For 75 years, Indian labour law was scattered across 29 separate Central Acts and hundreds of state-level rules. On 21 November 2025, the Government of India consolidated all of that into four Labour Codes and brought them into force together. If you run an SME — in Kerala or anywhere in India — these Codes change how you pay, hire, document and protect your workforce. The transition is real, the deadlines are real, and the penalties for getting it wrong are real.
This is a practical owner's guide — not a legal treatise. It walks through what the four Codes are, what actually changes in your payroll and HR process, and what to do this quarter.
At a glance — the four Labour Codes
- Code on Wages, 2019 — minimum wages, payment of wages, bonus, equal remuneration. Introduces the 50% wage rule.
- Industrial Relations Code, 2020 — trade unions, standing orders, layoffs & retrenchment, fixed-term employment.
- Code on Social Security, 2020 — PF, ESI, gratuity, maternity, employee compensation, gig & platform workers.
- Occupational Safety, Health and Working Conditions (OSH) Code, 2020 — Factories Act, Shops & Establishments, contract labour, inter-state migrant workers, working hours.
1. The 50% Wage Rule — The Single Biggest Change for Payroll
The Code on Wages, 2019 redefines what counts as "wages". Going forward, the statutory wage component must be at least 50% of an employee's total remuneration. Allowances that fall outside the wage definition — HRA, conveyance, bonus, overtime, gratuity and most special allowances — cannot together exceed 50% of total pay.
For most Indian SMEs, today's salary structures are inverted: basic is 30–40% and allowances make up 60–70%. Under the new rule, basic (and dearness allowance) goes up — and so does every downstream cost tied to it:
- Provident Fund — employer and employee contributions are 12% of basic + DA. Higher basic = higher PF outgo on both sides.
- Gratuity — calculated as (Basic + DA) × 15/26 × years of service. Higher basic = bigger gratuity liability sitting on your books.
- Leave encashment — also linked to basic, so the per-day cost goes up.
- In-hand salary — typically goes down for the employee in the short term, because more of their pay is now diverted to PF.
Action: rerun your salary structures for every employee. Decide whether to absorb the increased employer cost or restructure CTC. Communicate the in-hand impact to employees clearly — silence on this point is the #1 cause of friction we are seeing in client transitions.
2. Mandatory Appointment Letters for Every Worker
Every employee — permanent, contract, fixed-term, part-time — must now have a written appointment letter. This is no longer a "best practice"; it is a statutory requirement. The letter must record the role, wages, statutory benefits, period of service (for fixed-term) and conditions of employment.
For most Indian SMEs, the gap is not new hires — it's the backlog of existing employees who joined years ago on an offer letter or no letter at all. Plan a one-time documentation drive: standard template, signed by both parties, retained in the employee file and the HRMS.
3. Fixed-Term Employment is Formalised — and Gets Gratuity After 1 Year
The Industrial Relations Code now formally recognises fixed-term employment (FTE). A fixed-term employee is entitled to the same statutory benefits as a permanent employee — including a pro-rata bonus — and, under the Social Security Code, becomes eligible for gratuity after just one year of continuous service. The earlier five-year threshold no longer applies for FTEs.
If you've been using contract labour or "consultant" structures to avoid statutory benefits, that loophole is closing. Convert genuine employees to FTE or permanent, document them properly, and provision for the gratuity liability from day one.
4. Gig & Platform Workers Are Now in the Social Security Net
The Code on Social Security extends coverage to gig workers, platform workers and unorganised-sector workers. A national Social Security Fund will pay out:
- Life and disability cover
- Accident insurance
- Health and maternity benefits
- Old age protection
- Crèche facilities (where applicable)
Aggregators (food delivery, ride-share, e-commerce platforms etc.) will contribute 1–2% of annual turnover (capped at 5% of payouts to gig workers) to this Fund. SMEs that engage gig workers through platforms should review the impact on per-task costs.
5. Working Hours, Overtime & Leave — Standardised Across India
The OSH Code consolidates 13 separate Acts including the Factories Act, Shops & Establishments, Contract Labour and Inter-State Migrant Workmen. Key standardisations:
- Working hours: max 8 hours per day, 48 per week (no change to the headline, but enforcement is now national).
- Overtime: compulsory consent, double-rate pay, capped at 125 hours per quarter (varies by state rule).
- Earned leave: minimum 1 day for every 20 days worked, encashable after 180 days of service.
- Spread-over: 12 hours including breaks.
- Women in night shifts: permitted with consent, subject to safety provisions and POSH compliance.
If your leave policy was written before 2020, it needs a refresh — particularly around carry-forward, encashment and earned leave accrual.
6. PF, ESI & Compliance Filings — What Actually Changes
The PF and ESI Acts continue, but under a single umbrella — the Code on Social Security. The operational changes for payroll teams:
- PF contributions now sit on a higher basic (because of the 50% rule). Watch the employer-side outgo carefully.
- ESI wage ceiling stays at ₹21,000/month (₹25,000 for persons with disabilities) for now.
- Returns and inspections move to a single digital portal in each state — Kerala's is being integrated under the Labour Commissionerate.
- Penalties for non-compliance have been increased and rationalised — first-time errors now carry compounding options, but repeat violations attract sharper fines and prosecution.
7. POSH, Internal Committee & Workplace Safety
The POSH Act, 2013 continues — the new Labour Codes do not replace it. But the OSH Code reinforces workplace safety obligations including a constituted Internal Committee, displayed grievance procedure, and verified safe transport for women in late shifts. Treat POSH compliance and the Internal Committee as a baseline now, not a "nice to have".
What Kerala SMEs Should Do This Quarter
- Run a wage-rule diagnostic. For every employee, calculate the new basic at 50% of CTC and compute the revised PF, gratuity and in-hand. Flag any large CTC deltas.
- Issue or refresh appointment letters. Build a compliant template covering wages, statutory benefits, leave, working hours, notice period and code-of-conduct.
- Refresh your HR policy & employee handbook. Align leave, overtime, gratuity, POSH and grievance sections with the four Codes.
- Review fixed-term and contract staff. Document each one. Provision for the 1-year gratuity threshold on FTEs.
- Recheck your HRMS configuration. Salary breakup logic, PF wage base, leave accrual rules and statutory reports all need a settings refresh — not a workaround.
- Communicate the in-hand change to employees. Most disputes come from surprise, not the rule itself. Pre-empt with a clear FAQ and a 1:1 with each affected employee.
The Labour Codes are not a once-and-done compliance exercise — they reshape how Indian businesses pay, hire and grow. If you'd like a structured Labour Codes 2025 readiness audit for your business, or want help re-running salary structures and refreshing HR policy in line with the four Codes, talk to GREAT LEAP — India's Best HR Scaleup Consultant, trusted by 300+ Indian SMEs. You can also start with our free HR Scaleup Readiness check to see where the gaps are.
Frequently Asked Questions — New Labour Codes 2025
When did the new Labour Codes come into force in India?
All four Labour Codes — Code on Wages 2019, Industrial Relations Code 2020, Code on Social Security 2020 and the OSH Code 2020 — came into force on 21 November 2025. Central and state rules are being notified in phases.
What is the 50% wage rule under the new Labour Codes?
Under the Code on Wages, 2019, the statutory "wages" component must be at least 50% of an employee's total remuneration. Allowances and exclusions (HRA, conveyance, bonus, overtime, etc.) put together cannot exceed 50% of total pay. This typically increases basic salary, which in turn increases PF, gratuity and leave-encashment liabilities.
Are appointment letters mandatory under the new Labour Codes?
Yes. The new Labour Codes make a written appointment letter mandatory for every worker, including contract and fixed-term staff. The letter must capture role, wages, statutory benefits and conditions of service.
Has the gratuity rule changed for fixed-term employees?
Yes. Under the Code on Social Security, 2020, fixed-term employees become eligible for gratuity after just one year of continuous service — a sharp reduction from the earlier five-year threshold. Gratuity is paid pro-rata based on the term of the contract.
Do gig workers and platform workers now get social security?
Yes. The Code on Social Security, 2020 brings gig and platform workers under a national social security framework covering life cover, accident insurance, health, maternity, old-age protection and crèche facilities. Aggregators are required to contribute to a Social Security Fund.
What should SME business owners do first to comply with the new Labour Codes?
Start with three steps: (1) restructure salaries so "wages" is at least 50% of total remuneration; (2) issue compliant appointment letters to every employee, including contract staff; (3) refresh your HR policy, leave policy and employee handbook against the four Codes. A targeted HR audit is the fastest way to identify and close gaps.