What came into force, and when
The four Codes consolidate 29 central labour laws. The Code on Wages, 2019 replaces the Payment of Wages, Minimum Wages, Payment of Bonus and Equal Remuneration Acts; the Code on Social Security, 2020 takes in the EPF, ESI, Gratuity and Maternity Benefit Acts; the Occupational Safety, Health and Working Conditions Code, 2020 absorbs the Factories and Contract Labour Acts; and the Industrial Relations Code, 2020 replaces the Industrial Disputes, Trade Unions and Standing Orders Acts.
All four were brought into force on 21 November 2025. Labour is a concurrent subject, so most of the operating detail, from working hours and leave rules to registers and returns, sits in rules each state notifies, and those rules are arriving at different speeds. Everything below should be read as notified, with your state’s rules checked before you act.
The new definition of wages
The Codes use one definition of wages where the old Acts used several. Wages are basic pay, dearness allowance and retaining allowance. Excluded are, among others, bonus, house rent allowance, conveyance, overtime, commission, the employer’s PF contribution and gratuity.
Then comes the rule that changes payroll. If the excluded components exceed 50% of total remuneration, the amount above 50% is added back and counted as wages. Take an employee on ₹50,000 a month with basic of ₹15,000 and allowances of ₹35,000. The allowances are 70% of remuneration, so ₹10,000, the part above half, is deemed wages, and the wage for the Codes becomes ₹25,000.
Everything the Codes compute on wages moves with that figure: PF where the company contributes on full wages or the employee is below the ceiling, gratuity, leave encashment, statutory bonus, overtime and retrenchment compensation. A structure with basic at 30% of CTC to keep PF and gratuity low no longer achieves that.
Component by component
| Component | Before the Codes | Under the Codes |
|---|---|---|
| Definition of wages | Different under the Payment of Wages, Minimum Wages, EPF and Gratuity Acts | One definition across all four Codes, with excluded components above 50% of remuneration added back |
| PF wage base | Basic and DA, plus allowances paid universally after the 2019 Supreme Court ruling | Wages as defined by the Code, subject to the statutory ceiling as notified |
| Gratuity | After five years of continuous service, at 15/26 of last-drawn basic and DA per year | Same formula on Code wages; fixed-term employees eligible on a pro-rata basis after one year of service |
| Leave encashment | On basic and DA, per the state Act and company policy | On Code wages; leave above the carry-forward limit encashable at year end |
| Annual leave eligibility | 240 days worked in a calendar year under the Factories Act | 180 days worked in a calendar year, at one day for every 20 days of work |
| Overtime | Double the ordinary rate under the Factories Act and most state Acts | Twice the ordinary rate of wages, with hours and limits set by state rules |
| Minimum wages | Scheduled employments only, under the Minimum Wages Act | All employees, with a national floor wage below which no state may set its minimum |
| Appointment letters | Required by some state Acts | A written appointment letter to every employee, in the form the rules prescribe |
| Deductions | Capped at 50% of wages under the Payment of Wages Act for those it covered | Capped at 50% of wages for all employees, including loan and advance recoveries |
| Women on night shifts | Restricted under the Factories Act and many state Acts | Permitted with consent and the safeguards the rules prescribe, such as transport and security |
| PF and ESI coverage | EPF at 20 or more employees; ESI at 10 or more in implemented areas | Widened as notified: ESI extendable nationwide and to hazardous establishments with one worker; social security schemes for gig and platform workers |
What it does to a payslip and to employer cost
Stay with the ₹50,000 employee whose wage moves from ₹15,000 to ₹25,000. If the company restricts PF to the ₹15,000 ceiling, the PF lines do not change, because the ceiling still applies as notified. If it contributes on full wages, employee and employer PF each rise from ₹1,800 to ₹3,000 a month, and take-home falls by ₹1,200 unless CTC is raised to absorb it. The PF calculator shows both cases.
Gratuity moves for everyone. The monthly provision at 4.81% of wages rises from ₹722 to ₹1,203 for this employee, and the eventual payout rises in proportion, because it is computed on the last-drawn wage. Leave encashment on exit is revalued the same way. For a company with structures built around a low basic, the increase in gratuity provision and encashment liability is the largest single cost effect of the Codes. Renaming components does not avoid it; the 50% rule looks at the total, not the labels.
Attendance, leave and hours
The Occupational Safety, Health and Working Conditions Code keeps the eight-hour day and 48-hour week. Overtime beyond the daily or weekly limit is paid at twice the ordinary rate of wages, and because wages now include the added-back allowances, the overtime rate rises with them.
Annual leave is earned at one day for every 20 days worked, and the qualifying period falls from 240 days in a year to 180, so a worker who joins in April qualifies in the same year. Leave above the carry-forward limit is encashable at year end rather than lapsing. Both belong in the leave policy as numbers the system applies, not clauses HR interprets.
What to do this quarter
- 1Run every salary structure through the 50% test and list the employees whose excluded components exceed half of remuneration.
- 2Decide the PF basis, ceiling or full wages, and model the cost of each on the new wage figure before touching any structure.
- 3Recompute the gratuity provision on Code wages, including fixed-term employees who will cross one year of service.
- 4Revalue leave balances on Code wages, and set the 180-day eligibility and year-end encashment rules in the leave policy.
- 5Issue written appointment letters to every employee who lacks one, in the form your state prescribes.
- 6Check the overtime rate and hours limits in your state’s rules, the consent and safeguards for women on night shifts, and every recovery against the 50% cap on deductions.
- 7Compare your lowest structures with each state’s minimum wage and the floor wage as notified, and revise those on the line.
The payroll module computes PF, gratuity provision, leave encashment and overtime on the wage base you configure, with an effective date. The monthly dates do not move; the compliance checklist still applies.
Kuzhu payroll applies the wage definition, PF basis and gratuity provision you configure, versioned by effective date, so the Codes are a setting and not a re-implementation.
See the payroll moduleQuestions people ask
Are the Labour Codes in force in India?
Yes. The Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code were brought into force by the central government on 21 November 2025. State rules under each Code are being notified progressively, so the date on which specific provisions apply depends on the state an establishment operates in.
Will take-home salary reduce under the Labour Codes?
For some employees, slightly, and only where PF is contributed on full wages. The 50% rule raises the wage base for employees whose allowances exceeded half of remuneration, which raises their own PF contribution if it is not restricted to the ₹15,000 ceiling. Where the employer restricts PF to the ceiling, the payslip does not change; gratuity and leave encashment rise either way.
Is gratuity now payable after one year of service?
Only for fixed-term employees, who become eligible on a pro-rata basis after one year under the Code on Social Security, as notified. For other employees the qualifying period remains five years of continuous service, and the formula remains 15 days of last-drawn wages for each completed year, computed as 15/26 of a month, now on the Code’s definition of wages.
What is the 50% rule for wages under the Labour Codes?
Wages are basic, dearness allowance and retaining allowance. Excluded components such as HRA, conveyance, bonus, overtime, commission and the employer’s PF are added together, and if they exceed 50% of total remuneration, the amount above 50% is treated as wages. In effect, at least half of what an employee is paid counts as wages for PF, gratuity, bonus and overtime.
Do the Labour Codes change the PF wage ceiling of ₹15,000?
Not by themselves. The ceiling for the statutory contribution and the pension-scheme split continues as notified. What changes is the wage figure below the ceiling: an employee whose basic was ₹10,000 with high allowances now has a Code wage closer to half of remuneration, so contributions rise towards the ceiling.
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