LABOUR & EMPLOYMENT / FOR BUSINESSES

The four Labour Codes are in force: the employment documents an SME should update

With the Labour Codes effective from 21 November 2025, this note maps the statutory provisions that change how appointment letters, salary structures, leave policies, exit settlements and contractor arrangements should be drafted.

By Adv. Gurleen KaurPublished 29 October 2026Law stated as at 29 October 2026

The Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 (the OSH Code) were made effective from 21 November 2025, replacing 29 earlier labour laws (PIB release, Ministry of Labour and Employment, 21 November 2025). For a small or mid-sized business, the immediate effect is on paperwork. This note sets out the provisions that matter most for employment documents.

Where the law stands today

Commencement. The Codes are effective from 21 November 2025 (PIB release, 21 November 2025).
Transition. During the transition, the relevant provisions of the existing labour Acts, with their rules, notifications and schemes, continue in force (PIB release, 21 November 2025). Old rules remain in force until new rules are finally notified, to the extent consistent with the Codes (MoLE FAQs on Labour Codes, Sl. 1).
Central rules. The Code on Wages (Central) Rules, 2026 were notified as G.S.R. 343(E) dated 8 May 2026 (see corrigendum G.S.R. 629(E), 15 July 2026). The Industrial Relations (Central) Rules, 2026 (G.S.R. 342(E)), the Social Security (Central) Rules, 2026 (G.S.R. 344(E)) and the OSH (Central) Rules, 2026 (G.S.R. 345(E)) were notified on the same date, 8 May 2026.
State rules matter more for most SMEs. Central rules apply where the Central Government is the appropriate government; State rules apply where the State Government is (MoLE Additional FAQs, 16 March 2026, Sl. 27). For most private shops, offices and factories in Haryana and Delhi, that means the Haryana or Delhi rules. As at the date of this note, Haryana had published draft rules under all four Codes in its Gazette in May 2026, and Delhi had also published draft rules; final State rules were awaited. Until they are notified, the old State rules continue to the extent they are consistent with the Codes. Employers should check the State Gazette for final rules before changing prescribed forms and registers.
Old statutes. The Trade Unions Act, 1926, the Industrial Employment (Standing Orders) Act, 1946 and the Industrial Disputes Act, 1947 stand repealed on and from the date appointed under s. 1(3) of the Industrial Relations Code, 2020, that is, 21 November 2025 (s. 104(1), as substituted by the IR Code (Amendment) Act, 2026, which is deemed to have come into force on 21 November 2025).

1. One definition of "wages", with a 50% cap

"Wages" now means all remuneration, by way of salaries, allowances or otherwise, expressed in money, and includes basic pay, dearness allowance and retaining allowance (s. 2(y), Code on Wages, 2019). A list of payments is excluded, including house rent allowance, conveyance allowance, employer contributions to provident or pension funds, overtime allowance, commission, statutory bonus, gratuity and retrenchment compensation (s. 2(y), Code on Wages, 2019).

The key safeguard is the proviso: if the excluded payments in clauses (a) to (i) exceed one-half of total remuneration (or such other percentage as the Central Government notifies), the excess is treated as wages (first proviso to s. 2(y), Code on Wages, 2019). The Ministry has clarified that overtime allowance is counted in the 50% calculation, and that performance-based incentives and ESOPs are excluded from wages (MoLE Additional FAQs, Sl. 1(a); MoLE FAQs, Sl. 3). The revised definition applies from 21 November 2025, including for gratuity calculation (MoLE Additional FAQs, Sl. 7 and 11).

Practical point: where basic pay and dearness allowance are well below half the package, the excess allowances are added back, which raises benefits computed on "wages", such as gratuity.

2. Appointment letters are mandatory

Every employer must issue a letter of appointment to every employee on appointment, in the prescribed form (s. 6(1)(f), OSH Code, 2020). Where an employee had not been given one on or before the commencement of the Code, the letter had to be issued within three months of commencement (s. 6(1)(f), OSH Code, 2020). With commencement on 21 November 2025, that period ended in February 2026. Employers who have not yet issued letters to existing staff should do so now, dated on the date of issue and recording each employee's actual date of joining. The duty applies to an "establishment", which for most shops, offices and businesses means a place where ten or more workers are employed (definition of "establishment" in s. 2(1), OSH Code, 2020).

3. Fixed-term employment and pro-rata gratuity

"Fixed term employment" means engaging a worker on the basis of a written contract for a fixed period (s. 2(o), Industrial Relations Code, 2020). A fixed-term worker's hours of work, wages, allowances and other benefits cannot be less than those of a permanent worker doing the same or similar work; the worker is eligible for all statutory benefits available to a permanent worker proportionately; and the worker is eligible for gratuity on rendering one year of service under the contract (proviso to s. 2(o), Industrial Relations Code, 2020). For fixed-term employees, the Code on Social Security dispenses with the five-year continuous-service condition when the contract period ends and requires gratuity to be paid on a pro rata basis (s. 53(1)(d) and second proviso to s. 53(1); last proviso to s. 53(2), Code on Social Security, 2020); the one-year qualifying period comes from the proviso to s. 2(o) of the IR Code, 2020. The Ministry has clarified that the one year is counted from the start of the contract (MoLE Additional FAQs, Sl. 14 and 19).

4. Pay dates, and wages within two working days of exit

The employer fixes a wage period, which may be daily, weekly, fortnightly or monthly, but cannot exceed one month (s. 16, Code on Wages, 2019). Monthly wages must be paid before the expiry of the seventh day of the following month; shorter wage periods have shorter deadlines (s. 17(1), Code on Wages, 2019).

Where an employee is removed, dismissed, retrenched, resigns, or becomes unemployed because the establishment closes, wages payable must be paid within two working days (s. 17(2), Code on Wages, 2019). This rule applies to wages. Gratuity follows its own provision: the employer must pay it within thirty days from the date it becomes payable, and late payment carries simple interest (s. 56(3)–(4), Code on Social Security, 2020).

5. Provident fund: wage ceiling raised to ₹25,000

By notification S.O. 5109(E), the statutory wage ceiling for provident fund coverage was raised from ₹15,000 to ₹25,000 a month with effect from 17 September 2026, the first revision since September 2014. The pensionable wage ceiling is also ₹25,000, so the maximum monthly employer contribution to the pension scheme (8.33%) rises from ₹1,250 to ₹2,083 (S.O. 5109(E), Gazette of India, effective 17 September 2026; Ministry of Labour and Employment, PIB release of 23 September 2026). Employees earning between ₹15,000 and ₹25,000 a month now fall within mandatory coverage. For a small employer, this raises the monthly cost of every such employee, in addition to any effect of the 50% wage rule on the wage base.

6. Standing orders: the 300-worker threshold

The standing orders chapter applies to industrial establishments employing 300 or more workers on any day in the preceding twelve months (s. 28, Industrial Relations Code, 2020). Such employers had to prepare draft standing orders within six months of commencement (s. 30(1), Industrial Relations Code, 2020); until their own standing orders are certified, the Central Government's model standing orders are deemed adopted (s. 29, Industrial Relations Code, 2020).

Old position vs under the Codes

Item	Earlier position (as described by MoLE/PIB)	Under the Codes
Appointment letters	No mandatory appointment letters	Mandatory for every employee (s. 6(1)(f), OSH Code, 2020)
Gratuity for fixed-term staff	Five years' service	One year, proportionate (s. 53, Code on Social Security, 2020; s. 2(o), IR Code, 2020)
Timely payment of wages	No mandatory compliance for payment of wages	Fixed deadlines; two working days on exit (s. 17, Code on Wages, 2019)
Minimum wages	Only scheduled employments covered	Statutory right for all workers (Code on Wages, 2019)
Registrations and returns	Multiple registrations, licences and returns	Single registration, single licence and single return

A document-update list

Appointment letter. Issue to every employee, including existing staff without one (s. 6(1)(f), OSH Code, 2020). Use the form prescribed under the applicable rules.
Salary structure. Test each grade against the 50% proviso, counting overtime in the calculation (s. 2(y), Code on Wages, 2019; MoLE Additional FAQs, Sl. 1(a)).
Fixed-term contracts. Put the contract in writing, match pay and benefits to comparable permanent staff, and provide for proportionate gratuity after one year (s. 2(o), IR Code, 2020; s. 53, Code on Social Security, 2020).
Leave policy. Annual leave accrues at one day for every twenty days worked once a worker has worked 180 days in a calendar year (s. 32, OSH Code, 2020).
Exit and full-and-final process. Build a payroll step that releases wages within two working days of the last working day, for resignations as well as terminations (s. 17(2), Code on Wages, 2019).
Contractor arrangements. The contract labour chapter applies to establishments employing 50 or more contract labour on any day in the preceding twelve months (s. 45, OSH Code, 2020, as summarised in the MoLE Compliance Handbook). Review whether contractors are used for "core activities", that is, activities for which the establishment is set up (s. 2(1)(p), OSH Code, 2020), since that use is regulated (s. 57, OSH Code, 2020).
Standing orders. Only if 300 or more workers (s. 28, IR Code, 2020).

Points still open

Forms, registers and several thresholds are prescribed by rules, not by the Codes. Where the State Government is the appropriate government, State rules govern, and an employee keeps any more favourable benefit under State law (MoLE Additional FAQs, Sl. 25 and 27). For Haryana and Delhi establishments, the Codes are best read with the final State rules once notified.

Author’s view

In practice, the change that will hit small employers hardest is the new definition of "wages". Where allowances make up more than half of pay, the excess is now counted as wages (s. 2(y), Code on Wages), raising gratuity and other benefits linked to wages. With the provident fund wage ceiling also raised to ₹25,000 from 17 September 2026, the cost of labour for a small business rises on two fronts at once.

Paying wages within two working days of an employee leaving is difficult for a small employer, who must check past records before settling accounts. The two-day rule applies to wages (s. 17(2)); gratuity and other dues follow their own timelines, such as thirty days for gratuity (s. 56). A practical course is to release the wages due within two days and complete the rest of the final settlement within the time the law allows for each item.

Many employers have not issued appointment letters to their existing staff, and the deadline for doing so passed in February 2026. Such letters should be issued now, dated on the day they are issued and recording each employee's actual date of joining.

Labour law is written to protect workers, and the balance can feel one-sided to small employers. But compliance protects employers too: written appointment letters, proper wage records and timely payment are an employer's best defence when a claim is disputed.

Adv. Gurleen Kaur

Sources

Labour & employment ↗

The four Labour Codes are in force: the employment documents an SME should update

Where the law stands today

1. One definition of "wages", with a 50% cap

2. Appointment letters are mandatory

3. Fixed-term employment and pro-rata gratuity

4. Pay dates, and wages within two working days of exit

5. Provident fund: wage ceiling raised to ₹25,000

6. Standing orders: the 300-worker threshold

Old position vs under the Codes

A document-update list

Points still open

Author’s view

Sources

A note about
this website.

You have chosen
not to enter.

The four Labour Codes are in force: the employment documents an SME should update

Where the law stands today

1. One definition of "wages", with a 50% cap

2. Appointment letters are mandatory

3. Fixed-term employment and pro-rata gratuity

4. Pay dates, and wages within two working days of exit

5. Provident fund: wage ceiling raised to ₹25,000

6. Standing orders: the 300-worker threshold

Old position vs under the Codes

A document-update list

Points still open

Author’s view

Sources

You have chosennot to enter.

You have chosen
not to enter.