Labour codes – challenges and impact

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Four new labour Codes adopted by the government will replace 29 existing central labour regulations covering pay, social security, workplace safety, and labour disputes. Code on Social Security, 2020, Code on Wages 2019, Industrial Relations Code 2020 and Occupational Safety, Health and Working Conditions Code, 2020 have not yet been notified. These will change the paradigm and cause significant adaptation requirement for corporations.

The goal is to make compliance simple and ensure equity, use of technology in varied compliances and enforcement.

Impact and Challenge areas are:


The terms employee and worker are defined differently, non- administrative or supervisory positions are held by workers.

Employees are entitled to additional benefits from their employers, like overtime pay, cash out unused annual leave and further compensation in the event of a retrenchment,

Grievance redressal committee for the resolution of worker grievances, standing orders for conditions of service for workers (applicable for establishments employing 300 or more workers), 21 days’ notice for any change in the conditions of service for workers plus some more compliance.

The segregation of Employees or Workers will require companies to determine the categories carefully due to potential financial and other ramifications. 


The definition of wages is changed to definition of Pay. The new unified definition of pay across the four codes has been simplified. It includes all pay components that are expressed in monetary terms or have the potential to be so. It specifically excludes items like commission, HRA, conveyance assistance, and statutory bonuses. However, the total amount of the exclusions is only 50% of the compensation (except gratuity and retrenchment compensation). The benefits provided to employees and the expense incurred by employers will alter as a result of this change in the definition of wages and its general applicability.


Companies have to take a hard look at the budgets for talent, which may increase as a result of the new definition of wages. The provisions of the labour regulations for leave encashment for employees and gratuities for all staff is the next factor companies have to look at.

A retrospective effect on gratuity, to be calculated  on 15 days of “basic wage” for each completed year, is bound to impact the financial outflow for companies.

Leave encashment calculated on the revised definition of “wages”, will also have impact on financial payouts upon termination.


The labour codes could potentially encourage women employee with increased safety at work, flexible work arrangements, state wise.


The Occupation safety and Health Code 2020 include modifications for recruiting workers via contractors or third parties.

Any employee engaged by or via a contractor to perform work for the establishment or in connection therewith is referred to as Contract Labour under the Occupation safety and Health Code 2020  But if a person’s employment with the contractor is governed by mutually specified standards of the conditions of employment and he or she receives periodic wage increase, social security coverage, and other welfare benefits, then that worker would not be considered Contract labour. The contractor will be liable for all compliances under the new labour rules of such workers who do not meet the criteria of contract labour.


  • The minimum wage cannot be set by the state governments below the floor price. The problem is that all state governments set their minimum wages solely above the legally mandated floor price. This can create disparity.
  • A Gazetted Officer shall hear and decide any disagreement, according to Section 45 of the Code on Wages 2019. The fact that the officers will hear complex legal concerns without having any legal knowledge, can be less than effective solution.
  • In place of a judicial magistrate, an officer with at least the rank of secretary now has the authority to impose penalties under a new provision found in Section 52 of the Code. This clause breaches Article 50 of the constitution, which calls for the separation of the executive and judicial branches of government.
  • Due to Social Security Code, 2020 inclusion of workers from only enterprises with a certain number of employees (such as 10 or 20), only these establishments are eligible for benefits like pensions and health insurance. This will eliminate a large number of workers from the scheme. The other group of workers, which consists of those employed in the unorganised sector with a minimum of 10 employees and self-employed individuals, is left to be covered by various discretionary initiatives as and when the government notifies.
  • The Social Security Code 2020 also specifies that other benefits, such as provident funds, pension benefits, and medical insurance benefits, are only offered to employees who earn above a specific threshold specified by the GoI.


According to the Periodic Labour Force Survey Report (2018-19), 72% of regular wage or salaried workers in the non-agricultural sector, did not have a formal contract. According to the NITI Aayog, the structure of the current labour regulations does not specifically or intentionally promote the expansion of labour-intensive industries. These laws require revision in order to add a component of incentive for better labour absorption.  

The four new labour codes, which have not yet gone into effect, address the current problems. The rules have been created by the Ministry of Labour in accordance with a notification from the Central Government, some states have not yet drafted and framed the rules. The workers impacted by COVID-19 could have received a lifeline if the Codes were implemented properly and on schedule.

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Manupatra, Times of India, Peiodic Labour Force Survey Report

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