Clear interpretation key to labour Code success in India's reform journey

The second of the two-part series looks at working hours, employer responsibilities and compliance

The new labour Codes are entering a crucial phase of implementation. These historic reforms aim to create a more productive labour force, strengthen industrial competitiveness and reduce compliance burden, thereby attracting greater investments and placing India on a stronger growth trajectory. 

Yet, despite this landmark legislation, interpretational challenges surrounding certain provisions continue to pose dilemmas for stakeholders. This article is the second part of a two-part series examining key provisions under the labour Codes that have attracted considerable debate, to give an analytical view to help clarify these issues. 

Part 1 discussed the revised definition of wages and the compliance implications of its implementation, including the treatment of allowances and eligibility for overtime payments. This article examines questions relating to working hours, employer liability for social security coverage and the use of contract labour in the core activities of an establishment. 

Number of hours in a normal working day 

Under the Factories Act, 1948, workers were limited to nine hours of work per day and 48 hours per week. The Occupational Safety, Health and Working Conditions Code, 2020 (OSH&WC Code) defines hours of work under Section 25(1) as eight hours a day, with intervals and spread-overs to be notified by the appropriate government. 

A normal working day is understood to include eight hours of work (as defined in OSH&WC Code), along with rest breaks and spread-over intervals. Accordingly, appropriate governments may prescribe the overall duration of a working day. 

Some commentators rely on Section 13 of the Code on Wages, 2019, which empowers the appropriate government to fix the number of hours in a normal working day inclusive of specified intervals. 

The matter needs to be seen holistically in the light of Section 27 of the OSH&WC Code governing overtime payments. The provision requires wages for overtime work to be paid at twice the rate of wages, calculated on a daily or weekly basis — whichever is more favourable to the worker. Consent of workers is required for overtime work. 

ESI coverage and implementation timeline 

With the revised wage definition, a larger number of workers will become eligible for Employees’ State Insurance (ESI) benefits. A frequently raised question is whether compliance should begin from the notification date of the Codes or only after the rules are finalised. 

Since the relevant provisions are self-explanatory and not dependent on subordinate rules, ESI compliance for newly eligible workers would presumably become effective from 21 November, 2025. 

The employee contribution towards ESI is only 0.75 per cent of wages and therefore has a limited impact on take-home pay, particularly when viewed against the wide range of benefits available under the ESIC scheme. These include comprehensive medical care for employees and their families without a cap on benefits, along with sickness benefits amounting to 70 per cent of average daily wages for up to 91 days in a year. 

Liability of employers 

The labour Codes place significant responsibility on employers with regard to contract labour. Under Section 16 of the Code on Social Security (CoSS), the employer is responsible for ensuring payment of provident fund contributions for employees, whether directly employed or engaged through contractors. 

Violation of this provision attracts penalties under Section 133 of the CoSS, including imprisonment for up to three years and a fine. This provision is notable because several other violations under the Code provide for either imprisonment or a fine. Employers must therefore exercise particular diligence in monitoring compliance. 

Employers must also ensure adherence to safety provisions under the OSH&WC Code, especially in relation to hazardous

processes where similar penalties apply. 

Contract labour in core activities

  Another debated provision concerns restrictions on employing contract labour in the core activities of an establishment. Section 57(1) of the OSH&WC Code prohibits the engagement of contract labour in core activities while simultaneously providing several relaxations. 

While this may appear contradictory, the intention of the provision is clear. It seeks to encourage more stable employment with greater social security for workers, while recognising the widespread contractualisation in Indian industry. 

Approximately 42 per cent of the organised manufacturing workforce is engaged as contract labour (ASI, September 2025), which explains the broad relaxations provided in the Codes. 

Many micro, small and medium enterprises (MSMEs) — particularly those supplying components to the automobile sector — depend heavily on contract labour. Similar practices exist in several central public sector undertakings in sectors such as steel, telecommunications and oil terminals, where contract workers often receive attractive social security benefits. 

The relaxation provisions therefore appear designed to avoid disruption to established production systems and supply chains. 

To minimise interpretational ambiguity during enforcement, documentary records such as past labour returns, employer registrations and contractor licences issued under earlier labour laws may serve as evidence of the legitimate engagement of contract labour in the core activities of an establishment. 

Inspector-cum-facilitator framework 

The introduction of the Inspector-cum-Facilitator framework represents an important shift in labour governance. Inspectors are expected to facilitate compliance rather than focus solely on enforcement. 

Once the rules are finalised, inspectors are expected to issue compliance checklists and assist establishments in building systematic compliance frameworks. However, repeated violations will still attract penalties. 

Digital platforms such as the Shram Suvidha portal will play a central role. Inspectors are expected to upload inspection reports within a specified time frame, while employers will report compliance through the same portal—enhancing transparency and accountability. 

Inspections will also be conducted through web-based random selection based on risk profiling of establishments, reducing subjective or discretionary elements. 

Interaction with state Shops and Establishments acts 

Another layer of labour regulation that continues alongside the new Codes is the Shops and Establishments Act of individual states and Union Territories. 

With the labour Codes establishing a harmonised national framework, questions may arise regarding potential conflicts between these laws. In cases of inconsistency, the labour Codes — being Acts of Parliament — will prevail. 

Moreover, the original rationale for separate Shops and Establishments legislation seems to have diminished, as the labour Codes now cover establishments with 10 or more workers, as well as segments of the unorganised sector employing fewer than 10 workers. States may therefore need to amend their Shops and Establishments Acts to align with the new labour law framework. 

Striking a balance 

The new labour Codes represent a significant structural reform aimed at simplifying India’s labour law architecture while strengthening worker protections. Their success will depend not only on the legislative framework but also on clarity in interpretation, consistency in enforcement and the preparedness of businesses to realign their compliance systems. 

As companies restructure wages, review employment contracts and adapt to the new compliance architecture, the coming years should hopefully demonstrate the success of the labour Codes in balancing ease of doing business with the objective of ensuring decent work and social security for India’s workforce.

---

The writer is a former Union labour secretary. Views are personal