New labour code changes and why companies are making one-time provisions

Labour Codes Usher in Major Reforms

India's labour landscape has undergone a seismic shift with the implementation of four consolidated labour codes that replace 29 outdated laws.

These codes—the Code on Wages, Industrial Relations Code, Code on Social Security, and Occupational Safety, Health and Working Conditions Code—came into effect on November 21, 2025.

The reforms aim to simplify compliance, extend protections to more workers, and balance employer flexibility with employee rights.

For businesses, the changes mean recalibrating everything from wage calculations to hiring practices, especially as states finalize their rules.

Companies across sectors are now scrambling to align their operations, leading to unusual financial reporting trends in recent quarters.

Gratuity Overhaul Sparks One-Time Provisions

At the heart of the current buzz is a key tweak in the Code on Social Security, 2020, particularly around gratuity payments.

Previously, gratuity was calculated based on a narrower definition of wages, but now "wages" must include at least 50% of an employee's total cost-to-company (CTC).

This caps allowances outside the wage base at 50% of total remuneration, potentially doubling statutory liabilities for firms with allowance-heavy salary structures.

Fixed-term employees, seasonal workers, and even those on piece rates now qualify for pro-rata gratuity after just one year of service, up from previous thresholds.

As a result, most companies releasing Q3FY26 results are booking hefty one-time provisions for these enhanced employee benefits.

Manufacturing and heavy industries, with their large workforces, are leading with the biggest hits to their balance sheets.

Retail, e-commerce, and healthcare firms face similar pressures from gig and contract staffing models.

The ripple effects extend beyond gratuity.

Employers must now pay full and final settlements within two working days of an employee's exit, and minimum wages apply universally, including to unorganized sectors.

A national floor wage sets the baseline, with states required to match or exceed it.

Statutory bonuses and provident fund contributions also tie into the new wage definition, inflating costs across the board.

"Every allowance-heavy salary structure in India is now sitting on a hidden cost bomb—and the fuse has already been lit," warns a labour law expert, highlighting the urgency for restructuring compensation. |quote|

This has forced businesses to audit payrolls, reclassify roles, and provision for backdated liabilities to avoid penalties that can reach up to 13 times higher for repeat offences.

Wider Impacts on Businesses and Workers

These codes promote fairness and inclusivity in meaningful ways.

Women can now work night shifts with consent and safety measures like transport and security in place, breaking old barriers.

Gender-neutral "equal pay for equal work" covers transgender workers too, and crèche facilities become mandatory for firms with 50 or more employees.

Grievance committees with equal representation are required in larger setups, fostering better dispute resolution.

On the flexibility front, retrenchment thresholds rise to 300 workers before needing government nod, easing restructurings, while a reskilling fund cushions laid-off staff.

Contract labour is restricted to core activities, pushing companies toward fixed-term hires with parity benefits.

Gig workers gain social security through aggregator contributions.

Yet, strikes and lockouts face stricter rules, with notice periods and penalties to curb disruptions.

Sectors like manufacturing bear the brunt of provisions due to scale, but all face higher compliance via unified online registrations.

In summary, the new labour codes modernize India's workforce framework, driving one-time provisions as companies adjust to expanded gratuity and wage rules.

While boosting worker protections and inclusivity, they challenge businesses to rethink costs and strategies amid ongoing state implementations.

Stakeholders watch closely as these reforms reshape employment dynamics for years to come.