In 2026, the traditional distinction between “permanent” and “contract” employees has blurred under India’s Code on Social Security (2020). For decades, staffing agencies and principal employers relied on contract labour to “outsource” compliance responsibilities. With the full rollout of the New Labour Codes in late 2025, that buffer has largely disappeared.
As a Senior Labour Law Consultant, I see many agencies still clinging to outdated ESIC calculation methods, putting both themselves and their clients at risk. Here’s how staffing agencies must pivot for 2026.
1. End of the “Contractor Shield”
Under the legacy Contract Labour (Regulation & Abolition) Act, 1970, responsibility for social security often shifted between contractors and principal employers.
- The Core Shift: Under the OSH Code, 2020 and the Code on Social Security, 2020, staffing agencies are now clearly classified as “employers.”
- Principal Employer Liability: The principal employer remains the ultimate guarantor if the agency defaults.
- ESIC Coverage: If a temporary staffer’s “Wages” (as per Section 2(88) and the 50% rule) fall under ₹21,000, ESIC is mandatory, provided the establishment meets the statutory employee threshold.
2. The 50% Rule and Temporary Salary Structures
The most significant compliance hurdle for staffing agencies is the new wage definition.
- Section 2(88) defines “Wages” as Basic Pay + Dearness Allowance + Retaining Allowance.
- Allowances (HRA, Conveyance, Special Allowance, etc.) are excluded only up to 50% of total remuneration.
- Compliance Reality: If allowances exceed 50%, the excess is added back to Basic.
Example:
- Gross Salary = ₹22,000
- Basic + DA = ₹8,000
- Allowance = ₹14,000
- 50% of CTC = ₹11,000 → allowances exceed by ₹3,000
- Revised Basic + DA = ₹8,000 + ₹3,000 = ₹11,000
- Since ₹11,000 ≤ ₹21,000 → ESIC applies
3. Fixed-Term Employment (FTE): The New Standard
The Labour Codes have formalized Fixed-Term Employment (FTE), offering clarity for agencies:
- FTE employees are entitled to pro-rata statutory benefits (including ESIC and gratuity) from day one.
- No “waiting period” applies-ESIC coverage cannot be denied based on contract duration.
- This ensures temporary staff enjoy the same social security protections as permanent employees.
4. Compliance Checklist for Staffing Agencies
To remain audit-ready in 2026, agencies should:
- Audit Allowances: Ensure excluded components (HRA, travel, etc.) do not breach the 50% threshold.
- ESIC Registration: Confirm every worker has an Aadhaar-linked ESIC Insurance Number for portability.
- Client Transparency: Issue monthly compliance certificates to principal employers, proving ESIC contributions were made on the recalculated wage base.
Disclaimer: This content is for educational purposes and reflects the legal framework of the Indian Labour Codes as of 2026. It does not constitute legal advice. Staffing agencies and employers should consult with a qualified labour law expert at Key4Comply to ensure their specific contracts and salary structures meet the latest statutory requirements.