New Labor Laws in India 2022: An Essential Guide

The Central Government of India has codified 29 central labor laws into four codes to streamline and simplify the labor regulations in the country. Explore the implications of the changes and what impact they will have on the workforce.

Labor Laws in India: A brief Introduction 

In India, labor laws are a set of laws that regulate the relationship between employers and employees in the country. The idea of having labor laws in India is to ensure that employers and employees have a fair and equitable relationship, with workers being treated fairly and given the protections they need to work safely and with dignity. These laws cover a wide range of issues, including wages, working hours, leave entitlements, working conditions, and health and safety. One of the key principles of labor laws in India is the principle of fair wages, which requires employers to pay workers a fair and reasonable wage for their work. This includes both a minimum wage, which is set by the government and applies to all workers in a particular industry or occupation, and a living wage, which is based on the cost of living in a particular area and is sufficient to meet the basic needs of a worker and their family. 

Labor laws in India also regulate working hours and leave entitlements for workers. The Factories Act, for example, sets out the maximum number of hours that workers can be required to work in a day and a week, as well as the breaks that must be provided to workers. Similarly, the Maternity Benefit Act provides for paid maternity leave for women who are pregnant or have recently given birth. In addition to these provisions, labor laws in India also establish protections for workers in relation to working conditions and health and safety. The Industrial Disputes Act, for example, requires employers to provide a safe and healthy working environment for their employees, and the Factories Act sets out detailed requirements for the maintenance of machinery and equipment in factories. 

Learn More: Infographic: New Labor Laws in India 2022 at a Glance 

The History and Evolution of Indian Labor Laws 

 Labor laws in India date back to the early 20th century. The first labor law in India was the Trade Union Act of 1926, which recognized the right of workers to form unions and bargain collectively for better wages and working conditions. This was followed by the Industrial Disputes Act of 1947, which established the authority of labor courts and tribunals to resolve disputes between employers and employees. In the 1950s and 1960s, a number of other labor laws were enacted in India, including the Minimum Wages Act (1948), the Payment of Wages Act (1936), and the Employees' Provident Funds and Miscellaneous Provisions Act (1952). These laws established minimum wages for workers, regulated the payment of wages, and provided for the payment of social security benefits such as provident fund contributions. 

In the 1970s and 1980s, a number of additional labor laws were enacted in India, including the Payment of Gratuity Act (1972), the Maternity Benefit Act (1961), and the Child Labor (Prohibition and Regulation) Act (1986). These laws provided for the payment of gratuity to workers upon the termination of their employment, established entitlements for maternity leave, and prohibited the employment of children in certain hazardous occupations. 

Since the 1990s, labor laws in India have continued to evolve and are regularly amended to reflect changing economic and social conditions. In recent years, there has been a push to modernize and streamline labor laws in India, with a focus on simplifying compliance and promoting greater flexibility in the labor market. However, labor laws in India remain a complex and often controversial area, with ongoing debates about the balance between protecting workers' rights and fostering economic growth. 

Why Are the Labor Laws in India Being Reformed? 

There are currently around 29 labor legislations in India that deal with labor and employment regulations. Each of these Acts has a corresponding set of Rules that specify procedural requirements. The origins of some of the pre-existing labor laws in India may be traced back to the British Raj. Lacking relevance and effectiveness in contemporary times, these laws were ineffective in protecting the interests of the workforce in the country.  

What Is the Status of the New Labor Laws in India? 

The Parliament passed the Code on Wages in August 2019. With the passing of the three remaining codes in 2020, the four codes are set to subsume 29 central labor laws. Labor Laws fall under the Concurrent List of the Constitution of India, which means that both Central and State Governments have the power to notify rules under the codes; however, the Central Government reserves the right to frame laws for certain issues. At the time of writing this (September 2022), 23 states and Union Territories have framed the rules under all four codes.  

What Is the Timeline for Implementing the New Labor Codes in India? 

The New Labor Laws in India were expected to be rolled out on Jul. 1, 2022, for all organizations registered under the ministry of corporate affairs. Prashant Singh, the Vice President and Business Head of Compliance and Payroll Outsourcing at TeamLease Services, has noted that the shutdown of the state labor ministries, owing to the COVID-19 pandemic, is the primary reason for the delay in the implementation of the new laws. “The draft central rules have not yet been published as final rules. Most of the state governments copy the central rules and we have seen that many questions have not yet been clarified or answered in the draft central rules, hence states are awaiting clarification from the Centre before they start drafting their rules,” he said.

What Will Be the Impact of India’s Labor Laws Reforms on Companies? 

The labor law reforms will have a significant impact on businesses in India, and organizations need to apply effective change management to comply with them. The changes in the composition and payment schedules of wages will affect the payroll structure throughout the organization. The configuration of new overtime, shift, and leave policies, along with accommodating the changes in working hours, will require organizations to implement effective workforce management. They will need to prepare for the implementation by evaluating the impact of the reforms and framing internal policies, processes, and structures that are compatible with the changes under the laws. All functional units in organizations would need to work in tandem to build a truly future-ready foundation. The reforms to the Indian Labor Laws are expected to evolve continuously over the next few years. Therefore, the need for implementation will keep arising.

How Are the Labor Laws in India Being Reformed? 

The Ministry of Labor and Employment of the Central Government of India is planning to implement a set of four labor codes in India aimed at streamlining and simplifying the labor regulations in India. The new labor laws in India will subsume 29 central labor laws into four labor codes which have been categorized as: 

1. The Code on Wages, 2019 
2.  The Industrial Relations Code, 2020 
3. The Occupational Safety, Health and Working Conditions Code, 2020 
4. The Code on Social Security, 2020  

Let’s have a quick look at each of the codes. 

The Code on Wages, 2019 

The Code on Wages aims to simplify and consolidate the existing laws related to wages and bonuses in the country. It replaces four existing labor laws:  

• The Minimum Wages Act, 1948 
• The Payment of Wages Act, 1936 

• The Payment of Bonus Act, 1965 
• The Equal Remuneration Act, 1976 

The Code on Wages seeks to provide a more comprehensive and unified framework for regulating wages and bonuses in India. It applies to all employees in both the public and private sectors and sets out the minimum wages that must be paid to workers, as well as the processes for fixing and revising minimum wages. 

One of the key features of the Code on Wages is that it provides for the establishment of a National Minimum Wage, which will apply to all workers in the country, regardless of the industry or occupation in which they work. This is intended to ensure that workers across India receive a basic level of pay that is sufficient to meet their basic needs. The minimum wage fixed by the State Government cannot be less than the floor wage fixed by the Central Government. The Code also regulates the payment of wages to workers, including the frequency of payment and the deductions that can be made from wages. It also requires employers to maintain records of wages and to provide workers with pay slips. 

Further, it sets parameters for overtime. The maximum number of overtime hours has been increased from 50 hours to 125 hours in a quarter across all industries and workers shall receive twice the rate of their wages for overtime.  The code also lists the components which shall be included and left out of the definition of ‘wages’ and further stipulates that the employee's basic salary must be at least 50% of their gross salary. At least 50% of the total remuneration must be considered 'wages' for calculating social security contributions. 
Overall, the Code on Wages is an important piece of legislation that aims to ensure that workers in India are fairly compensated for their work and are protected from exploitation by their employers. 

Learn More: Code on Wages, 2019: A Quick Overview

The Industrial Relations Code, 2020 

The Industrial Relations Code replaces three existing labor laws:  

• The Industrial Disputes Act, 1947 
• The Trade Unions Act, 1926 
• Industrial Employment (Standing Orders) Act, 1946. 

The Industrial Relations Code provides a framework for regulating industrial relations in India. It applies to all industries and occupations in both the public and private sectors and sets out the rights and obligations of employers and employees in relation to issues such as strikes, lockouts, and the settlement of industrial disputes. 

The Industrial Relations Code sets out the process for the recognition and registration of trade unions and establishes the rights and responsibilities of trade unions in relation to collective bargaining and the resolution of disputes. It also provides for the establishment of labor courts and tribunals to resolve industrial disputes and enforce the provisions of the code. It further establishes fixed-term employment has been given a legal basis, and fixed-term workers are to be considered equal with permanent employees, concerning working conditions, wages, allowances, and other benefits. Provisions regarding the configuration and notice period for strikes, lockouts, shifts, and the establishment of a reskilling fund are also laid down under the Industrial Relations Code. 

The Occupational Safety, Health and Working Conditions Code, 2020 

The Occupational Safety, Health and Working Conditions Code replaces 13 existing labor laws, including the Factories Act, 1948, the Mines Act, 1952, and the Plantations Labor Act, 1951. The code aims to ensure that workers in India are protected from hazardous working conditions and are able to work safely and with dignity. It provides a framework for regulating the rights and obligations of employers and employees in relation to issues such as working hours, leave entitlement, and health and safety. 

The Occupational Safety, Health and Working Conditions Code sets out detailed requirements for the maintenance of machinery and equipment, and for the provision of safe and healthy working conditions in the workplace. It also provides for the establishment of health and safety committees and the appointment of safety officers to ensure compliance with the provisions of the code. 

The code regulates the working hours of workers, including the maximum number of hours that workers can be required to work in a day and a week, and the breaks that must be provided to workers. It establishes the entitlements of workers to leave, including annual leave, sick leave, and casual leave. It also sets out the procedures for applying for and granting leave. The code also acknowledges ‘work from home’ as an important practice in contemporary work culture. Further, it lays down rules and regulations for the retrenchment and termination of employees. 

The Code on Social Security, 2020 

The Code on Social Security replaces nine existing labor laws, including the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, the Employees' State Insurance Act, 1948, and the Maternity Benefit Act, 1961. It sets out the rights and obligations of employers and employees in relation to issues such as provident fund contributions, health insurance, and maternity benefits. 

One of the key features of the Code on Social Security is that it provides for the establishment of a National Social Security Board, which will be responsible for the administration of social security schemes and the disbursement of benefits to workers. The code also establishes the authority of the Employees' Provident Fund Organization and the Employees' State Insurance Corporation to oversee the implementation of the social security schemes established under the code. 

The Code on Social Security sets out the process for the payment of provident fund contributions by employers and employees and establishes the entitlement of workers to receive benefits from the provident fund upon the termination of their employment. It also provides for the payment of health insurance benefits to workers and their dependents and establishes the entitlements of women to receive maternity benefits. It further establishes laws on gratuity and the impact of the new wage structure on take-home salaries. 

How You Can Prepare for the Changes to the Labor Laws in India? 

According to the ‘Industry Expectation Survey on New Labour Codes’ by Grant Thornton Bharat, internal evaluations have been initiated by 43% of organizations with the goal of successful adoption of the new labor codes in India. While 20% of businesses have hired outside experts to help them be prepared.  

According to the report, 13% of businesses are awaiting the formal announcement of the implementation date of the new labor codes of 2022, and 20% of respondents have not yet chosen their implementation techniques. Further, as per the study, organizations must assess how financial factors like gratuity, leave encashment, statutory bonus, etc., would affect overall employee pay expenditures in order to improve planning.  

While there is still some work to be done by the federal and state governments before the new labor laws in India can be implemented, organizations can choose to be change-ready by taking the following steps:

• Consulting with an expert before making any changes in their employment systems and procedures to ensure they fully comply with all the regulations.
• Keeping abreast of the labor law reforms and the guidelines for compliance by subscribing to resources like legal firm newsletters.
• Training HR staff and managers on all the requirements applicable to their employees. 
• Organizations can also seek internal or external attorneys to offer just-in-time advice, as necessary.

FAQs 

As an outcome of our two-part webinar series on ‘Navigating the Indian Labor Law Reforms of 2022’, we have compiled a list of Code-wise Q&As from the queries generated by the participants. Read on to discover: 

CODE ON WAGES 

1. Is the wage settlement applicable to the IT Sector?

• Yes, it will be applicable to all industries. 

2. How will a Full and Final settlement be done within two working days if the employee doesn’t return assets like laptops, etc.?

• The clause speaks of wage settlement and not Full and final settlement. This raises the question of what a wage in this scenario is. It can be an unpaid monthly wage or payment towards, say, unavailed leave or impending bonus if any. This is the settlement that must be made within two working days. Employers will have to develop a robust process for accepting a resignation and relieving a person. They may have to insist on employees serving at least one month; within this period, both parties can complete all formalities. It is noteworthy that the threshold for two days is from the actual date of relieving, not from the submission of the resignation. 

3. While transport allowance is an exclusion under the new wage code, the code is silent about conveyance expenses such as fuel reimbursement and taxi auto charges reimbursed to employees for official work undertaken. How will these be treated under the act?

• It'll be exempted. There is a clause for defraying the expenditure incurred by an individual employee considering his nature of employment. As mentioned in the exclusion clause, these expenses will be treated as reimbursement, not as part of wages. 

4. Will the cost of insurance premiums such as Mediclaim premiums borne by companies be treated as remuneration in kind in the new codes?

• No, it will not be. 

5. If the basic salary is 50% of the CTC, House Rent Allowance (HRA) is 50% of the basic salary, and Provident Fund (PF) is Rs.1800 per month, will the CTC structure be compliant with the upcoming wages code?

• The direct monthly gross salary of the employee will be considered as a hundred percent salary. Out of that, it will need to be ensured that the sum of basic salary and Dearness Allowance (DA) works out to more than 50%. If you do not have a DA, ensure that the basic salary alone is 50% or more. 

6. Is overtime applicable to the IT Sector as well?

• The provisions of the OSHWC code will only be applicable to factories, mines, and plantations. The rest of the establishments will continue to be governed by the Shops and Establishments Acts of their respective states. 
  
  

7. What is the applicability criterion for workmen compensation? 

• When the codes are implemented, the current Employee’s Compensation Act will be repealed, and it will become a part of the Code on Social Security. It will continue to apply to all the employees as defined under the Act. 
  
  

OCCUPATIONAL SAFETY, HEALTH AND WORKING CONDITIONS CODE 

8. Does the OSHWC code apply to the establishments registered under the Shops and Establishments Act?

• It will not be applicable as a whole. However, for instance, if a commercial establishment engages in fixed-term employment, the underlying provisions will be applicable since contract labor has been made a part of the Occupational Safety, Health and Working Conditions Code (OSHWC). 

9. Will the engagement of interns also need to be acknowledged by appointment orders?

• No, interns are not employees. There is no employer-employee relationship between the management and the interns. 

10. Is there a threshold limit for the Interstate Migrant Worker Act?

• Currently, it is five. But after the implementation of the codes, it is going to be 10. 

11. What is the point of view on leave encashment in the new code? 

• Under the Factories Act, there is no provision for encashment at the end of the year. It is being brought in through the codes, which means that if the magnitude of leave days goes over and above the maximum accumulation limit, leave encashment is to be made available to the workers. Under the provisions of the existing Factories Act, the accumulated leaves will lapse. 

12. Will the provisions of a 48-hour working week and overtime be applicable to me?

• The provisions of the OSHWC code will only be applicable to factories, mines, and plantations. The rest of the establishments will continue to be governed by the Shops and Establishments Acts of their respective states. 

13. Can you please elaborate on the definition of ‘core activities’ for contract labor?

• According to Section 2(p) of the OSH Code, 2020, a ‘Core Activity’ is any activity for which the establishment is designed, including any activity that is necessary for such activity. Certain activities, such as sanitation work, catering, and canteen services, housekeeping and laundry services, watch and ward services, etc., are exempted from the definition of core activities, provided that they are not regarded as essential or necessary activities if the establishment is not configured for them. There are some deviations from the above definition of Core Activity. In the following situations, the main employer may use contract labor for essential tasks: 

• When the activity is carried out by contractors as part of the establishment's regular operations. 
• When the amount of work that must be done in a certain amount of time suddenly increases. 

14. For the encashment of earned leaves, do we have to consider Basic Salary+HRA or gross salary?

• The suggestion is to consider only the components which are universally, necessarily, and ordinarily paid to an employee. However, the definition of the term ‘wage’ as defined under the specific act per which the said payment is considered may be read carefully. 

15. Will contractual employees be eligible for leave benefits applicable after working for 180 days? 

• Yes, contract workers are also eligible for leave benefits, provided they fulfil the eligibility conditions. 

CODE ON SOCIAL SECURITY  

16. Is voluntary coverage under ESI given to people who are drawing wages more than the threshold limit?

• ESI coverage refers to an establishment, not an individual. Voluntary coverage of an establishment under ESI is not provided as an option in the existing set of laws. 

17. If somebody engaged in fixed-term employment renders less than five years of service, say, three years, will they be entitled to gratuity?

• Yes, if recruited for a fixed period of 3 years, they will be entitled to proportionate gratuity at the termination of the service period. This will be computed as 15 days’ wages for every completed year of service. 

18. ESI is applicable for workers with salaries under Rs. 20000 per month. Is this threshold liable to extend to Rs. 30000 per month?

• The threshold is Rs. 21000. No change has been proposed so far. 

19. If an employee has completed 4.6 years in an IT company, will they be eligible for Gratuity? 

• If an employee completes a continuous service of 4 years and 8 months, they are deemed to have completed 5 years of service and thus become eligible for payment of gratuity. 

20. ESI is not mandatory for establishments with 10 employees or below. Does that stand for the total headcount of employees or the total number of employees eligible for ESI? 

• ESIC Chapter IV is applicable to every establishment in which ten or more employees are employed. It refers to the total headcount of employees. 

21. While the employers’ contribution to PF is clearly defined as an exclusion under the new wage code, the code is silent about the employers’ contribution to ESI. Any thoughts on 

this?  

• No. The employer’s share of contribution towards ESI is not included under the  

definition of Wages. 

22. What is the number of years required to be completed by an employee to be eligible for 

Gratuity?  

• The status quo remains. Employees should have rendered not less than 5 years of continuous service. However, the said period of 5 years of continuous service shall not be necessary in case of death or disablement of an employee or the expiration of the fixed term of the contract. In all these cases, the employer shall pay gratuity on a pro-rata basis.  

23. Is the PF limit of Rs.15000 going to change? 

• That cannot be speculated at the moment. 

INDUSTRIAL RELATIONS CODE 

24. Is it mandatory to have a registered trade union for IT companies?

• No. Employees have the prerogative to form trade unions. If they do, they must register under the Trade Unions Act. However, another aspect is recognition. In certain industrial establishments, there could be multiple trade unions. This raises the need for the recognition of one trade union. In this case, the responsibility falls on the employer to recognize one of these unions, preferably one with more than 50% of employees as members. If no such union is available, they may have to form a negotiating council comprising one member for every 20% of workers, i.e., roughly five people. The management will consult this council in lieu of a trade union. 

25. Will the provisions of the reskilling fund be applicable to me?

• The provision of a reskilling fund is under the Industry Disputes Act. Therefore, if your organization resorts to retrenchment, it will be applicable to you. 

26. Is the Industrial Relations Act of 1946 covered in the new code?

• The Industrial Relations Code will subsume the following acts- The Trade Unions Act, 1926, The Industrial Employment (Standing Orders) Act, 1946, and The Industrial Disputes Act, 1947. 

GENERAL 

27. When do you think the new labor codes will come into effect? Is there a timeline? 

• With respect to the code on wages, some 32 states and UTs have come up with draft rules apart from the central government. This number is only lower for the rest of the three codes. There’s no saying when the codes will come into effect as of now. 

28. Will the Shops and Establishments Act be applicable to a company that does not have an office or a location but is registered for GST?

• Yes, even for virtual offices, it is possible. 

29. If the office branch is only in one state, but employees are spread across different states, will the state law be applicable to those employees or only the state law where the company office is present? 

• Ideally, the laws of the land where employees are posted should be made applicable to them. However, in practice, the laws of the land where the muster roll is maintained for those employees are followed.  

30. What will be the financial impact of the new codes on employers? 

• The definition of the term ‘Wages’ is undergoing a change. At least 50% of the total monthly remuneration shall be considered as wages as per the proposed definition. In any given establishment, if the wage portion works out to less than 50% of the total monthly remuneration of employees, they will have to restructure their salary. This could lead to financial implications. Since the definition will be common for all purposes, it will also have an impact on Bonuses, Gratuity, PF, ESI, and Minimum Wages. In addition, there could be an impact while calculating Overtime wages and un-availed leave encashment. 

The Way Forward for Organizations 

Businesses in India are expected to benefit from the disentanglement of labor regulations and compliances. The costs incurred in complying with licenses and paperwork are positioned to be reduced. Once the codes are enacted, organizations will need to ensure they are in compliance with the new laws. HR will be expected to spearhead the implementation of the Indian labor law reforms.  

To learn more about the labor law reforms in India, get insights into their impact on businesses, and explore how Darwinbox can help you implement them seamlessly in your organization, download this comprehensive guide.