India’s labour law framework has entered a new era with the enforcement of the Labour Codes. These reforms consolidate 29 existing laws into four streamlined codes:
- Code on Wages
- Code on Social Security
- Industrial Relations Code
- Occupational Safety, Health and Working Conditions Code
For employers, the changes are not just about compliance, they directly impact payroll, benefits, and financial planning. Many companies are now creating one-time provisions in their accounts to prepare for the transition.
1. The Wage Definition Shift
At the heart of the new codes is the uniform definition of “Wages” (Section 2(88)).
- Wages = Basic Pay + Dearness Allowance + Retaining Allowance.
- Allowances cannot exceed 50% of total remuneration.
- Excess allowances must be added back to wages for statutory calculations.
This impacts:
- Provident Fund (PF) contributions
- Gratuity payouts
- Bonus eligibility
- ESIC contributions
2. Why Companies Are Making Provisions
Businesses are setting aside funds to cover:
- Higher PF and gratuity liabilities due to the 50% rule.
- Retrospective adjustments for employees whose salary structures previously minimized contributions.
- Potential ESIC wage ceiling hike (from ₹21,000 to a proposed ₹30,000, under review in Budget 2026).
3. Impact on Employers
- Financial Planning: Increased benefit costs require upfront provisioning.
- Payroll Structuring: Salary packages must be restructured to comply with the wage definition.
- Audit Preparedness: Transparent accounting ensures smoother inspections under the Inspector-cum-Facilitator model.
4. Impact on Employees
- Stronger Benefits: PF and gratuity contributions will rise, boosting long-term savings.
- Expanded Coverage: Gig and platform workers are being phased into social security schemes.
- Family Protection: ESIC coverage now includes dependent parents-in-law and, in some cases, grandparents.
5. Compliance Strategy for 2026
- Audit salary structures to ensure Basic + DA ≥ 50% of Gross Salary.
- Update payroll software to align with new definitions.
- Monitor Budget announcements for wage ceiling changes.
- Train HR teams on compliance requirements.
Disclaimer: This blog is for educational purposes only and does not constitute legal advice. Labour laws are subject to frequent amendments and judicial interpretation. Employers should consult a certified Labour Law Consultant before making structural changes to payroll or compliance policies.