Labour Code draft rules clarify doubts, concerns still remain

Draft rules under India's four Labour Codes clarify wages and gratuity calculations, extend social security, but smaller firms still face implementation concerns

The notification of the draft rules for the four new Labour Codes unlocks the next and most important part of the reform process — how companies interpret them, according to domain experts. After the enforcement of the four new Labour Codes on November 21, the Labour Ministry pre-published the draft rules on Wednesday, following consultations with relevant stakeholders.

 

How will stakeholders participate in finalising the rules? 

The government has sought objections and suggestions from all stakeholders within 30–45 days of the notification of the rules. Once that happens, the Labour Ministry will notify the finalised rules, which are essential to make the laws fully effective.

   

What are the concerns for smaller firms? 

“While it is essential to provide social security to informal workers and gig workers, whether smaller firms will be able to make increased contributions is an area of doubt,” said Bornali Bhandari, professor at National Council of Applied Economic Research.

 

How does the draft clarify wage calculations? 

The draft rules clarify that ‘wages’ will include basic pay, dearness allowance, and retaining allowance, if any. “If the allowances (except gratuity and retrenchment compensation) exceed 50% of all remuneration, the excess amount shall be added back to wages,” says an FAQ published by the Labour Ministry. Performance-based incentives, Employee Stock Option Plans (ESOPs), and variable or reimbursement-based payments to the employee will not be included in ‘wages.’

 

What guidance is provided on gratuity? 

Gratuity payments have been clarified such that an employee will get 15 days’ worth of wages if they have completed more than six months of service, since a period longer than six months will count as a full year. For example, a worker completing a year and seven months will get 30 days’ worth of wages, as it counts as two full years.

 

Who is excluded from the definition of a worker? 

The rules clarify that a person employed in a supervisory capacity drawing wages exceeding Rs 18,000 (or an amount notified by the central government from time to time) is not included in the definition of a worker.

 

When will these rules apply?

  The FAQs state that the definition of wages and calculation of gratuity will apply prospectively from November 21, 2025, when the Codes were enforced. Until states notify final rules, the old rules will remain in force, to the extent these align with the Codes.