India's newly introduced labour codes, effective November 21, 2025, are poised to usher in monumental changes across various aspects of the country's employment landscape, including employee benefits, working conditions, hiring models, and enforcement mechanisms. A report by Ernst & Young (EY) underscores the profound impact these reforms will have, aiming to simplify labour regulations and enhance workplace governance by merging 29 existing labour laws into four comprehensive codes.

A significant reform detailed by the EY report is the new system for categorising employees and workers. Under the new framework, the term "employee" broadly covers all workers, irrespective of their role, level, nature of duties, or salary. Conversely, the term "worker" specifically applies to individuals engaged in manual, unskilled, skilled, technical, operational, clerical, or supervisory functions. Notably, supervisory staff earning more than ₹18,000 per month are explicitly excluded from the "worker" category. This re-categorisation carries substantial implications for areas such as overtime, leave encashment, contract labour, retrenchment, and dispute resolution processes.

The four comprehensive codes that replace earlier workplace legislations are The Code on Wages, 2019; The Code on Social Security, 2020; The Occupational Safety, Health and Working Conditions Code, 2020; and The Industrial Relations Code, 2020. These new codes supersede a multitude of previous acts, including the Minimum Wages Act, the Payment of Wages Act, the Factories Act, and the Industrial Disputes Act, among others, streamlining the regulatory framework.

Another pivotal shift highlighted is the revised definition of "wages," which directly impacts employee compensation structures. The new definition encompasses all salary components expressed in monetary terms. However, certain elements such as conveyance allowances, House Rent Allowance (HRA), bonuses, and overtime payments are part of an exclusion set. Crucially, these exclusions cannot exceed 50 percent of the total remuneration, thereby mandating that the basic wage must constitute at least half of an employee's total salary. As a direct consequence, statutory payments like Provident Fund (PF) and gratuity are expected to increase, leading to higher costs for employers and, concurrently, a reduced take-home salary for employees.

Beyond wage definitions, the codes introduce several other significant changes to employee benefits. Gratuity eligibility is now extended to fixed-term employees upon completing one year of service, aligning their benefits more closely with permanent staff. Overtime payments will now be applicable for work exceeding 8 hours a day or 48 hours a week, establishing clear guidelines for compensation for extended work hours. Furthermore, leave encashment provisions will apply at the end of each calendar year, ensuring employees can monetize unused leave.

The new framework formally recognizes flexible hiring models, particularly fixed-term employment. These employees must now receive the same wages and benefits as their permanent counterparts, with no restrictions imposed on the number or duration of such hires, providing greater flexibility for employers while protecting employee rights. Regulations for contract labour have also been significantly tightened, including restrictions on their employment in core activities (with specified exceptions) and placing statutory responsibility squarely on the principal employer.

Enforcement and compliance mechanisms are also strengthened. The codes introduce online inspection schemes to enhance transparency and efficiency. Employers face stricter compliance responsibilities, and provisions for prosecution have been introduced for repeated violations, aiming to deter non-adherence. Empowering employees, the new framework allows them to directly file complaints in court, ensuring greater access to justice.

Given these comprehensive changes, the EY report advises organizations to proactively redesign payroll structures, revise the classifications of their workforce, update internal controls, and thoroughly review all human resources policies to ensure full alignment with the new provisions of the labour codes.