By: HUB’s EB Global Benefits Team
WHAT IS IT ABOUT?
India has implemented one of the most significant labor law reforms in its modern history. The four consolidated labor codes came into force in late November 2025. Their stated objectives are to simplify compliance, modernize worker protections, and introduce greater clarity and uniformity across wage and benefit structures.
For employers, the changes are far-reaching. The new definitions of wages expanded social security coverage, introduced new benefit entitlements, and formalized employment practices which will have material implications for payroll, benefit costs, HR documentation, and ongoing compliance obligations.
- New Definition of Wages and 50% Limit on Allowances.
Far-reaching impact of changes comes from the introduction of a new definition of “wages”. Under the new definition, any excess of allowances over 50% of total remuneration must be added back to wages. This change will affect statutory liabilities such as Provident Fund (PF), statutory gratuity, and other salary-related programs, which may have to include:
- Basic Pay
- Dearness Allowance
- Retaining Allowance
- Any portion of aggregate allowances exceeding 50% of total pay
Historically, many organizations structured salary packages with a low basic pay and high allowances to limit PF and gratuity costs in particular. Under the new rule, Gratuity costs, which are calculated on last drawn wages, could experience tremendous increases due to the retroactive effect of applying higher covered salary especially for long-tenured employees or those in higher-paid roles.
- Mandatory Free Annual Health Check-ups
Under the new reforms, employers must provide free annual health check-ups for all workers aged 40 and above, with mandatory coverage for those engaged in hazardous occupations.
- Gratuity Eligibility for Fixed-Term Employees
The reforms significantly expand gratuity entitlements. Fixed-term employees, who were previously only eligible after completing five years of continuous service, will now be eligible for gratuity after just one year of service.
This change will increase employer gratuity costs in industries where fixed-term contracts are common (technology, services, manufacturing, retail, and project-based roles). Employers should incorporate gratuity provisioning into cost forecasts for shorter-tenure hiring and anticipate higher year-on-year payouts for fixed-term workers completing 12 months of service.
- Social Security Using the New Wage Definition
The revised definition of wages applies not only for PF and gratuity but also across all social security calculations including Employees’ State Insurance (ESI), maternity benefits, pension calculations, disability compensation, and life insurance under the social-security framework.
Payroll and HR systems must be updated to ensure accurate calculations across all statutory benefit areas.
- Other Benefits Impacted by the Reforms
The reforms introduce several employee-centric enhancements, including a significant expansion of dependent eligibility for programs that cover dependent parents, siblings, adult children with disabilities, and other financially dependent family members.
IMPACT ON COMPANIES
- Increase in Provident Fund, Gratuity, Employees’ State Insurance costs due to the broadened wage definition. Higher workforce-related expenses for fixed-term employees, especially where attrition or project-based hiring is high.
- New compliance obligations around annual health check-ups for workers aged 40+, requiring operational planning.
- Increased administrative complexity with broader dependent definitions for PF, ESI, and insurance claims.
SUGGESTED EMPLOYER ACTION
- Conduct a thorough review of total compensation programs to comply with the new wage rules.
- Conduct a financial analysis of impact of the new mandates and model alternatives to devise a new compensation strategy.
- Conduct an actuarial review of the gratuity program to understand impact and to revise budgets.
- Update employment contracts, HR policy manuals, and payroll documentation to reflect new wage and social-security definitions.
- Implement annual health check-up programs for workers aged 40+ and maintain strict compliance records.
- Update dependent-nomination processes and documentation across PF, ESI, worker’s compensation and other affected insurance programs.
If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.