India's labour landscape is undergoing a significant transformation with the implementation of new labour codes that promise to reshape employee benefits, hiring practices, and the compliance framework for businesses across the nation, according to a recent analysis by Ernst & Young (EY).
Redefining Employee and Worker Categories
The report highlights a fundamental shift in how the workforce is classified. The new system broadly categorises all personnel under the term "employee," which now encompasses individuals irrespective of their role, level, or salary. A separate "worker" category is designated for those engaged in manual, unskilled, skilled, technical, operational, clerical, or supervisory functions.
However, a crucial exclusion applies to supervisory staff earning more than ₹18,000 per month, who will not fall under the "worker" classification. This new categorisation has direct implications for overtime pay, leave encashment, contract labour regulations, retrenchment procedures, and dispute resolution mechanisms.
Major Overhaul in Wage Definition and Benefits
One of the most impactful changes is the revised definition of "wages." The new codes specify that wages include all remuneration expressed in monetary terms, while certain allowances like conveyance, house rent allowance (HRA), bonus, and overtime pay are part of an exclusion set.
Critically, the total value of these exclusions cannot exceed 50 per cent of the total remuneration. This mandates that the basic wage must constitute at least half of an employee's total salary. This adjustment is expected to increase statutory payments such as Provident Fund (PF) and gratuity, leading to higher costs for employers and a potential reduction in the take-home salary for employees.
Other key benefit changes include making gratuity applicable to fixed-term employees who complete one year of service. Overtime payments will be mandated for work exceeding 8 hours a day or 48 hours a week, and leave encashment will be processed at the end of each calendar year.
New Hiring Models and Stricter Compliance
The labour codes formally recognise flexible hiring models. Fixed-term employment is now officially recognised and must receive the same wages and benefits as permanent staff, with no restrictions on the number or duration of such contracts.
Simultaneously, regulations for contract labour have been tightened. There are now restrictions on employing contract workers in core activities, with some exceptions, and the principal employer bears statutory responsibility for these workers.
On the enforcement front, the codes introduce a regime of online inspection schemes and place stricter compliance responsibility on employers, including prosecution for repeated violations. Employees are also empowered, as they can now file complaints directly in court.
The EY report advises organisations to proactively respond by redesigning payroll structures, revising worker classifications, updating internal controls, and reviewing HR policies to align with the new legal framework. These four comprehensive codes, which merged 29 existing labour laws, came into force on November 21, 2025.
