The Four Labour Codes, Ten Months In: What Employers Got Wrong About the 50% Wage Rule

The four Labour Codes — 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 — consolidated twenty-nine central labour statutes and came into force nationally on 21st November 2025. We are now roughly ten months into the new regime, which is exactly the point at which the early confusion has settled and the practical mistakes have become clear. Most of the businesses we advise in Raipur got the headline change — the new wage definition — broadly right. Where they are still tripping up is in the second-order effects it has on gratuity accrual, PF contribution base, and overtime computation, none of which move in the direction most payroll teams initially assumed.

The Wage Definition Overhaul

Under the earlier regime, "wages" was defined differently across the Payment of Wages Act, the EPF Act, the Payment of Gratuity Act, and the Employees' State Insurance Act — a fragmentation that let employers structure a meaningful share of compensation as allowances excluded from each Act's respective wage base. The Code on Wages closes that gap with a single, uniform definition applied across all four Codes.

The mechanics: wages now means basic pay, dearness allowance, and retaining allowance where applicable — but with a statutory cap on exclusions. Specified allowances (HRA, conveyance, overtime, bonus, commission, and similar components) can be excluded from the wage base only up to 50% of total remuneration. If excluded allowances exceed that 50% ceiling, the excess is added back into "wages" for the purpose of computing PF, gratuity, and other statutory dues. In practice, this means:

• A CTC structure that was built to keep basic pay artificially low (say, 25–30% of gross) and push the rest into HRA, special allowance, and other exempt heads is no longer effective. The wage base for PF and gratuity is now the higher of actual basic-plus-DA, or 50% of total remuneration — whichever computation yields the larger figure.
• Overtime allowance is included within the 50% wage calculation, while statutory contributions (employer's own PF/ESIC contribution) and gratuity itself are excluded from the remuneration base used to test the 50% threshold. Several payroll consultants initially read this the other way; the correct treatment excludes only statutory contributions and gratuity, not overtime.

What This Actually Does to Take-Home Pay and Cost-to-Company

The net effect for most salaried employees on a conventional Indian CTC structure is a higher statutory wage base, which cuts both ways:

• PF contribution rises — both the employee's 12% deduction and the employer's matching contribution — because the deemed wage base for PF purposes is now larger for employees whose basic pay was previously structured below the 50% threshold.
• Take-home pay falls correspondingly, since a larger PF deduction comes straight off the monthly payout.
• Gratuity accrual improves at separation or retirement, since gratuity is computed on the same expanded wage base.

For an employer, this is a real cost increase on the employer's PF contribution line, not merely a payroll reclassification exercise. Businesses that ran their FY 2025-26 budgets on the old CTC structuring assumptions and have not revisited employer contribution costs since 21st November 2025 are very likely understating their actual statutory payroll cost for the remainder of the year.

Gratuity: The Fixed-Term Employee Change

This is the change with the widest practical reach, because it affects every business that uses fixed-term or contractual staff rather than only permanent employees. Under the earlier Payment of Gratuity Act, eligibility required five years of continuous service — a threshold fixed-term employees rarely met before their contract ended. Under the new regime:

• Fixed-term employees become eligible for gratuity after just one year of continuous service, computed proportionately for the actual period served.
• Permanent employees continue to be governed by the five-year threshold.

This is a genuine structural shift for sectors that lean heavily on fixed-term contracts — manufacturing units running seasonal or project-based hiring, and services businesses using annual renewable contracts. Gratuity liability now needs to be budgeted and, where the workforce is large enough, actuarially provided for on a materially shorter time horizon than before.

Industrial Relations Code: The 300-Worker Threshold

For establishments that qualify as an "industrial establishment" under the Industrial Relations Code, 2020, two long-standing thresholds moved from 100 workers to 300 workers:

• Standing Orders: Establishments with 300 or more workers must prepare and get standing orders certified, covering classification of workers, working hours, leave, and disciplinary conditions. Establishments below that headcount are outside the mandatory standing-orders requirement.
• Prior permission for layoff, retrenchment, and closure: The requirement to obtain government permission before laying off or retrenching workers, or closing the establishment, now applies only at 300 or more workers — up from the earlier 100-worker trigger.

For a mid-sized manufacturing unit in Urla or Bhanpuri that has historically stayed just above 100 workers and structured its HR compliance around that older threshold, this is a genuine relaxation — but it is worth confirming actual current headcount against the new 300-worker line rather than assuming the old compliance posture is now over-engineered without checking.

The Code also formally recognises fixed-term employment as a distinct category for the first time in central industrial law, extending to fixed-term workers the same statutory benefits — wages, working hours, and now gratuity, per the change above — as permanent employees doing comparable work, without the job security protections that attach to permanent status.

A Compliance Checklist for the Remainder of FY 2025-26

1. Re-run the CTC structure for every employee whose current basic pay sits below 50% of gross remuneration, and confirm PF and gratuity are being computed on the correct (higher) wage base.
2. Recompute employer PF contribution cost for the current financial year against the actual post-21st-November wage definition, not the pre-Code assumption the annual budget may still be running on.
3. Audit the fixed-term employee register for anyone who has now crossed one year of continuous service and has become gratuity-eligible for the first time.
4. Confirm the establishment's actual worker headcount against the new 300-worker threshold before assuming standing orders or prior-permission requirements do or don't apply.
5. Update offer letters and appointment terms to reflect the codified wage definition, since ambiguous CTC structuring in a fresh appointment letter is now more likely to be read against the employer on a dispute.

Practitioner Note: The most common mistake we are correcting at this stage is not ignorance of the 21st November 2025 commencement date — every HR team we have spoken with knows the Codes are in force. It is under-appreciating that the 50% wage rule is a live payroll recalculation exercise, not a one-time compliance checkbox. Every increment cycle, every new fixed-term contract, and every CTC restructuring proposal now needs to be tested against the 50% threshold before it is finalised, not after.

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