Labour Codes face friction from state law overlaps, says experts

Overlaps between Labour Codes and state laws on working hours, leave and overtime may create compliance uncertainty, especially for firms operating across multiple states

Overlaps between the Labour Codes and state-level Shops and Establishments Acts on key provisions such as working hours, overtime, leave and leave encashment are expected to create continued compliance uncertainty for companies, experts said.

 

The issue arises from the parallel applicability of central and state laws, with states continuing to frame rules on key aspects of employment. While the Labour Codes lay down a broad framework, variations across state laws have resulted in differing thresholds and conditions, requiring companies, especially those operating across multiple states, to navigate multiple standards simultaneously.

 

“The uncertainty of dual compliance of Labour Codes and State Shops legislations still continues. Matters relating to working hours, overtime, leave and encashment thereof have separate stipulations under the Labour Codes. This will potentially result in either overcompliance at higher cost or increase the risk of non-compliance,” said Pooja Ramchandani, partner at Shardul Amarchand Mangaldas & Co.

 

The Shops and Establishments Acts are state-specific labour laws that govern working conditions in commercial establishments such as offices, shops and restaurants, covering areas like working hours, overtime, leave and holidays. Since each state prescribes its own rules, these laws often vary across jurisdictions, covering areas such as working hours, overtime, leave and holidays, opening and closing hours, and conditions of employment.

 

Puneet Gupta, partner, People Advisory Services - Tax, EY India, said that a key concern is the overlap between the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), and state Shops and Establishments Acts, with the Code applying specifically to “workers” as defined under the labour laws, while state Acts cover “employees” or “workers” based on their own definitions, which vary widely across states in terms of coverage, exclusions and wage thresholds.

 

“This may create issues where different provisions may apply to different categories of people within the same establishment. Further, key aspects such as daily and weekly working hours, overtime eligibility triggers, maximum overtime limits, and rest intervals differ materially across states under S&E Acts when compared with the uniform baseline contemplated under the OSHWC Code,” added Gupta.

 

Industry associations have raised these concerns with the labour ministry and are awaiting clarifications, according to people aware of the matter.

 

“While the Labour Codes provide for eight working hours per day and 48 hours per week, with flexibility in spread-over, several state Shops and Establishments Acts currently prescribe stricter daily limits or more restrictive spread-over conditions, which can create practical uncertainty for employers when designing work schedules,” said Ankur Jain, partner and leader, Regulatory and Business Solutions at PwC India.

 

Jain noted that divergences are also evident in leave and overtime provisions. While the Labour Codes permit earned leave accumulation up to 30 days and allow encashment beyond this limit, certain state laws allow higher accumulation or carry-forward limits but do not permit annual encashment in most cases. Similarly, the Codes allow up to 144 hours of overtime per quarter with worker approval, whereas some states prescribe lower caps, he added.

 

This comes as the rollout of the Labour Codes remains incomplete, with final rules yet to be notified. While the Codes came into effect in November 2025 and draft rules were issued in December, the final rules, which are expected to provide operational clarity, have been delayed. Although the government had earlier indicated a notification by the end of FY26, it remains pending as companies continue to operate under evolving provisions.

 

Aarti Raote, partner at Deloitte India, also highlighted the mismatch between state rules and the central Labour Codes, citing Karnataka’s provision allowing carry-forward of up to 45 days of leave compared to the 30-day cap under the Codes.

 

Gupta added the overlap could increase compliance complexity for multi-state companies, requiring them to adopt state-specific policies or higher uniform standards to reduce legal risk, and where conflicts persist, central law would prevail over state law under Article 254 of the Constitution.

 

“To mitigate disputes and regulatory risk, many employers are therefore likely to adopt a more employee-friendly or conservative standard. Although this may increase compliance costs in the short term, it can also promote greater consistency, enhance employee trust, and offer stronger long-term legal certainty across their operations,” added Jain.

 

While most states have published draft rules under the Labour Codes, final notification remains pending in several states, with implementation continuing to be staggered across jurisdictions. Some states such as West Bengal are yet to publish draft rules under the Labour Codes, while others like Tamil Nadu have issued draft rules for select Codes but not all.