiring, creating a class of perpetual temporary workers who can be “hired and fired” with ease. They fear that raising the layoff threshold to 300 workers removes a crucial safety net for employees in medium-sized industries, potentially leading to job losses without adequate government scrutiny.

State-Level Disparity

Labour is a concurrent subject, meaning both the central and state governments can make rules. While the central codes provide a uniform framework, the final rules are being notified by states. There is a growing demand from industry for uniformity across states to ensure ease of compliance for multi-state operators. A lack of harmony could recreate the very complexity the codes sought to eliminate.

A STEP TOWARDS THE FUTURE

The implementation of India’s new Labour Codes marks a watershed moment in the country’s economic history. It represents a bold and necessary shift from a protectionist, complex, and often opaque labour regime to one that is simpler, more transparent, and designed for the demands of a 21st-century economy.

The initial phase has undoubtedly been painful, with corporate India grappling with transitional costs and employees adjusting to new salary structures. The concerns raised by trade unions regarding job security and the challenges faced by MSMEs are legitimate and require ongoing dialogue and perhaps fine-tuning of the rules. The need for uniform state rules remains a critical piece of unfinished business to ensure the reform delivers on its full promise.

Yet, to view these codes only through the lens of short-term cost is to miss the bigger picture. The architects of this reform have attempted to build a framework that balances the fluidity required by modern businesses with the bedrock of security required by the modern worker. By extending a social safety net to millions of Gig and unorganized workers, it transforms the very definition of the Indian worker. By simplifying compliance, it frees up entrepreneurial energy. For India to truly become a global economic powerhouse, it needed a labour law that was an enabler, not an impediment. These new codes, for all their current challenges, are a decisive step in that direction. As the ecosystem stabilizes and the teething troubles subside, the foundation being laid today promises a more equitable, productive, and prosperous future for both India’s workforce and its businesses.

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