The four labour codes: what changed in 2025 for startups

Parliament passed four codes between 2019 and 2020: 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. They merged and simplified dozens of older central laws such as the Payment of Wages Act, the Industrial Disputes Act and the Payment of Gratuity Act.

The central government brought all four into force on 21 November 2025, according to law-firm summaries. Some provisions are being phased in through rules made by the central and state governments, and a law-firm note reports that central rules were notified in May 2026. As of November 2026, details can still vary by state.

The codes use one definition of wages across all four laws. Under it, basic pay, dearness allowance and retaining allowance are wages, and other components, such as house rent allowance, conveyance and bonus, are excluded only up to a point. If these excluded items add up to more than half of total pay, the extra is added back to wages.

In effect, wages must be at least 50% of total remuneration. Many companies keep basic pay low at 30% to 40% of the package and pay the rest as allowances, which reduces Provident Fund (PF) and gratuity contributions. The 50% rule raises basic pay, which raises PF, gratuity and overtime costs for the employer and can lower the employee's take-home pay while raising savings.

• Wages include basic pay, dearness allowance and retaining allowance.
• Excluded items stay out only if they total 50% or less of remuneration.
• Higher wages raise PF, gratuity, bonus and overtime calculations.
• Take-home pay can fall even though total cost to company stays the same.

Under the old Payment of Gratuity Act, an employee had to complete five years of continuous service to receive gratuity. Under the Code on Social Security, a fixed-term employee becomes eligible after one year of continuous service, in proportion to the service, according to law-firm summaries. Permanent employees keep the five-year rule, with limited exceptions such as death or disablement.

Fixed-term employment is a contract for a set period, without a notice period. The codes say fixed-term staff should get the same pay, hours and benefits as permanent staff in the same work. Startups that hire people on short contracts to avoid benefits will need to price this in.

The codes ask employers to issue written appointment letters that state pay, designation, social security benefits and other terms. For most startups, a signed offer letter already carries most of this, but older informal arrangements, such as verbal terms for interns and consultants, need to be put on paper.

Other changes that matter for hiring include an annual free health check for workers above a set age, rules on working hours and overtime, women working night shifts with their consent and safety measures, and wider coverage for contract and gig workers. State rules decide many details, so a startup with teams in several states should check each.

The Industrial Relations Code raises the headcount threshold above which an employer needs government permission for layoffs, retrenchment or closure, from 100 to 300 workers, as summarised by law firms. Most startups are far below this, so they are not usually affected, but the rule is a reference point in layoff headlines.

Notice, retrenchment compensation and a re-skilling fund for retrenched workers also appear in the code. The final settlement of dues is also meant to happen faster after exit. Startups should keep their notice and settlement terms in line.

A startup can start with the salary structure: check whether basic pay and similar items meet the 50% test, then update the payslip and PF calculations. Next, review contracts for fixed-term staff and interns, add the gratuity effect to the cost of short contracts, and update the offer-letter template.

It also helps to check ESOP and bonus terms against the new wage definition, since some payments may now count as wages. Payroll tools and accountants usually offer templates, but the responsibility stays with the employer.

• Check the basic-to-total pay ratio for each role.
• Update offer and appointment letter templates.
• Review fixed-term and intern contracts.
• Recalculate PF, gratuity and leave provisions.
• Track state rules for each office location.

ESOPs are not wages in the usual sense, but cash bonuses linked to performance may count under the new wage definition. A startup should check whether any cash component sits in the excluded list and whether the 50% test is still met.

Interns and consultants are a grey area. A true internship or a consulting contract is not employment, but a person who works fixed hours under supervision may be treated as an employee in practice. Startups may want to review these arrangements before an audit or a dispute.

Labour is a subject on which both the centre and the states make rules. Each state notifies its own rules under the codes, and thresholds for registration, shops and establishment laws and leave policies differ. A startup with teams in Bengaluru, Gurugram and Mumbai may follow three sets of detailed rules under one set of codes.

Payroll platforms often track these differences, but the employer remains responsible.

Compliance is also moving online. The codes push towards a single registration, a single return and electronic records, which should cut paperwork for companies with many locations. Inspectors are described as facilitators who first advise and then act, though the details depend on state rules. Penalties for non-compliance have been rewritten, with fines for many first offences and prison terms only for serious ones, according to law-firm summaries.

Founders should also expect questions on these points in diligence. Investors checking a startup before a round often ask for proof of PF and ESI registration, gratuity provisions and written contracts, and the new codes make missing records a larger risk.

A story about 'new labour codes' may refer to the November 2025 start date, to later central rules or to a state's own rules, so check which one. A claim that 'take-home pay will fall' depends on a company's salary structure, and not every employee is affected the same way. This page is general information and not legal advice, so check with a labour-law professional.