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Impact of New Wage code on salary structuring & social security benefits

On 21 November 2025, the Government of India implemented a historic labour law reform by consolidating 29 (twenty-nine) legacy labour laws into 4 (four) unified Labour Codes, namely: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. This reform streamlines complex and overlapping legal provisions into a simplified and efficient regulatory framework, supported by digital initiatives such as unified registration, a single return, and the single license concept, thereby reducing the regulatory burden on employers.

Few key points to be considered from financial impact, process and documentation perspective are highlighted below:

• 50% Wage rule: The unified definition of “wages,” which includes all remuneration paid to an employee, comprising basic pay, dearness allowance, and retaining allowance, while excluding certain allowances, provides that any amount exceeding 50% (fifty percent) of the total remuneration is added back to wages. This definition applies uniformly across all four Labour Codes. This simply means that Excluded components should not exceed 50% of the total remuneration of an employee.
• Salary Structuring: Organizations are required to undertake a one-time salary structuring process to ensure that excluded components are less than 50% of the total remuneration & hence a detailed review of all components of salary would be essential.
• Issuing new amendment letters of employment: Once the revised salary structure is finalized, updated salary letters reflecting the revised compensation structure need to be issued to all employees.
• Review & updation of Company HR & payroll policy: Organizations are required to update & amend the employee handbook & Company’s policies in relation to leave, working hours, overtime etc. to ensure compliance with the new Code.
• Revision in social security benefits: Since social security benefits like Provident Fund & ESIC are linked to wages & not basic pay under the new code, these benefits will undergo a change in the amount of deduction as well as Employer’s contribution.
• Revision in retiral benefits: Since retiral benefits like Gratuity & leave encashment are linked to wages & not basic pay under the new code, these benefits will undergo a change.
• Additional impact in current year: Since the Gratuity & leave encashment provisions are based on last drawn wages, a change in definition of wage would result in additional one – time impact towards accrual of these expenses based on actuarial valuation report.
• Section 124 of the Code on Social Security: An employer cannot directly or indirectly reduce the wages if the coverage is above 50% to ensure compliance with the new code. If the wage coverage is above the required criteria of 50%, then no change to salary structure is an advisable option.
• Relaxation in Gratuity term for FTE’s: Fixed term employee is also entitled to gratuity if completes 1(one) year of service. Gratuity to be paid on pro-rata basis to fixed term employees. For others it continues to remain the same as under the existing provisions of the Payment of Gratuity Act, 1972 i.e. 5(five) years.
• Key Maternity Benefits: The Code retains the provision of 26 (twenty-six) weeks paid leave, rights for adopting mothers and commissioning mothers for 12 (twelve) weeks paid leave and the provision for mutually agreed work from home arrangements after availing the maternity benefits.

Considering the key points mentioned above, here’s how we can plan effectively:

• Early Planning: Planning to understand the implications of various changes can ensure that organizations are compliant with the new Code in a timely manner.
• Liaising effectively with various stakeholders: It is recommended that all the stakeholders like HR head, CFO, payroll consultants, HR consultants & actuaries are engaged to ensure effective coordination for implementation.
• Organizing Drive with employees: It is recommended that employees are informed about the changes in the Code to ensure once the change is implemented in the Company policy as well as CTC structures, there is less confusion & queries from the employees.

The New Labour Code marks a major shift in India’s labour law framework by consolidating numerous existing labour laws into four comprehensive codes. It introduces significant changes in areas such as wages, industrial relations, social security, and occupational safety, with the objective of creating a more uniform, transparent, and business-friendly regulatory environment while ensuring consistency in labour compliances.

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