India underwent a dramatic change in its economic governance with the implementation of four new Labour Codes towards the end of 2025. This move replaced 29 archaic and complicated central labour laws with four simplified codes, which included the Code on Wages; passed by Parliament in August 2019.1 For decades, India’s labour market was governed by a web of regulations which economists often termed as “regulatory cholesterol,” hindering businesses from expanding and workers to access formal benefits.2
The earlier system was so disjointed that a single factory had to comply with two different ‘wages’ for instance, under the Minimum Wages Act and the Payment of Bonus Act.3 This confusion has led to a scenario where many firms have preferred not growing up in order to stay away from complicated compliance, and is the very same reason why one witnesses, what we call as “dwarfism” of Indian firms.4 The World Bank repeatedly highlighted that such stringent laws are a significant impediment to India realizing its potential as an international manufacturing destination.5 The new codes attempt to address this through a balance of two primary objectives, namely ease of doing business for employers and social security cover to every worker including those in the informal sector.6
The Code on Wages, 2019
The most affected by reforms would be the monthly salary of every employee. The Code on Wages, 2019 brings uniformity within the definition of ‘wages,’ which is a resolve to an old issue where different laws gave varied definitions for what constituted as wages.
Under the previous system, employers would split a total salary of an employee into plenty of allowances, including House Rent Allowance, conveyance allowance etc. only to keep ‘basic wage’ at a minimum level. This is because social security contributions, such as the Provident Fund, are a percentage of the basic wage.7 Companies did not have to pay more towards the PF by keeping basic wage on lower side.
This gap has been filled up through uniform definition of wages in new Code vide Section 2(y).8 Although it is still subject to exclusions like HRA, overtime pay etc., there is an essential condition, if the amount of such exclusion exceeds 50% of total salary payable then anything in excess will be treated as wages pursuant to Code on Wages, 2019.
This ‘50% cap’ has a double-sided effect. The mandatory PF contribution is 12% of wages, with the larger wage base, will result in more amounts being deducted from employee’s salary.9 This way, there is a reduction in the employees’ monthly take-home pay accompanied with, but they will also accrue more interest on their retirement savings. This is especially concerning because government data shows that a significant part of the Indian population does not have substantial savings for retirement.10
This has its impact to gratuity as well, which is a lump sum paid to employees when they leave a job after five years. This expanded wage base would allow a larger employee to be eligible for gratuity.11 This is good news for the employees but an additional cost burden on employers as they will now have to reserve more funds towards these future payments.12
Under Section 9, the Code also brings in a “National Floor Wage,” an upper cap set by Central Government for minimum wages and no state can go below this floor wage.13 Traditionally, the states competed with one another by driving down minimum wages to attract factories and etc., leading to a ‘race to the bottom.’ The government is planning to set a national floor so that all workers earn enough and providing them with basic subsistence wages.14
The Code on Social Security, 2020
The Gig Economy is one of the most modern and progressive inclusions in the new laws. Until then, legislation had only provided a model for the relationship of an employer and an employee. As a result, hundreds of millions who work for platforms such as Uber and Zomato or Urban Company were left without legal coverage.15
“Gig Workers”16 and “Platform Workers”17 have been defined for the first time under the Code on Social Security, 2020. It acknowledges that these workers are not traditional employees but still deserve a safety net. This represents a big shift away from the old laws for unorganized sector which can be described as muddled and toothless.18
In order to pay for these worker’s social security, the Code introduces an unprecedented funding model. Aggregators, the digital firms which link workers with consumers are required to pay 1% and up to 2 % of their gross annual revenues into a separate social security fund under Section 114.19 The sum of all contributions cannot be more than 5% what is paid to the workers side.
This is not what we see in the West. In the UK, for example, Uber drivers have recently been declared workers entitled to minimum wage by the Supreme Court.20 Countries like India on the other hand have walked a middle path. Inspired by such insights, India maintains the app-based gig economy model while securing benefits for independent workers at platforms’ expense.21 This is somewhat like the “Proposition 22” model in California, but the fund here is managed by the government.22
The problem is that great as the law may be on paper, implementation has proved difficult. While the government has launched e-Shram portal for registration of these workers, they are difficult to track as many work on multiple platforms simultaneously.23 Ensuring that benefits are portable, meaning a worker carries their benefits with them even if they move from Delhi to Mumbai, requires a very advanced digital system. However, a debate continues to rage on if the 1 to 2 % levy is adequate enough to not only provision real health and pension benefits.24
The Industrial Relations Code, 2020
The reform which created the most controversy is the Industrial Relations (IR) Code.25 It is a combination of three previous laws: the Trade Unions Act, 1926; Industrial Employment (Standing Orders) Act,1946 and Industrial Disputes Acts, 1947. The main goal here is to make it easier for companies to adjust their workforce based on market demand.
As per the earlier Industrial Disputes Act, any factory with 100 or more workers had to take permission from the government before laying off staff or closing. However, this became a theoretical permission with no chance of practically firing an employee legally. So, the companies here become reluctant to hire permanent workers and hired more contract labour instead.26
In the new IR Code, Section 77 increases this threshold to 300 workers.27 Medium sized companies are also now eligible to cut staff numbers without obtaining the consent of relevant authorities, but they must compensate any workers who leave. Government justifies that this will promote increasing size of the unit without any regulatory fear.28 But the trade unions say it eliminates job security for about 74% of industrial workers in India.29
The Code also formally recognizes “Fixed-Term Employment” (FTE) under Section 2(o).30 Until then, court judgments like the Supreme Court of India decision in SAIL v. National Union Waterfront Workers31 had made it legally risky for employers to engage such a person on fixed terms. The companies can now hire FTE workers for period of any duration.
The Code says these workers are to receive the same pay and hours as full time employees to prevent their exploitation. They are also entitled to gratuity even if they work for one year, whereas permanent employees must complete five years of service to be eligible.32 It seeks to render FTE a better alternative than the exploitative contract labour system.33
Additionally, the IR Code also increases difficulties for trade unions to go on strike. Section 62 provides that no workman shall go on strike in breach of contract without giving to the employer notice, not less than two weeks before striking.34 In the past this rule was only on public utility services like water and electricity, but would now cover every industry. This essentially prohibits spontaneous protests. While this is good for business continuity, unions claim it restricts their fundamental right to protest and collective bargaining.35
The OSH Code, 2020
The Occupational Safety, Health and Working Conditions (OSH) Code, 2020,36 replaces 13 old laws, including the Factories Act of 1948. It tries to modernize the rules for safety and working hours to fit the 21st century.
There has been a lot of talk about a four-day work week. The OSH Code does not call it mandatory, but it only enables. However, Section 25 maintains the cap of maximum working hours at 48 per week.37 Even though the standard is 8 hours, but according to draft rules daily working limit can be extended up to twelve.38 This permits a company to have people work four days for 12 hours each and then get three days off.39
This flexibility is great for the IT sector, but it creates health problems among factory workers who perform manual labour in factories. A high threshold for overtime is allowed by the Code to avoid abuse, i.e., from 50 hours to 125 hours per quarter.40 This is in accordance with changes initiated by states like Gujarat and Maharashtra who had previously tried to make amendments.41
Section 43, allowing women to work in night shifts (7 PM to 6 AM) of all establishments is the most notable step towards gender equality.42 This was strictly controlled under the old Factories Act. The new law allows women to voluntarily work after dark only if the employer ensures their safety and transportation, to safeguard constitutional guarantee of non-discrimination.43
The COVID-19 lockdown in 2020 exposed the terrible conditions of migrant workers. The old Inter-State Migrant Workmen Act only applied to migrants engaged through contractors, thereby excluding all migrant workers who went on their own.44 Now, the definition is broadened by the OSH Code to include any worker who migrates out of state in search of employment and lands up making wage that are below the salary limit. It results in forming a national database and helpline to aid them.
Challenge and Implementation
Even though the Codes have been passed by the Parliament, implementing them is a complex task. In India, ‘Labour’ is in the Concurrent List of the Constitution, which means both the Central and State governments can make rules and authorize.45
Each state must make its own rules for the Codes to work. As of 2025, while the Centre and several BJP ruled states have completed this, some opposition-ruled state governments like West Bengal, Kerala or Tamil Nadu have delayed it due to political reasons as of late 2025.46 This creates problems like, a company operating in Karnataka may have to comply with the new rules, but its branch situated in another state such as Tamil Nadu would only be governed by the outdated 1948 Laws.47
One of the key promises of these reforms was to bring an end to the ‘Inspector Raj,’ under which, government officials would harass businesses for bribes. The OSH Code renames “Inspectors” as “Inspector-cum-Facilitators” in Section 34.48 It implements an online inspection system in which inspectors would be selected at random by a computer and unable to target on any specific company. But that will take time as it would necessitate every state to upgrade their digital infrastructure, which takes time.49
The most crucial aspect of the Social Security Code seems to be whether the Universal Account Number (UAN) works for all. The old Employee Provident Fund (EPFO) and Employee State Insurance (ESIC) systems still hold the details of millions upon millions of workers, collating this outdated data is a technical challenge.50 This data integration is important for realization of portability benefits to gig workers.
Conclusion
The Unified Labour Codes of 2025 are arguably the most significant reform in nearly seven decades, since India’s independence. They strive to address the trilemma between flexibility for employers, protection of workers and compliance-friendly options for government.
The employers can recruit Fixed-Term Employees and the slightly tougher thresholds for dismissal would prove beneficial saving productivity as well as investment.51 The Codes take the first step towards legal recognition and social security for workers, especially those in food delivery as well as non-agricultural informal sectors.52 However, it brings a trade-off for the organized workforce, they get more gratuity and portable benefits but surrender some take home pay as well as power to strike easily.53
History teaches us that laws are effective only when they are enforceable. Experience has shown that there will be no end to the confusion if rules are not harmonized between Central and State governments. So far, they have failed but if the Codes are able to deliver on their promises, India will finally make that jump from an informal economy of low productivity into a full-blown high-growth formal one. The journey has started but roads are still under construction.
Author: Kriti Agrawal
Juris Centre 