Corporate compliance and employee impact under Labour Codes 2020

In this ‘Leading Questions’ section, Sidhant Dhingra and Kajal Gupta break down the Labour Codes 2020 with a focus on corporate compliance and employee impact. As we approach the implementation deadline, here is the essential breakdown.

Question: How will the standardized definition of “wages” reshape corporate compensation structures?

Answer: The revised definition of “wages” represents a fundamental shift in how compensation is structured, moving away from fragmented salary slips toward a consolidated base. By including basic pay, dearness allowance, and retaining allowance while capping excluded components, such as HRA, travel, and medical, at 50% of total remuneration, the Code closes a long-standing loophole. Under the new mandate, any allowance value exceeding the 50% threshold is automatically added back to the wage base for social security calculations. For the employer, this translates into a higher “wage bill” and increased Cost to Company (CTC), particularly in the IT, ITeS, and retail sectors where high-allowance models were previously the industry standard.

Question: How does the new 300 worker threshold change workforce restructuring and operational flexibility for companies?

Answer: One of the most significant shifts in industrial relations is the elevation of the worker threshold from 100 to 300 for establishments seeking to implement layoffs, retrenchments, or closures. By tripling this threshold, the Code provides corporates with the necessary agility to restructure their workforces in response to economic volatility without being bogged down by bureaucratic delays. Furthermore, the requirement for “standing orders”, such as the formal rules governing hours, leave, and discipline, now only applies to these larger establishments, offering substantial administrative relief to small and medium enterprises.

Question: What is the impact of statutory recognition of trade unions and the revised strike regulations on industrial relations?

Answer: The Code introduces a first-of-its-kind statutory framework for the recognition of “negotiating unions”, aiming to professionalize the collective bargaining process. In environments with multiple registered unions, a single union must command at least 51% of worker membership to be recognized as the sole negotiating authority. In cases where no single union meets this majority, a “negotiating council” is formed with proportional representation for any union holding at least 20% membership. This structure prevents employers from fragmenting labour groups and ensures a more stable dialogue. To further protect industrial productivity, the Code mandates a 14 day notice period for all strikes and lockouts, expanding a rule that was once reserved for public utilities. This includes a new definition of “strike” that encompasses “mass casual leave” by 50% or more of the workforce. To balance these restrictions, the “Worker Re-skilling Fund” requires employers to contribute 15 days of wages for every retrenched worker, providing a financial bridge for retraining and future employment.

Question: How does the Code extend social security protections to gig, platform and unorganized workers?

Answer: The 2020 Code marks a historical milestone by universalizing social security benefits to include gig and platform workers who previously operated in a legal vacuum. The Code mandates that aggregators contribute between 1% and 2% of their annual turnover to a dedicated Social Security Fund. This fund facilitates essential protections such as life insurance, health benefits, and old-age security. The digital backbone of this system is the e-Shram portal, where workers receive a Universal Account Number (UAN) based on Aadhaar registration. This ensures “benefit portability”, allowing migrant and gig workers to carry their accrued credits across different states or platforms. Additionally, the Code grants “Fixed-Term Employment” (FTE) parity with permanent staff, notably reducing the gratuity eligibility period from 5 years to just 1 year of continuous service to reflect the modern reality of project-based work.

Question: What key compliance steps must companies take to prepare for the implementation deadline?

Answer: As the full implementation deadline approaches, corporate leaders must prioritize a comprehensive restructuring of their internal systems. The primary task is to redesign compensation structures to ensure the 50% wage threshold is met. Beyond payroll, there is an urgent need for technological integration to support the shift to digitized records and randomized, web-based inspections. Organizations must update to standardize leave accrual at the new rate of one day for every twenty worked and ensure that formal appointment letters, which are now a statutory requirement, are issued to every employee. While the manufacturing sector gains flexibility from higher retrenchment thresholds, the IT sector must focus on night-shift compliance and increased statutory outgoings. The transition requires a delicate balance between achieving regulatory compliance and maintaining industrial harmony during a period of significant compensation shifts.

Sidhant Dhingra is a Senior Partner and Kajal Gupta is Senior Associate at Foresight Law Offices India.