New labour codes in India: what SMEs must change in payroll, leave and policies
India's labour law has changed more in the past year than in the previous several decades. On 21 November 2025, the four labour codes came into force, replacing 29 central labour laws. Draft central rules followed on 30 December 2025, and the final central rules were notified on 8 May 2026. States are notifying their own rules at different speeds.
For SMEs, the codes are not just a legal update. They change how salaries are structured, what documents must be issued, how quickly exiting employees must be paid and how leave and overtime work.
The four codes in brief
- Code on Wages, 2019: minimum wages, payment of wages, bonus and equal remuneration
- Industrial Relations Code, 2020: trade unions, standing orders, layoffs, retrenchment and disputes
- Code on Social Security, 2020: PF, ESI, gratuity, maternity benefit and social security for gig and platform workers
- Occupational Safety, Health and Working Conditions Code, 2020: working hours, leave, safety, welfare and working conditions
Change 1: a single definition of wages and the 50 per cent rule
The codes use one definition of wages: basic pay, dearness allowance and retaining allowance. Items such as HRA, conveyance, overtime and commission are excluded, but if the excluded items add up to more than 50 per cent of total remuneration, the excess is added back into wages.
Example
An employee earns Rs 50,000 a month, of which Rs 15,000 is basic and DA and Rs 35,000 is allowances. Allowances are 70 per cent of pay. Only 50 per cent, Rs 25,000, can be excluded, so Rs 10,000 is added back and wages become Rs 25,000 for statutory calculations.
This matters because benefits that use wages as their base, such as gratuity, bonus and, depending on how your PF is structured, provident fund contributions, can increase. Many companies built CTC structures with low basic pay to keep these costs down. Those structures now need review. Our compensation consultants can model the impact on your salary bands.
Change 2: appointment letters for every employee
Every employee must now receive an appointment letter in the prescribed form. Informal hiring through an email or a WhatsApp message is no longer enough. Review your offer and appointment letter templates and issue letters to existing employees who never received one.
Change 3: gratuity for fixed-term employees after one year
Permanent employees still qualify for gratuity after five years of continuous service. Fixed-term employees now qualify after one year, calculated pro rata at 15 days' wages for each completed year. If you use fixed-term contracts, provide for this cost.
Change 4: wages on exit within two working days
Under the Code on Wages, wages must be paid within two working days when an employee resigns, is removed, dismissed or retrenched, or loses work because the establishment closes. Gratuity follows its own 30 day timeline. This is one of the biggest operational changes for most companies. Read our guide to full and final settlement for a process that meets the deadline.
Change 5: working hours and overtime
Weekly working hours are capped at 48, and work beyond the normal daily or weekly limit is paid as overtime at twice the ordinary rate of wages. Total overtime is capped at 144 hours per quarter. A four-day week is permitted where daily hours are adjusted within the limits, but it is not mandatory. Women may work night shifts with their consent and appropriate safety arrangements.
Change 6: annual leave after 180 days
For workers covered by the OSH Code, eligibility for annual leave starts after 180 days of work in a calendar year, earning one day of leave for every 20 days worked. Unused leave can be carried forward up to 30 days, and leave above that limit must be encashed. State Shops and Establishments rules may also apply to office staff, so align your leave policy with both.
Change 7: other thresholds and new coverage
- Standing orders and prior approval for layoffs and retrenchment now apply to establishments with 300 or more workers, up from 100
- Aggregators must contribute to a social security fund for gig and platform workers
- Bonus provisions apply to establishments with 20 or more persons, and a conviction for sexual harassment is a new ground for disqualification
What SMEs should do now
- Map every salary structure against the 50 per cent wage rule and estimate the cost impact
- Update offer and appointment letter templates and issue letters to all employees
- Identify fixed-term employees and provide for gratuity after one year
- Redesign the exit process so final wages are paid within two working days
- Review working hours, overtime rules and attendance system settings
- Update leave policies and check carry-forward and encashment rules
- Check which state rules have been notified for each location and track updates
- Brief managers and the finance team on what has changed
How SimplyHR can help
SimplyHR's statutory compliance team tracks central and state rules and keeps your registers and filings up to date. A labour code readiness audit shows exactly which salary structures, documents and processes need to change, and our payroll software can be configured for the new wage definition.
This article is general information based on the labour codes and central rules and is not legal advice. Check the rules notified in your state before making changes.