The labour codes:what changes in your payroll.

For most employers the labour codes change payroll in three places: what counts as wages, when people must be paid, and what records must be kept. None of these is a one-off task. Each shows up again every month.

What changed, and when

Four codes replaced 29 central labour laws on 21 November 2025:

• 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 Central Government notified its final rules under all four codes on 8 May 2026. Labour is a concurrent subject, so each state also notifies rules for establishments it regulates. Some states have finalised theirs; others are still working from drafts. The government has said that relevant provisions of the old laws continue while the transition runs, and the existing provident fund and pension schemes continue for now under the Social Security Code.

The practical result for a payroll team is a period of overlap: new definitions and deadlines in force, new register formats prescribed centrally, and some state and scheme detail still to come.

One definition of wages

Before the codes, each law had its own idea of "wages". The Code on Wages now gives one definition, in section 2(y), and the other three codes use it.

Wages include basic pay, dearness allowance and retaining allowance. The definition then excludes a list of items, among them house rent allowance, conveyance allowance, overtime allowance, commission, statutory bonus, the employer's contributions to pension and provident fund, gratuity, and retrenchment compensation.

Anything in a salary structure that is not listed as an exclusion is, by default, part of wages. Components such as "special allowance" need to be read against the list, not assumed to be outside it.

A worked example

An illustrative monthly salary. The classification of each component in your own structure needs its own review.

On paper nothing about this employee's pay has changed. What has changed is the base on which gratuity, bonus, leave encashment and other benefits are worked out.

What the wage base now drives

• Gratuity. Calculated on wages as defined. A higher wage base means a higher gratuity liability, which also matters for the actuarial valuation in your accounts.
• Fixed-term employees. Under section 53 of the Code on Social Security, a fixed-term employee becomes eligible for gratuity after one year of continuous service, not five.
• Statutory bonus, leave encashment and overtime. These follow the same definition under the codes.
• Provident fund and ESI. The Social Security Code computes contributions on wages as defined. While the existing EPF schemes continue, their own wording still refers to basic wages, and employers have taken different positions in the transition. Before changing your PF contribution base, check the latest EPFO circulars and take a considered decision you can explain.

Net take-home pay can fall if statutory deductions rise with the wage base. Explain any change to employees before the payslip does.

Pay dates and exits

Section 17 of the Code on Wages sets time limits for paying wages, and they now apply to every employee, not only those below a salary ceiling:

• where wages are paid monthly, before the end of the seventh day of the following month;
• when an employee is removed, dismissed, retrenched or resigns, their wages are due within two working days.

The second rule changes the exit process more than any other. A full-and-final settlement that used to take a payroll cycle now needs inputs, computation, approval and payment within two working days of the last day. That usually means starting the working when notice is given, not when it ends.

Registers, wage slips and letters

The Central Rules prescribe formats for the core records: a register of employees, a register of wages (with overtime, advances, fines and deductions), wage slips, and an attendance register that also serves as the muster roll. The direction of the rules is electronic: registers kept digitally, returns filed on portals.

Every employee must also be given an appointment letter. For new joiners this is a template change; for long-serving employees without one, it is a project.

Where a state has not yet notified its own rules, keep both the old and the new records until its position is clear. An inspector will ask for whichever the state enforces.

What is still settling

• State rules, especially on returns, registers and inspection, arrive state by state.
• New schemes under the Social Security Code will in time replace the existing EPF and pension schemes; EPFO circulars will set the detail.
• Components such as performance bonuses and one-off payments raise questions of classification that practice and guidance have not fully settled.

Waiting for complete clarity is not an option. The definitions and pay dates are already law.

A checklist for payroll teams

1. List every pay component and classify it against section 2(y): wages, excluded, or unclear.
2. Run the 50 per cent test for every salary structure, not only the typical one.
3. Recompute gratuity, bonus and leave encashment on the new wage base; tell finance about the liability.
4. Take and record a decision on the PF and ESI contribution base, with the circulars you relied on.
5. Move the monthly pay date, if needed, so every employee is paid by the 7th.
6. Redesign the exit process to pay a full-and-final within two working days.
7. Switch registers and wage slips to the prescribed formats; keep old formats where a state still requires them.
8. Check every employee has an appointment letter on file.
9. Track each state's rules on one calendar, with the date you applied each change.