New Labour Codes: The Employer Compliance Checklist
- The four new Labour Codes reshape how you calculate wages, PF, gratuity, and leave — non-compliance attracts penalties up to ₹3 lakh and criminal prosecution under the respective Codes.
- The redefined "wages" formula (at least 50% of CTC must be basic wages) is the single biggest change most small employers are getting wrong right now.
- Until the Codes are formally notified for commencement, the old laws technically still apply — but restructure your payroll now so the transition is painless.
The four Labour Codes — the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020, and the Occupational Safety, Health and Working Conditions Code 2020 — consolidate 29 older central labour laws into a single unified framework. As of FY 2026-27, the central government has passed all four Codes and most states have published draft rules, but formal commencement notifications are still pending in several states. That means you need to operate under existing law today and prepare your payroll structure for the day the Codes go live — which could happen mid-year. This checklist gives you the exact action points, worked numbers, and common pitfalls so you are ready either way.
What Changes Under the New Labour Codes?
The most disruptive change is the redefinition of "wages" under the Code on Wages. Previously, employers could split CTC into dozens of allowances to keep basic salary low, which reduced PF, gratuity, and bonus liabilities. Under the new definition, wages must be at least 50% of total CTC. Any allowances that cumulatively exceed 50% of CTC are added back into wages for computation purposes. This one rule ripples across PF contributions, gratuity, bonus, and leave encashment.
Other key structural changes include:
- Working hours: The Codes allow states to permit a 4-day work week with up to 12 hours per day (maximum 48 hours per week). Overtime beyond 48 hours must be paid at double the wage rate.
- Leave encashment: Earned leave accrual and carry-forward rules are standardised. Unused earned leave can be encashed on separation.
- Gratuity eligibility: The Code on Social Security proposes reducing the eligibility threshold from 5 continuous years to 1 year for fixed-term contract employees. For regular employees, the 5-year rule continues.
- ESIC and PF coverage: Thresholds and definitions are being harmonised, with the intention to bring gig and platform workers into the social security net over time.
- Retrenchment and notice pay: The Industrial Relations Code retains the requirement for government permission for establishments with 300 or more workers before retrenchment (up from 100 in some states).
The 50% Wages Rule: A Worked Example
Let us take an employee with a CTC of ₹12,00,000 per year (₹1,00,000 per month). Here is how the same CTC looks before and after the Codes:
| Pay Component | Old Structure (₹/month) | New Code-Compliant Structure (₹/month) |
|---|---|---|
| Basic Salary | 25,000 | 50,000 |
| HRA | 20,000 | 20,000 |
| Special Allowance | 47,000 | 22,000 |
| LTA | 8,000 | 8,000 |
| Total CTC | 1,00,000 | 1,00,000 |
| Wages (for PF/Gratuity base) | 25,000 | 50,000 |
| Employer PF @ 12% of wages | 3,000 | 6,000 |
| Employee PF @ 12% of wages | 3,000 | 6,000 |
| Monthly gratuity accrual (approx.) | 1,202 | 2,404 |
The arithmetic: Under the old structure, employer PF was ₹3,000/month = ₹36,000/year. Under the new structure it doubles to ₹6,000/month = ₹72,000/year. For a company with 50 such employees, that is an additional employer PF outgo of ₹18,00,000 per year. Budget for this now. Gratuity provisioning similarly doubles, which affects your P&L if you are on the actuarial provisioning method.
Employer Compliance Checklist for FY 2026-27
- Audit your salary structure: Map every CTC component against the new "wages" definition. Identify employees where basic + DA falls below 50% of gross.
- Revise offer letters and appointment letters: Ensure new hires are onboarded on a Code-compliant structure from day one.
- Recalculate PF liability: Run payroll projections on the revised wages base. Update your cash-flow forecast and EPFO return templates.
- Review gratuity provisioning: If you fund gratuity through a trust or LIC policy, speak to your actuary about revised projections.
- Check ESIC applicability: Confirm whether your establishment crosses the employee-count threshold and whether any newly included allowances push previously exempt workers into ESIC coverage.
- Update standing orders: Establishments with the applicable number of workers must update model standing orders under the Industrial Relations Code once it is notified in your state.
- Track state-level notifications: Labour is a concurrent subject. Your state may notify the Codes on a different date from the Centre. Subscribe to your state labour department's notifications.
- Maintain digital records: The Codes encourage digital registers. Shift attendance, wage, and leave records to a compliant HRMS.
- Display statutory notices: Under the Code on Wages, the employer must display the wage period, payment day, and deductions at the workplace — digitally or physically.
- File annual returns on time: Once the Codes are notified, most annual returns will be unified into a single combined return per establishment.
Not sure where your business stands? Run a quick Compliance Checkup to identify gaps before an inspector does.
Penalties You Need to Know
The Code on Wages sets out a tiered penalty structure. A first-time violation of wage payment provisions can attract a fine of up to ₹50,000. A second or subsequent offence can mean up to ₹1,00,000 in fines plus imprisonment of up to three months. Non-maintenance of records under the Code on Social Security can attract penalties up to ₹1,00,000. Critically, directors and partners who are in charge of day-to-day affairs can be personally prosecuted — not just the company.
Common Mistakes Employers Are Making Right Now
1. Assuming the Codes are not yet in force, so nothing needs to change
The Codes are not yet fully enforced, but several states have notified rules. More importantly, restructuring payroll after enforcement creates immediate back-pay liability. Start restructuring now.
2. Applying the 50% rule only to new hires
Existing employees' wage structures must also comply once the Code is notified. Grandfathering the old structure does not work — the definition of "wages" applies universally.
3. Forgetting that HRA may be included in "wages" in some calculations
The Code excludes HRA, conveyance, and certain other allowances from the definition of wages — but only if they do not collectively exceed 50% of total remuneration. If your excluded allowances push the 50% cap, the surplus gets added back into wages. Many payroll teams are miscalculating this.
4. Not updating gratuity and bonus calculations
A higher wages base means higher statutory bonus and higher gratuity. Employers who continue to compute bonus on the old lower basic salary will be underpaying statutory bonus and may face worker grievances or inspector notices.
5. Missing state-specific rules on working hours and leave
The central Codes set the floor. States can modify several provisions — including overtime rates, leave quantum, and the 4-day work week. Applying only the central model rules without checking your state's draft rules is a compliance gap waiting to be discovered.
What Should You Do This Month?
Pull your payroll register for your highest-paid 10 employees and your lowest-paid 10 employees. For each, check whether basic salary is at least 50% of gross monthly pay. If it is not, model the revised PF and gratuity cost and present it to your management for budget approval. Simultaneously, ask your labour law consultant or CA to map which of the four Codes your state has already notified — and set a calendar reminder for the remaining ones. The employers who act now will have a smooth transition. Those who wait will face a scramble and possible retrospective liability.
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Open Compliance Checkup →Frequently asked questions
Are the new Labour Codes already in force in India?
As of FY 2026-27, all four Labour Codes have been passed by Parliament and most states have published draft rules, but formal commencement notifications are still pending in several states. You should check your specific state's labour department website for the latest status, because labour is a concurrent subject and enforcement dates vary by state.
How does the new definition of "wages" affect my employees' take-home pay?
If you increase basic salary to comply with the 50% wages rule, employee PF deductions also increase (12% of a higher base), which can reduce take-home pay. You will need to communicate this clearly to employees and may need to gross up CTC to maintain net take-home, which increases employer cost. Model both scenarios before making changes.
Does the 1-year gratuity rule apply to all employees under the new Codes?
No. The reduced eligibility period of approximately 1 year is proposed specifically for fixed-term contract employees under the Code on Social Security. Regular permanent employees continue to be eligible for gratuity only after 5 continuous years of service, as under the current Payment of Gratuity Act.
What records must a small employer maintain under the new Labour Codes?
The Codes move toward a unified register system. You will need to maintain records covering wages paid, deductions made, attendance, leave availed, and accidents (if applicable). The Codes permit these to be maintained digitally, which is a significant improvement over the multiple physical registers required under the old laws. Until your state formally notifies the Codes, continue maintaining all existing registers under current law.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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