The four Labour Codes and the 50% wage rule: what changed for small employers
India’s four Labour Codes came into force on 21 November 2025. The change most likely to touch a small firm is a new definition of "wages" that quietly re-bases what you owe on gratuity and PF.
After years of drafts, India’s four Labour Codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security and the OSH Code — were brought into force on 21 November 2025, replacing 29 older central labour laws. For a small firm the headlines (four-day weeks, 300-worker thresholds) mostly do not apply. One quieter change does.
A single new definition of "wages"
All four Codes now share one definition of "wages" (Section 2(y) of the Code on Wages). It includes basic pay, dearness allowance and retaining allowance, and excludes eleven listed heads — HRA, conveyance, overtime, commission, employer PF contribution, bonus, gratuity and more. The catch is the first proviso: if the excluded allowances add up to more than 50% of total remuneration, the excess is added back into "wages." Structure a salary as mostly allowances, and the law re-bases it for you.
The Labour Ministry’s own worked example
The Ministry’s FAQ gives the arithmetic: on total pay of Rs 76,000 with basic + DA of Rs 20,000, allowances of Rs 40,000 and other components of Rs 16,000, half of total pay is Rs 38,000; the allowances exceed that by Rs 2,000, so Rs 2,000 is added back — statutory dues are then computed on wages of Rs 22,000, not Rs 20,000. Gratuity and retrenchment compensation sit outside the 50% test itself.
Where it actually bites
The effect is that anything calculated on "wages" — gratuity, bonus, leave encashment, PF — rises when a firm has leaned on allowances. But note the ceilings: mandatory PF is still capped at the Rs 15,000 wage ceiling (about Rs 1,800 a month), so the 50% rule’s PF impact is limited. The real increase for a small employer usually shows up in gratuity (uncapped, 15 days’ wages per year) and ESI (up to the Rs 21,000 ceiling).
Two more things a small firm should know
- Appointment letters are now mandatory. The OSH Code requires a letter of appointment for every employee in a 10-plus establishment, and existing staff without one had to be issued one within three months of commencement.
- Fixed-term staff earn gratuity at one year. A fixed-term employee is now eligible for gratuity after one year of service (not five), paid pro-rata, and must get the same wages and benefits as a permanent worker doing the same job.
The takeaway
The Codes are in force, but for most small firms the operative change is the 50% wage rule: allowance-heavy salaries get re-based, lifting gratuity and (up to their ceilings) PF and ESI. Review your salary structure, issue appointment letters, and remember gratuity now starts at one year for fixed-term staff.
General awareness only, accurate to the best of our research as of August 2026 — not legal, tax or HR advice. The Codes are in force but many subordinate rules are still being notified, and for most small businesses the day-to-day rules come from the STATE, most of which were still at draft stage at the time of writing. A proposed rise in the EPF wage ceiling to Rs 25,000 was under consideration but not yet in effect. Confirm the position for your state and establishment with your consultant.
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