The four Labour Codes replaced 29 older labour laws on 21 November 2025. For most employers the day-to-day payroll impact comes down to five things: how "wages" are defined, gratuity, overtime, leave, and how fast a leaving employee must be paid.
1. A new definition of wages — and the 50% rule
Wages now mean basic pay, dearness allowance and retaining allowance. Allowances such as HRA and conveyance are left out — but if the left-out parts add up to more than 50% of total remuneration, the excess is added back into wages. In practice, wages used for statutory calculations are at least half of total pay.
The Labour Ministry has clarified that:
- the new definition of wages applies from 21.11.2025;
- overtime pay counts towards the 50% calculation;
- employer PF and pension contributions and statutory bonus are counted when working out the 50%, while gratuity, ESI and other retirement benefits are not;
- annual performance-based incentives are not wages.
2. Gratuity
Gratuity is now paid under the Code on Social Security, 2020 at 15 days' wages for every completed year (a part-year over six months counts as a year), on the wages last drawn — using the new definition for exits from 21 November 2025. Two changes stand out:
- Fixed-term employees qualify after one year of service under their contract, paid pro rata.
- For contract labour, the contractor as employer pays gratuity after five years of continuous service.
For the formula and a worked example, see our gratuity calculation guide.
3. Overtime and working hours
The standard working day is 8 hours. Work beyond 8 hours in a day or 48 hours in a week is overtime, paid at twice the normal rate of wages at the end of the wage period. The Ministry has confirmed overtime applies to any employee whose minimum rate of wages is fixed under the Code on Wages.
4. Leave
Under the Occupational Safety, Health and Working Conditions Code, a worker can carry forward up to 30 days of leave into the next calendar year. Leave that was applied for and refused can be carried forward without limit. At separation, a worker can encash the leave to their credit, and there is no maximum on how much leave can be encashed.
5. Final settlement within two working days
Under Section 17(2) of the Code on Wages, when an employee is removed or dismissed, retrenched, resigns, or becomes unemployed because the establishment closes, the wages due must be paid within two working days. See our full and final settlement checklist.
What employers should do now
- Compare basic + DA with total pay for every salary structure and check the 50% rule.
- Recalculate gratuity provisions using the new wage definition.
- Update exit processes so final dues can be paid within two working days.
- Check overtime and leave carry-forward policies against the Codes and your state's rules.
- Watch for state rules — several details, including time limits, can be set by the appropriate government.
Sources
- Ministry of Labour & Employment — Additional FAQs on Labour Codes (as on 16.03.2026) labour.gov.in
- Code on Wages, 2019 — Section 17 (time limit for payment of wages) indiankanoon.org
- Code on Social Security, 2020 — Section 53 (gratuity) indiankanoon.org
- KPMG — Implementation of Labour Codes: what changes and the road ahead kpmg.com
Published 28 Sept 2026. This update is general information for HR and payroll teams, not legal or tax advice — confirm with the official source before acting on it.