The Four Labour Codes: Status and What Employers Should Prepare

India's labour law landscape is undergoing a significant transformation with the consolidation of 29 central labour laws into four comprehensive Codes. While these Codes aim to simplify compliance and foster economic growth, their implementation has been delayed. Employers, founders, and professionals need to understand their current status, key provisions, and prepare for their eventual rollout, particularly regarding wage definitions, fixed-term employment, and social security for gig workers.

What are the Four Labour Codes?

The Four Labour Codes are a set of legislative reforms passed by the Indian Parliament between 2019 and 2020, consolidating and rationalising 29 existing central labour laws into four broad categories:

These Codes aim to simplify India's complex labour regulatory framework, promote ease of doing business, and enhance worker protection. They seek to bring uniformity across various aspects of employment, from wages and industrial relations to social security and occupational safety. The consolidation is expected to reduce compliance burdens for employers while ensuring minimum standards for workers.

The four Codes are:

The Code on Wages, 2019: This Code amalgamates four laws: The Payment of Wages Act, 1936; The Minimum Wages Act, 1948; The Payment of Bonus Act, 1965; and The Equal Remuneration Act, 1976. It provides for a universal minimum wage, timely payment of wages, and equal remuneration for equal work.
The Industrial Relations Code, 2020: This Code subsumes three laws: The Industrial Disputes Act, 1947; The Trade Unions Act, 1926; and The Industrial Employment (Standing Orders) Act, 1946. It focuses on industrial dispute resolution, trade unions, and conditions of employment.
The Code on Social Security, 2020: This Code merges nine laws, including The Employees' Provident Funds and Miscellaneous Provisions Act, 1952; The Employees' State Insurance Act, 1948; The Maternity Benefit Act, 1961; and The Payment of Gratuity Act, 1972. It aims to extend social security benefits to all workers, including unorganised sector workers, gig workers, and platform workers.
The Occupational Safety, Health and Working Conditions Code, 2020: This Code consolidates 13 laws, such as The Factories Act, 1948; The Mines Act, 1952; and The Contract Labour (Regulation and Abolition) Act, 1970. It addresses the health, safety, and working conditions of workers across various sectors.

What is the current status of the Labour Codes' implementation?

While the four Labour Codes have been passed by Parliament, they have not yet been implemented nationwide because the Central Government needs to notify the rules, and individual State Governments must also frame and notify their respective rules.

As of early 2024, the Central Government has finalised the draft rules for all four Codes. However, the implementation is contingent on a sufficient number of states notifying their rules. Labour is a concurrent subject in India, meaning both the Central and State Governments can legislate on it. For the Codes to be fully operational, states must align their regulations with the central framework.

Several states have made progress in drafting and notifying their rules. For example, states like Uttar Pradesh, Madhya Pradesh, Uttarakhand, Punjab, and Haryana have reportedly drafted or notified rules for some or all of the Codes. However, a universal date for implementation across all states remains elusive, leading to continued reliance on the existing labour laws. The Central Government has indicated that the Codes will be implemented simultaneously across the country once a critical mass of states are ready. This staggered approach ensures a smoother transition and addresses concerns raised by various stakeholders.

How does the new wage definition impact employers?

The Code on Wages, 2019, introduces a harmonised and expanded definition of "wages," which will significantly impact how employers calculate various statutory payments.

Under Sec. 2(y) of The Code on Wages, 2019, "wages" are defined comprehensively, including all remuneration, whether by way of salaries, allowances, or otherwise, expressed in terms of money or capable of being so expressed, which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment. This definition explicitly includes basic pay, dearness allowance, and retaining allowance. Crucially, it also specifies what components are excluded from wages, such as house rent allowance, conveyance allowance, statutory bonus, overtime allowance, and commission.

The key change is the provision that the excluded components cannot exceed 50% of the total remuneration. If these excluded components exceed 50%, the excess amount will be deemed part of the "wages" for calculation purposes. This means that if an employee's non-basic components (like HRA, conveyance, etc.) are too high, their "wage" for statutory calculations will increase.

This harmonised definition will impact the calculation of:

Provident Fund (PF) contributions: Higher "wages" mean higher PF contributions from both employer and employee.
Gratuity: Gratuity is calculated based on the last drawn wages, so a higher wage definition will lead to increased gratuity payouts.
Bonus: The Payment of Bonus Act, 1965, which is subsumed, uses a wage definition.
Minimum Wages: The Code aims for a universal minimum wage based on this definition.

Employers will need to restructure salary components to ensure compliance and manage increased costs. Many companies currently structure salaries with a lower basic pay and higher allowances to reduce PF and gratuity liabilities. The new definition will necessitate a review of these structures to avoid unexpected increases in statutory outgoings.

What changes does fixed-term employment bring?

The Industrial Relations Code, 2020, formally introduces and legitimises fixed-term employment across all sectors, providing parity with permanent employees in terms of wages and benefits.

Sec. 2(o) of The Industrial Relations Code, 2020, defines "fixed term employment" as "the employment of a worker for a fixed period, which may be for a specific project or for a specific duration, as may be prescribed." This legalises a practice that was previously ambiguous or confined to specific sectors. The significant aspect is that fixed-term employees will be entitled to the same wages, allowances, and other benefits as permanent workers doing the same work, on a pro-rata basis. This includes gratuity, even if their service period is less than five years, provided the contract is not renewed.

This change offers employers greater flexibility in managing their workforce, allowing them to hire for specific projects or seasonal demands without the long-term commitments associated with permanent employment. It can help businesses scale up or down more efficiently.

However, employers must ensure that fixed-term employees receive equitable treatment. This means:

Equal Pay: Wages and allowances must be comparable to permanent employees for similar work.
Pro-rata Benefits: Benefits like gratuity, leave, and social security contributions must be provided on a pro-rata basis for the duration of their employment.
No Discrimination: Employers cannot discriminate against fixed-term employees in terms of working conditions or opportunities.

This provision aims to balance employer flexibility with worker protection, preventing exploitation often associated with temporary contracts.

How do the Codes address social security for gig and platform workers?

The Code on Social Security, 2020, makes a pioneering move by extending social security benefits to gig workers and platform workers, a segment largely outside traditional labour laws.

Sec. 2(35) of The Code on Social Security, 2020, defines a "gig worker" as "a person who performs work or participates in a work arrangement and earns from such activities outside of a traditional employer-employee relationship." Similarly, Sec. 2(61) defines a "platform worker" as "a person engaged in a work arrangement outside of a traditional employer-employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services or any such other activities as may be prescribed."

The Code mandates the Central Government to formulate and implement social security schemes for these workers, covering aspects like life and disability insurance, health and maternity benefits, provident fund, and skill upgradation. These schemes will be funded through a combination of contributions from the Central Government, State Governments, and aggregators (the companies facilitating the gig work). The Code proposes that aggregators contribute 1-2% of their annual turnover, not exceeding 5% of the amount paid or payable by the aggregator to gig workers and platform workers.

This is a significant step towards formalising a rapidly growing segment of the workforce and providing them with a safety net. For aggregators and platforms, this means new compliance obligations and potential financial contributions towards worker welfare. They will need to establish mechanisms for registration, contribution, and benefit disbursement for their gig and platform workers.

Comparison of Key Provisions: Old vs. New Labour Laws

| Feature | Existing Labour Laws (Pre-Codes) B. The Code on Social Security, 2020. C. The Occupational Safety, Health and Working Conditions Code, 2020. D. The Industrial Relations Code, 2020.

All these Codes have been passed by Parliament and assented to by the President. However, their implementation is pending as the Central Government needs to notify the rules, and individual State Governments must also frame and notify their rules.

How SP & SC helps

Navigating the complexities of India's evolving labour laws and ensuring compliance can be challenging for any business. SP & SC Legal and Taxation Services offers comprehensive labour law compliance services, helping you understand the current status of the Codes, assess their potential impact, and prepare your organisation for the upcoming changes. Our experts can assist with salary restructuring, policy updates, and ensuring your business remains fully compliant. Visit our services page at /services/compliance/labour-compliance to learn more.

Frequently asked questions

When will the Four Labour Codes be implemented?

The exact date for the nationwide implementation of the Four Labour Codes is not yet fixed. While the Codes have been passed by Parliament and the Central Government has finalised the draft rules, their enforcement is contingent on a sufficient number of State Governments also notifying their respective rules. The Central Government aims for simultaneous implementation once a critical mass of states are ready, but this process has seen delays.

Will the new wage definition increase my company's costs?

Potentially, yes. The harmonised wage definition under the Code on Wages, 2019, stipulates that certain excluded allowances cannot exceed 50% of the total remuneration. If your current salary structures have a lower basic pay and higher allowances (exceeding 50%), the "wage" for statutory calculations (like PF, gratuity) will increase, leading to higher employer contributions and payouts. Companies will need to review and potentially restructure their compensation packages.

Can I hire employees on fixed-term contracts under the new Codes?

Yes, the Industrial Relations Code, 2020, formally legalises fixed-term employment across all sectors. This allows employers to hire workers for a specific project or duration. However, fixed-term employees must be provided with the same wages, allowances, and other benefits (on a pro-rata basis) as permanent employees performing similar work, including gratuity, irrespective of their service tenure.

What are the implications for businesses employing gig workers?

Under the Code on Social Security, 2020, aggregators and platforms employing gig workers and platform workers will have new social security obligations. The Central Government will formulate schemes for these workers (covering benefits like life insurance, health, and provident fund), which will be partly funded by contributions from aggregators (1-2% of annual turnover, not exceeding 5% of payments to workers). Businesses will need to factor in these contributions and comply with new registration and reporting requirements.

Do I need to update my company's policies and employment contracts now?

While the Codes are not yet implemented, it is prudent for businesses to start reviewing their existing policies, employment contracts, and salary structures in anticipation of the changes. Understanding the new definitions, compliance requirements, and potential impacts will allow for a smoother transition once the Codes are enforced. Consulting with legal and HR experts can help in proactive preparation.

What happens to the old labour laws once the new Codes are implemented?

Once the Four Labour Codes are fully implemented and the rules are notified by both the Central and State Governments, the 29 central labour laws they consolidate will be repealed. This means the old laws will cease to be in effect, and all labour-related matters will be governed by the provisions of the new Codes.