New labour codes 2026: the HR compliance checklist for startups and growing businesses
The founder of a 30-person services company sat down to approve the June 2026 payroll and noticed something was off. The salary structures had been designed two years earlier to keep take-home pay high, which meant basic pay sat at barely a third of each employee's cost to company. Under India's new labour codes 2026, that structure no longer holds. Basic pay now has to make up at least half of total remuneration, and the gap feeds straight into provident fund and gratuity.
That was only the first problem. Roughly half the team had joined on a verbal offer and an email, with no formal appointment letter on file. The three contractors on the books were being paid less, with no provident fund, even though the codes now require parity. And nowhere in the company's records was there a properly constituted Internal Committee for workplace harassment complaints, despite the business having crossed ten employees more than a year ago.
None of this came from negligence. It came from a company growing faster than its paperwork, which is the normal condition of most startups and small businesses. The difference in 2026 is that the cost of falling behind has gone up. The four labour codes consolidated a sprawl of older laws into a tighter framework, digital inspections are replacing occasional manual ones, and employees are far more aware of what they are owed.
For a founder or an operator without a full human resources department, the codes can feel like a wall of legal text written for someone else. They were not. Most of what they require is concrete, checkable, and fixable in a few focused weeks. The trick is knowing exactly what changed, what applies to a company your size, and the order in which to fix it.
This guide is built for that reader. It walks through what the codes actually change for an employer, gives you a working compliance checklist, sets out a quarter-by-quarter action plan for a lean team, and helps you decide whether to run the work in-house or hand it to a specialist. Every statutory figure here is drawn from the Ministry of Labour and Employment and the text of the codes, and the areas still being clarified are flagged as such.
India's new labour codes replace 29 central labour laws with four codes, covering wages, industrial relations, social security, and occupational safety. They became enforceable from 21 November 2025, with compliance changes phasing through 2026. For employers, they reset how you structure pay, issue appointment letters, treat fixed-term staff, calculate benefits, manage working hours, and evidence workplace-safety compliance.
That paragraph is the short version. The rest of this guide is the working detail behind it.
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What the new labour codes are, and why 2026 is the turning point
For decades, Indian employment was governed by dozens of separate central Acts, layered with state amendments, that often overlapped and sometimes contradicted each other. The four labour codes are the government's attempt to consolidate that into a single, more consistent framework. The Ministry of Labour and Employment confirms the codes became enforceable on 21 November 2025.
The four codes at a glance
The framework rests on four codes, each absorbing a group of older laws. The Code on Wages, 2019 governs minimum wages, the definition of wages, and timely payment. The Industrial Relations Code, 2020 covers employment terms, fixed-term employment, standing orders, and the rules around retrenchment and layoffs. The Code on Social Security, 2020 consolidates provident fund, employees' state insurance, and gratuity. The Occupational Safety, Health and Working Conditions Code, 2020 deals with working conditions, working hours, and documentation such as appointment letters.
Read together, these four codes touch almost every part of the employment relationship, from the day an offer is made to the day a person leaves. That breadth is why a single structural change, such as the way wages are defined, ripples across payroll, benefits, and exit settlements at the same time.
What changed compared with the old system
The most consequential shift is not any single rule but the standardisation of the definition of "wages" across all four codes. Previously, different laws defined pay differently, which let employers keep statutory contributions low by loading salary into allowances. The codes close that gap by capping how much of total pay can sit outside the wage definition.
The second shift is a move toward documentation and digital record-keeping as the default. Where earlier enforcement relied on periodic physical inspections, the direction of travel is toward data-driven, portal-based compliance. For a growing business, that means gaps in paperwork are easier for an inspector to spot and harder to explain away after the fact.
Who the codes apply to, and the thresholds that matter
Not every provision applies to every company, and this is where founders often get confused. Many obligations switch on at specific employee-count thresholds, and those thresholds differ by code and, in some cases, by state rules made under the codes.
A few thresholds are worth committing to memory. A workplace with ten or more employees generally falls within the ambit of the social-security and safety provisions, and ten employees is also the trigger for constituting an Internal Committee under the harassment law. Standing orders and certain formal processes tend to apply from higher counts, often 300 workers under the Industrial Relations Code, though states can vary this. Because the exact threshold for a given obligation depends on the specific code and your state's rules, treat the numbers here as a prompt to check your own position rather than a substitute for that check.
What actually changed: the shifts every employer must absorb
If you read nothing else in this guide, read this section. These are the changes most likely to catch a growing business out, because they alter numbers you thought were settled.
The 50% wage rule and the hit to take-home pay
Under the Code on Wages, "wages" means basic pay, dearness allowance, and retaining allowance. The code then limits the allowances that fall outside this definition: excluded components taken together generally cannot exceed half of total remuneration. Where they do, the excess is added back and treated as wages for the purpose of calculating provident fund, gratuity, and related contributions.
In practice, this is the 50% rule. It means basic pay for most employees has to be restructured upward to at least half of cost to company. Because provident fund is calculated on that larger base, monthly contributions rise, and employees can see take-home pay fall by a modest amount even though total cost to company is unchanged. Widely cited industry estimates put the take-home reduction in the range of two to five percent for salaries that were previously structured with a low basic, though the exact figure depends on the individual salary design.
The Ministry's clarifications have also confirmed some finer points. Overtime allowance counts toward the calculation, while gratuity and employees' state insurance contributions are excluded from the computation of that 50% threshold. Annual performance incentives generally do not form part of wages for statutory calculation. These details matter, because they decide how much of a given pay packet gets reclassified.
Mandatory appointment letters for every employee and worker
One of the quieter but more far-reaching changes concerns appointment letters. Under the occupational safety code, the direction is that every employee and worker should receive a formal letter of appointment, rather than the older position where written appointment letters were required only in specific categories of employment.
For an established company this is routine. For a fast-growing startup that hired its first dozen people on the strength of an email and a handshake, it is a real gap. Reconstructing appointment letters for existing staff, with correct designations, wage structures, and terms, is one of the first remediation jobs most growing businesses face. Confirm the precise wording and effective date of this requirement against the occupational safety code and your state rules, as implementation detail is still settling.
Fixed-term employees and the end of the parity gap
The Industrial Relations Code formalises fixed-term employment as a legitimate category, but with a condition. A fixed-term employee must receive the same wages, hours, allowances, and statutory benefits as a permanent employee doing the same or similar work. That means the same provident fund, the same employees' state insurance where applicable, the same medical benefits, and the same leave.
This closes a common cost-saving practice, where contract or fixed-term staff were paid less and given fewer benefits than permanent colleagues. If your business runs a bench of fixed-term staff on lighter terms, that exposure needs to be assessed and corrected. It is one of the areas inspectors and employees are most likely to flag.
Gratuity now turns on one year for fixed-term staff
Gratuity eligibility has also changed for fixed-term employees. The Ministry of Labour has clarified that a fixed-term employee becomes eligible for gratuity after completing one year of service from the commencement of the contract, rather than the five-year period that still applies to permanent employees. A fixed-term worker engaged for only eleven months, on that reading, would not qualify.
For a business that uses project-based or seasonal fixed-term hiring, this reshapes the cost of those contracts. A twelve-month contract now carries a gratuity liability that an eleven-month contract does not, which is exactly the kind of detail that belongs in your workforce planning rather than being discovered at settlement.
Full and final settlement within two working days of exit
The Code on Wages tightens the timeline for paying an employee's final dues. Where employment ends by removal, dismissal, retrenchment, or resignation, wages are to be paid within two working days. This is a sharp reduction from the looser, often weeks-long practice many companies followed.
Two working days is a demanding standard for a lean finance function, especially where the exit is contested or the final calculation is complex. It means your offboarding process, final-settlement calculation, and payment mechanism need to be ready to run quickly, not assembled after each resignation. Verify the exact scope of this provision against the Code on Wages and its rules, as the practical application can depend on the nature of the exit.
Working hours, overtime, and the 48-hour week
The codes retain a standard working week capped at 48 hours, with a daily limit that, including overtime, is generally set at 12 hours. What the codes add is flexibility in how those hours are distributed. An employer can spread the 48 hours across four, five, or six days, which enables compressed work weeks provided daily limits are respected.
For most office-based startups this changes little in day-to-day practice, but it does need to be reflected accurately in your policies and any standing orders. Overtime, where it applies, has to be paid at the statutory rate, and the hours have to be recorded. Loose or undocumented overtime is a common source of dispute.
The HR compliance checklist: what to fix before an inspection
This is the working checklist. Treat it as five areas to review and remediate in turn. Each maps to one or more of the four codes, and each is something an inspector or an aggrieved employee could reasonably raise.
Payroll and wage structure
Start with the salary structures, because they drive the most downstream change. Review every employee's pay design and confirm that basic pay, dearness allowance, and retaining allowance together meet at least half of total remuneration. Recompute provident fund and gratuity liability on the corrected base, model the effect on take-home pay, and plan how you will communicate any change to staff before it lands on a payslip.
Contracts and documentation
Confirm that every employee and worker has a current appointment letter reflecting their correct designation, wage structure, and terms. Reconstruct any that are missing. Review offer letters and employment contracts for the updated wage definition and for fixed-term parity language, and refresh your employee handbook so that its policies match the new framework rather than a template written for the old one.
Statutory registrations and filings
Check that provident fund and employees' state insurance registrations are in order and that contributions are deposited on time, generally by the fifteenth of the following month. Confirm your professional tax position where applicable, register on the relevant unified compliance portal, and make sure returns and filings are current. Filing gaps are among the easiest failures for a data-driven inspection to detect.
Mandatory policies
A handful of policies are effectively non-negotiable for a company past the ten-employee mark. You need a workplace harassment policy with a properly constituted Internal Committee, a leave policy that reflects statutory entitlements, a code of conduct, a grievance mechanism, and, increasingly, a documented position on remote and hybrid work. Policies that exist only as unsigned files carry little weight, so acknowledgement records matter.
Records and registers
The codes lean toward digital, inspection-ready record-keeping. Maintain complete employee records, including appointment letters, contracts, identity and bank details, and wage registers, in a form you could produce quickly if asked. The test is simple: if an inspector requested your records tomorrow, could you assemble them in a day without scrambling. If not, that is your first project.
POSH and workplace-safety obligations you cannot skip
Workplace harassment compliance sits slightly outside the four codes, under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, but it belongs in any 2026 HR review because it is heavily enforced and frequently neglected by growing businesses.
Constituting the Internal Committee at ten or more employees
Any workplace with ten or more employees must constitute an Internal Committee to receive and address harassment complaints. The committee has a defined composition: a senior woman as presiding officer, at least two internal members, and one external member with a background in law or women's rights, with at least half the members being women. A committee that exists on paper but does not meet this composition is not compliant.
Annual reporting, board disclosure, and SHe-Box
Compliance here is increasingly treated as a governance and reporting matter rather than a one-time policy. Employers file an annual report on complaints received and resolved, and disclosure obligations have moved toward specific, board-level reporting of complaint data rather than a bare confirmation that a committee exists. The government's SHe-Box portal has become the central digital point for workplace harassment complaints and monitoring.
Penalties for non-compliance
The cost of getting this wrong is concrete. Non-compliance with the harassment law can attract a monetary penalty, commonly cited at up to fifty thousand rupees per offence, with repeat violations attracting a higher penalty and the risk of business-licence consequences. Surveys by the relevant ministry and state bodies consistently find that startups and smaller businesses are the most likely to have either no committee or an incorrectly constituted one, which makes this a high-probability finding in any audit.
A quarter-by-quarter 2026 action plan for lean teams
Knowing the checklist is one thing. Sequencing it without a dedicated HR team is another. The following plan orders the work so that the highest-risk, highest-dependency items come first. Adjust the pace to your size, but keep the order.
First 30 days: audit and stop the bleeding. Run a wage-structure audit across all employees against the 50% rule, and list every person without a current appointment letter. These two findings drive most of what follows, so establish them before touching anything else. In parallel, confirm whether you have crossed the ten-employee harassment threshold and, if so, whether a valid Internal Committee exists.
Quarter one to two: restructure and document. Redesign salary structures to meet the wage definition, model the take-home impact, and communicate changes to staff before implementation. Issue or reissue appointment letters, correct fixed-term contracts for parity, and update the employee handbook and core policies. Retrain whoever runs payroll and HR on the new definitions so the changes stick.
Quarter three to four: register, file, and formalise. Register on the relevant unified compliance portal, close any provident-fund, employees'-state-insurance, or professional-tax filing gaps, update or adopt standing orders where your headcount requires them, and complete the harassment-law reporting cycle. By the end of this phase, your records should be inspection-ready.
Ongoing: build the quarterly rhythm. Compliance is not a project you finish. Set a quarterly review of wage structures for new hires, appointment-letter completeness, filing status, and policy currency. A short recurring check prevents the slow drift that created the problem in the first place.
Common mistakes growing businesses make
Most compliance failures in growing companies are not exotic. They cluster around a few predictable errors.
The first is treating the codes as a one-time fix. A business restructures salaries once, issues letters once, then hires twenty more people over the next year on the old template. The gap reopens quietly. The codes reward a recurring process, not a single clean-up.
The second is the copy-paste handbook. A founder downloads a policy template, often one written for a different jurisdiction or the pre-code framework, and adopts it unchanged. The result reads well and complies with nothing in particular. Policies have to reflect the actual codes, your actual headcount, and your actual working arrangements.
The third is underestimating fixed-term and contractor exposure. Because these arrangements were historically a way to save on cost and benefits, they are exactly where parity rules now bite hardest. A bench of underpaid fixed-term staff, or contractors who function as employees in all but name, is a concentrated risk that many founders overlook until it surfaces in a dispute.
Handle it in-house or outsource HR compliance?
For a company without a dedicated HR function, the real question is not whether to comply but who does the work. There is a genuine decision here, and it turns on your size, your risk, and where your team's time is best spent.
What compliance takes if you keep it in-house
Running this internally is entirely possible, and for some companies it is the right call. It requires someone who can read the codes accurately, translate them into salary structures and policies, keep up with clarifications as they are issued, and maintain the quarterly rhythm. For a founder-led team, the cost is rarely a line item on a budget. It is the founder's or operator's attention, pulled away from the core business into a specialised area that changes under them.
When outsourcing the audit and documentation makes sense
Outsourcing tends to make sense in two situations. The first is the initial clean-up, where a one-time audit and remediation of wage structures, contracts, and policies is a discrete, front-loaded project that a specialist can complete faster and more accurately than a generalist learning as they go. The second is ongoing, where a growing business without the volume to justify a full-time HR hire still needs the work done reliably every quarter.
The point of specialist help is not just execution. It is judgment about which of the settling, still-being-clarified provisions apply to you, and in what order to act, so that you are not guessing on questions with financial and legal consequences.
The cost signal
A useful way to frame the decision is to compare the cost of help against the cost of a mistake. A mis-structured payroll that understates provident fund, a missing Internal Committee at a company well past ten employees, or fixed-term staff without parity are not abstract risks. They carry back-payment liability, penalties, and, increasingly, reputational and governance consequences. Set the modest, predictable cost of a proper audit against that, and the decision usually clarifies itself.
If auditing wage structures, contracts, filings, and policies against the new codes is pulling you away from the core business, Outsource360's HR team runs the due-diligence audit and the documentation clean-up for growing businesses, and hands you a prioritised remediation plan. Book a consultation or write to hr@outsource360.in.
Quick-reference compliance checklist
Use this as a one-screen summary. Each line corresponds to a section above.
Salary structures reviewed so basic, dearness, and retaining allowance meet at least 50% of total remuneration.
Provident fund and gratuity liability recomputed on the corrected wage base, with take-home impact modelled and communicated.
A current appointment letter on file for every employee and worker.
Offer letters and contracts updated for the new wage definition and fixed-term parity.
Fixed-term and contractor arrangements reviewed for wage, benefit, and gratuity exposure.
Employee handbook and core policies refreshed to the codes, not a legacy template.
Provident-fund, employees'-state-insurance, and professional-tax registrations current, with contributions deposited on time.
Registration on the relevant unified compliance portal completed and filings up to date.
Internal Committee constituted correctly if you have ten or more employees, with annual reporting done.
Employee records and wage registers maintained in a digital, inspection-ready form.
A recurring quarterly compliance review scheduled and owned by a named person.
Frequently asked questions
Are the new labour codes actually in force, or is it still April 2026?The four codes became enforceable on 21 November 2025, per the Ministry of Labour and Employment. April 2026 was widely reported as an operational milestone, but the codes are already in force, and compliance changes have been phasing through 2026. Treat them as current law, not a future event.
Do the labour codes apply to a company with fewer than 50 employees?Yes, many provisions apply well below 50 employees. The wage definition and its 50% rule apply broadly regardless of size, and the ten-employee threshold triggers several social-security and harassment obligations. Specific thresholds vary by code and by state rules, so check your exact position rather than assuming a blanket exemption.
Will the 50% wage rule reduce my employees' take-home pay?It can. When basic pay is restructured upward to meet the 50% threshold, provident fund contributions rise on the larger base, and take-home can fall by a modest amount even when total cost to company is unchanged. Industry estimates commonly put the reduction in the two-to-five-percent range, depending on the original salary design.
Do I have to reissue appointment letters to existing staff?The occupational safety code moves toward a formal appointment letter for every employee and worker. If existing staff never received one, reconstructing appointment letters with correct terms is a standard remediation step. Confirm the precise requirement and timeline against the code and your state rules.
What changes for fixed-term and contract employees?Fixed-term employees must receive the same wages, hours, allowances, and statutory benefits as comparable permanent employees, including provident fund and, where applicable, employees' state insurance. The historical practice of paying fixed-term staff less on lighter benefits no longer holds.
When is gratuity payable now, one year or five years?The Ministry has clarified that a fixed-term employee is eligible for gratuity after one year of service from the start of the contract. Permanent employees still generally require five years of continuous service. An eleven-month fixed-term contract would not attract gratuity on that basis.
What is the new full-and-final settlement deadline?The Code on Wages provides for final wages to be paid within two working days where employment ends by removal, dismissal, retrenchment, or resignation. Your offboarding and settlement process needs to be able to run within that window rather than being assembled after each exit.
How many employees trigger a POSH Internal Committee?Ten. Any workplace with ten or more employees must constitute an Internal Committee with the prescribed composition, including a senior woman as presiding officer and an external member, with at least half the members being women.
What are the penalties for non-compliance?Penalties vary by provision. Harassment-law non-compliance is commonly cited at up to fifty thousand rupees per offence, rising for repeat violations with a risk to business licences. Wage and social-security failures carry back-payment liability and their own penalties. The larger exposure is often the accumulated back-liability rather than the headline fine.
What is the limit on working hours and overtime?The standard working week is capped at 48 hours, with a daily limit that, including overtime, is generally 12 hours. The codes allow those 48 hours to be spread across four to six days, enabling compressed weeks provided daily limits and overtime rules are respected.
Which registrations and filings do the codes require?At a minimum, keep provident-fund and employees'-state-insurance registrations and contributions current, address professional tax where it applies, and register on the relevant unified compliance portal. Deposit contributions on time, generally by the fifteenth of the following month, and keep returns up to date.
Do startups need a formal employee handbook now?There is no standalone law requiring a handbook, but the practical answer is yes. A current handbook is how you evidence the mandatory policies the codes and the harassment law expect, from leave and conduct to grievance and harassment redressal, and it materially reduces disputes.
How often should we run an HR compliance audit?At least once a year, with a lighter quarterly check on the highest-risk areas: wage structures for new hires, appointment-letter completeness, and filing status. Run an additional review after any major change, such as a hiring surge, a restructuring, or expansion into a new state.
Can we outsource labour-code compliance, and what does it cost?Yes. Many growing businesses outsource the initial audit and documentation clean-up, and some retain ongoing support rather than hiring a full-time HR function. Cost is typically scoped to your headcount and complexity, and is usually set against the far larger cost of back-liability and penalties from getting the structure wrong.
References
Ministry of Labour and Employment, Frequently Asked Questions on the Labour Codes
Ministry of Labour and Employment, Additional FAQs on the Labour Codes (16 March 2026)
Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes
SCC Online, Thematic analysis of the Ministry FAQs on the four labour codes (2026)
The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, and Ministry of Women and Child Development guidance
This article is for educational and general business information only. It does not constitute legal, tax, or human-resources advice, and statutory thresholds and timelines under the labour codes continue to be clarified. Consult a qualified labour-law practitioner or HR professional before acting on any point above.
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