By Akash Sengar · · 6 min read
What changed and when
The Government made the four Labour Codes effective from 21 November 2025: 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, replacing 29 central labour laws (Ministry of Labour and Employment, via PIB). The Ministry's explainer note summarises the main changes, and the Codes and notifications are on the Ministry's website.
This checklist is for payroll and HR teams. It is compliance support, not legal advice. Several details depend on central and state rules; confirm your position with counsel.
1. Test the wage definition (the 50% rule)
The Codes use a single definition of "wages". It includes basic pay, dearness allowance and retaining allowance, and excludes listed items such as house rent allowance, conveyance, overtime, bonus, commission and certain contributions. The key proviso: if the excluded payments together exceed 50% of total remuneration, the excess is added back to wages.
For each salary structure (not each employee):
- List every component and classify it as included or excluded under the definition.
- Calculate excluded components as a share of total remuneration.
- If over 50%, compute the amount to add back to wages.
- Record the result and the assumptions, and get them reviewed.
2. Check the PF, ESI and gratuity base
Contributions and benefits calculated on "wages" follow the new definition. Where allowances were high and basic pay low, the base for provident fund, ESI and gratuity can increase, changing employer cost and take-home pay. Model the effect per structure, decide how you will handle any statutory wage ceilings, and communicate changes to employees before the payroll run.
3. Gratuity for fixed-term employees
Under the Code on Social Security, fixed-term employees become eligible for gratuity after one year of continuous service, on a proportionate basis, instead of five (PIB, 22 November 2025). Update your gratuity provision, your exit calculation for fixed-term contracts and your HRMS eligibility rules.
4. Appointment letters
The Codes require employers to issue appointment letters to workers (Ministry explainer). Check that every current employee, including contract and fixed-term staff, has one with the details your state's rules require, and that new joiners get one as part of onboarding.
5. Full and final within two working days
The Code on Wages requires wages due to be paid within two working days of an employee's removal, dismissal, retrenchment or resignation. This changes most exit processes, which typically allowed weeks:
- Set a hard internal deadline for final attendance, leave encashment and deductions.
- Agree in advance how asset recovery and notice-period recoveries are handled within the timeline.
- Run a monthly report of exits and final payment dates to prove compliance.
6. Overtime
Overtime must be paid at not less than twice the normal rate of wages. Check working-hour and overtime limits under your state's rules, consent requirements for overtime where applicable, and that your attendance system records the hours needed to calculate it.
7. Registers and returns
The Codes consolidate many registers and returns, and allow them to be kept electronically where the rules provide. Map your existing registers to the new formats once your state's rules are final, decide which system is the record of truth, and retire duplicates.
State rules status
Contracts, policies and communication
Payroll changes rarely stand alone. Review these alongside the calculations:
- Offer and appointment letter templates: salary structure wording, components, notice and exit terms that match the two-working-day final payment.
- Fixed-term contracts: gratuity eligibility at one year, and whether terms match those of comparable permanent staff, as the Codes expect.
- Leave and attendance policies: working hours, overtime approval and recording.
- Exit policy: clearance steps that can finish within the payment deadline, with recoveries agreed in advance.
- Employee handbook: references to repealed Acts replaced with the relevant Code.
If structures change, take-home pay may change too. Explain the reason, show an example payslip before and after, and give employees a contact for questions. Changes to service conditions can also carry notice requirements; check them with counsel before you implement.
Keep a dated record of every decision: which structures were tested, the result, what changed and who approved it. If an inspector or auditor asks later, that record is your evidence of a considered approach.
8. HRMS and payroll configuration changes
- Add a wage-definition calculation per structure, with the 50% add-back as a separate, visible line.
- Point PF, ESI and gratuity calculations to the new wage figure.
- Gratuity eligibility for fixed-term contracts at one year, prorated.
- Exit workflow with a two-working-day final pay deadline and alerts.
- Overtime at twice the normal rate, from recorded hours.
- Appointment letter template and acknowledgement tracked per employee.
- Audit trail of who changed which payroll rule and when.
Our HRMS service configures these rules in Zoho People or a custom build, and our HR consulting service helps with policies, payroll compliance and Labour Code readiness.
Common mistakes
- Testing one employee's payslip instead of every salary structure.
- Changing the wage calculation in payroll but not in the gratuity provision or exit calculation.
- Assuming a fixed-term contract shorter than five years means no gratuity.
- Keeping a 30- or 45-day full and final cycle out of habit.
- Applying central rules and forgetting that state rules may differ for each location.
- Making structure changes without telling employees why their take-home pay changed.
A sensible order of work
- Wage-definition test per structure, and cost model.
- Decision on structure changes; employee communication.
- HRMS and payroll configuration, tested on a parallel run.
- Exit process redesigned for two working days.
- Appointment letters reissued where missing.
- Registers mapped once state rules are confirmed.
This guide is general guidance, not legal advice.
