India’s Labor Codes Force Boardroom Rethink on Pay and Compliance

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India’s new labor codes are driving company decisions on pay structures, statutory provisioning and compliance as businesses align payroll and accounting systems for the new fiscal year.

The four codes, which took effect on 21 November 2025, consolidate 29 central labor laws covering wages, industrial relations, social security and occupational safety and working conditions.

The shift centers on redefining “wages” to limit the use of allowances in compensation structures, pushing a larger share of pay into the base for statutory calculations and increasing exposure to provident fund contributions, gratuity payouts, and leave liabilities.

Early disclosures across sectors including software, automobiles, and financial services show companies taking different approaches, with some rebalancing variable pay and allowances to manage higher statutory outgoings, while others plan to absorb the impact to avoid reducing employees’ take-home salaries.

Company disclosures have shown labor-code-related charges or provisions at Tata Technologies Ltd, Tata Elxsi Ltd, Cyient Ltd and Tata Communications Ltd, while major IT firms such as Infosys Ltd, Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd have also disclosed related provisions.

TCS said it recorded a one-time charge in the December quarter due to the new labor codes, driven mainly by higher gratuity and leave-related provisions, and said it continues to monitor the finalization of central and state rules.

“The real disruption is that roles long considered flexible or contractual may now be interpreted as formal employment under the law,” said Nitin Nahata, Group Chief Human Resources Officer at Gameskraft. “Labor compliance is no longer an HR process. It is a cost, risk, and governance decision at the board level.”

State Complexity

Implementation remains uneven across states, with many yet to notify final rules, leaving companies to rely on central guidance as they prepare for compliance.

The uneven rollout has also created interpretational gaps, with clarifications issued since December still leaving room for variation in how wage components and exclusions are applied across jurisdictions.

The changes are also forcing updates to payroll software, compliance workflows, and financial reporting, as companies align calculations and provisioning with the revised wage definition.

For businesses operating across multiple states, differing timelines and rule notifications are adding complexity, in some cases forcing parallel compliance approaches.

The Code on Wages requires basic pay to account for at least half of total compensation, compressing the room for allowances and shifting more pay into provident fund and gratuity-linked components, said Biswajeet Mahapatra, principal analyst at Forrester.

That shift also raises the risk of disputes where companies reclassify allowances to protect cost structures, with regulators and courts likely to test whether compensation design reflects substance over form, he said.

Hybrid Strain

The pressure extends beyond wage design. Legal and industry experts say the new framework does not always align neatly with how technology companies operate, particularly where hybrid work, cross-border teams, and flexible schedules have become part of their operating models.

“The labor codes aim to address the multiplicity of laws but don’t fully align with how the IT sector operates today,” said Veena Gopalakrishnan, a partner at Trilegal. “As a result, companies are left with no option but to navigate a framework that doesn’t fully recognize hybrid work, cross-border teams or flexible schedules. This creates friction between how work is done and how it is regulated.”

For employers with operations across cities such as Bengaluru, Pune and Hyderabad, state-level rulemaking is likely to create uneven compliance pressure, with some jurisdictions moving faster on inspections, digital filings and workplace requirements than others, Mahapatra said. That is increasing the need for location-specific compliance playbooks rather than a single national standard.

He said the move toward mandatory digital records, appointment letters and formal grievance mechanisms may reduce ambiguity over pay and separation. Still, it also gives regulators clearer audit trails into working hours, overtime and remote-work practices.

For companies with large hybrid workforces, that could mean greater scrutiny where informal work-from-home arrangements conflict with statutory hour limits and documentation requirements.

Industry lobby Nasscom has taken a more upbeat view, saying the eventual implementation of the codes could improve predictability and transparency for the sector through clearer rules on appointment letters, fixed-term employment, social security coverage, and grievance mechanisms.

The industry body has also said harmonizing the central framework with state-level requirements will be critical to avoid overlapping obligations and unintended compliance challenges.

Gameskraft’s Nahata said the bigger test for companies will be whether they treat the codes as a narrow compliance burden or a broader operating reset. “Companies that treat this as compliance will absorb the impact. Those that redesign their operating architecture around it will build lasting advantage.”