Labour Codes and India's continuing search for regulatory clarity

The first of a two-part series on labour Codes looks at wage definition, compliance challenges, and the road ahead

India’s long-awaited labour reforms are finally entering the implementation phase. With the final notification of rules by the Centre and states/UTs, the labour Codes will soon become fully operational. For businesses, however, the real challenge is no longer legislative change but interpreting how the new Codes will function in practice. 

The reforms seek to align labour regulation with contemporary economic realities — ensuring decent living standards and social security for employees, establishing a technology-driven labour governance framework, and reducing the heavy compliance burden of labour-related statutes, which reportedly accounted for more than 40 per cent of business-related compliances in the country. 

These measures are expected to advance labour force formalisation, strengthen manufacturing competitiveness, and simplify compliance, particularly for micro, small and medium enterprises. Yet, despite the rationalisation of the legislative framework, several provisions remain open to interpretation, prompting stakeholders — especially industry — to seek greater clarity. 

Two issues relating to the new wage definition have generated particular discussion. One concerns its implementation across the country, including the manner of wage calculation and the date from which it becomes operational. The implications are significant, as they directly affect the financial planning and cash-flow management of establishments. 

Another issue relates to the expanded applicability of minimum wages across all categories of employees. This raises a connected interpretational question of whether the statutory overtime rate will apply to all employees or only to those classified as workers under the Codes. 

This article is the first part of a two-part series examining key provisions under the labour Codes that have generated debate due to interpretational ambiguities. Part I focuses on the implications of the revised wage framework. Part II will examine other operational aspects, including the number of hours in a normal working day, social security coverage, employer liability, the use of contract labour in core activities, the inspector-cum-facilitator enforcement mechanism, and the interaction of the labour Codes with the Shops and Establishments Acts of States and Union Territories. 

Uniform definition of wages and its implications 

One of the most significant provisions concerns the definition of wages, which has been made uniform across the country for the first time. The objective is to ensure a fair wage structure while preventing the manipulation of salary components to reduce statutory liabilities. 

Earlier labour laws contained multiple definitions of wages. As a result, employers often structured salary packages in ways that kept the basic wage component low while increasing allowances. 

The Code on Wages provides a clearer framework by defining wages to include all remuneration — whether by way of salaries, allowances, or otherwise — while exhaustively listing exclusions such as bonus, house rent allowance, conveyance allowance, and employer contributions to pension or provident fund [Section 2(y)]. 

However, a proviso states that if these excluded components exceed one-half (or such other percentage as may be notified by the Central government) of total remuneration, the excess will automatically be included in the wages. This provision ensures that the basic wage remains at a reasonable level for the calculation of statutory payments relating to social security and other employee benefits. 

Treatment of unlisted allowances 

Allowances vary widely across organisations, including for senior leadership roles. Employers therefore seek clarity on how allowances not listed in the Codes should be treated when applying the one-half (or other notified) cap. 

A close reading of Section 2(y) suggests that the provision has been drafted with deliberate clarity. While the definition of “wages” is broad, the exclusions appear carefully and exhaustively listed. In practical terms, if a payment or allowance is not specifically mentioned in the exclusion list, it must be treated as part of wages. 

The design appears intentional: To prevent arbitrary classification of allowances by employers as being “outside wages” and to ensure fair treatment of employees. 

Impact on employers and financial planning 

The revised wage composition is expected to increase employee benefits. From the employer’s perspective, however, it may also lead to a higher cost to the company due to increased social security contributions and other statutory liabilities. 

Companies are confronted with the question of whether implementation should begin from 21 November 2025 — the date of notification — or whether they should wait until the final rules are prescribed by the Centre and states. 

In practice, provisions that are definitional and self-contained should be implemented without delay. The definition of wages falls squarely within this category. Although the final notification of the percentage cap is still awaited, businesses should accord immediate priority to a review of wage restructuring for all employees. 

Several large companies such as TCS, Infosys, L&T, and Tech Mahindra have already indicated that they are provisioning for the restructuring of wage components in anticipation of higher liabilities for social security payments and other employee welfare benefits. These adjustments are essentially a one-time correction arising from the revised wage structure. 

Minimum wages and overtime interpretation 

The new labour Codes also expand the scope of minimum wage protection.  

Minimum wages will now apply to all employees — skilled, semi-skilled, or unskilled — engaged in technical, operational, managerial, or administrative roles. 

Earlier, minimum wage provisions applied only to scheduled employment, leaving many employees outside the protection framework. This expansion raises a related question regarding the category of employees eligible for overtime wages. 

Under the Code on Wages, overtime is payable to “an employee,” whereas the Code on Occupational Safety, Health and Working Conditions (OSH&WC) specifies overtime payment to “a worker.” This difference in terminology has generated debate over whether managerial and supervisory employees may also claim overtime, which must be paid at not less than twice the normal rate of wages. 

To address this issue, it is necessary to understand the distinction between “employee” and “worker.” Under the Codes, a worker is defined as a person engaged in skilled, unskilled, manual, operational, technical, clerical, or supervisory work, but excludes those in managerial or administrative roles, as well as supervisors drawing wages exceeding ₹18,000 per month. This clarifies that overtime under the OSH&WC Code applies specifically to such workers. 

However, the reference to overtime wages being payable to “employee,” as mentioned in the Code on Wages, nevertheless creates some uncertainty. In the broader context of the Code on Wages, it is presumed the provision is intended primarily to safeguard wage payments across the workforce. 

At the same time, overtime provisions are historically linked to the welfare and safety of workers engaged in labour-intensive activities. Their purpose is to protect workers from excessive physical labour and to compensate them for work beyond normal working hours. Managers and senior leadership would generally fall outside this category. 

Nevertheless, employers should review employment contracts to determine whether working hours have been defined for employees, including senior leadership. 

Need for common narrative 

The implementation of the new labour Codes marks an important step towards modernising India’s labour regulatory framework and carries significant implications for the Indian economy. At this stage, it is important for a common narrative to emerge that clarifies the provisions and brings all stakeholders onto the same page as the country progresses towards a ‘Viksit Bharat’.

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