Adv. Harsha Swaroop P, B.E., LL.B., LL.M. (Corporate & Commercial Law)
Corporate, Projects & Regulatory
Published 11 September 2026. Last reviewed 11 September 2026. Law stated as at this date.
The labour codes change what employment costs, and the largest change is already on the balance sheet. Gratuity on fixed-term staff now accrues at one year instead of five, which for a 300-person fixed-term cohort at INR 80,000 a month is roughly INR 1.38 crore that was zero and is now not. Overtime carries a quarterly ceiling that is a limit, not a cost. Both attach to the company and its officers, not to a process.
India's four labour codes were notified on 21 November 2025, and the Central Government notified final rules under all four on 8 May 2026. Most of the commentary since has been addressed to HR. That is the wrong audience for the part that matters to an owner. Two of the changes are large enough to belong in a board conversation rather than a compliance checklist.
Under the Payment of Gratuity Act, 1972, gratuity has generally required five years of continuous service. Under the Code on Social Security, a fixed-term employee becomes eligible after one year. A period of more than six months but less than a year may be rounded up and counted as an additional year.
For a company that moved deliberately to fixed-term contracts, and many did precisely to avoid accruing gratuity, this reverses the logic of that decision. The liability the structure was designed to avoid now attaches at one year instead of five.
Take a technology services company with 300 engineers on fixed-term contracts at an average monthly wage of INR 80,000. Gratuity is fifteen days' wages for each completed year, calculated as 15/26 of the monthly wage.
15/26 x 80,000 = INR 46,154 per engineer per year
x 300 engineers = INR 1.38 croreThat is the provisioning obligation for a single year of service across the cohort. Under the five-year rule, a fixed-term population that turned over inside five years accrued nothing, so this INR 1.38 crore is not an increase on a previous figure. It is a liability that was zero and is now not.
Two things make the real number larger. Tenure past a year adds a further year's accrual each time, with the six-month rounding rule pushing partial years up rather than down. And the Code on Wages redefines "wages" so that excluded allowances cannot exceed half of total remuneration, which for many salary structures raises the base on which gratuity is calculated. A company that has kept basic pay low and allowances high will find the base moves as well as the trigger.
If finance is still provisioning on a five-year assumption, the figure in the accounts understates the liability. That is a question an auditor is entitled to ask, and the answer either appears in the accounts or does not.
Working hours are capped at eight in a day and forty-eight in a week. Overtime is payable at twice the ordinary rate. There is a ceiling of 144 hours in any quarter.
The ceiling is the part that gets missed. Overtime pay is a cost and a company can decide to bear it. The quarterly ceiling is not a cost, it is a limit, and exceeding it is a completed contravention rather than an expensive choice.
Any business that absorbs demand through sustained overtime rather than headcount, a plant against a delivery date or a services firm against a release, should know its quarterly position while the quarter is open. Discovering it afterwards leaves nothing to do about it.
Two obligations attach at sizes that growing companies cross without noticing, because nobody re-reads the threshold when they hire.
An establishment with fifty or more employees must provide a crèche. A monthly allowance of at least INR 500 per child is available as an alternative.
An establishment with twenty or more workers must constitute a grievance redressal committee.
Both are counted on current headcount, not headcount at the last policy review. A company that has grown through a funding round or an acquisition may have crossed both without a decision ever being taken.
Three deadlines in the codes are short enough that they are missed through sequence rather than intent.
Contract labour aggregators must share details of existing workers within 45 days of commencement.
Vacancy notices must be displayed at least fifteen days before a position is filled.
Transfers to the re-skilling fund following retrenchment must be made within ten days.
The exposure concentrates in working hours and contract labour. Extended shifts against production targets run into the quarterly ceiling, and the aggregator obligation requires knowing who is on the premises under whose licence, which many plants document loosely.
The gratuity change is the sharper one. Fixed-term engagement is common and the one-year trigger applies to it fully. The working-hours cap also applies, notwithstanding a culture that has long treated hours as elastic for salaried staff.
Contract labour is the workforce model rather than a supplement to it, so the aggregator disclosure timeline bites hardest where the principal employer does not hold current records of who the contractors have engaged.
Two things, and both matter more than the settled parts.
The rules position differs between the central sphere and the states, and the state-level position is not uniform. An organisation with establishments in several states may face different compliance postures for the same obligation. This is a question to determine for each specific establishment rather than to assume from national commentary, including this note.
There is also little judicial guidance yet on how the codes interact with settlements, standing orders and contractual terms agreed under the earlier statutes. Where an existing arrangement is more generous than the code requires it will generally continue, subject to the specific savings provision in the relevant code. Where it is less generous the position is more complicated than a simple rule allows, and the difficult cases will be litigated before they are settled.
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Adv. Harsha Swaroop P, B.E., LL.B., LL.M. (Corporate & Commercial Law)
Corporate, Projects & Regulatory
Published 11 September 2026. Last reviewed 11 September 2026. Law stated as at this date.
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