New Labour Codes: An overview of key financial reporting implications

In a landmark development for the Indian labour law landscape, the Government of India has announced the implementation of the four labour codes, which will replace 29 existing labour laws, effective 21 November 2025. The labour codes are:

• The Code on Wages, 2019
• The Code on Social Security, 2020
• The Occupational Safety, Health, and Working Conditions Code, 2020
• The Industrial Relations Code, 2020

Although all the labour codes were notified in earlier years, their implementation was awaited. On 21 November 2025, the Government issued four separate notifications in the Official Gazette announcing implementation of all the codes. Notifications for implementation of the final rules under the labour codes by the central and state governments are still awaited but are expected to follow shortly. The Press Release issued by the Ministry of Labour & Employment clarify that during the transition period, existing rules will continue to apply (to the extent they are consistent with the Codes) until the new rules are finally notified.

The labour codes simplify and consolidate existing labour laws, promoting transparency and digitization in compliance and workforce models, enhancing worker welfare and ease of doing business.

Key impact areas for employers

Given below is overview of key changes brought by the labour codes which are likely to have significant financial reporting implications for the employers:

Definition of worker

The labour codes establish distinct definitions for the terms ‘employee’ and ‘worker,’ with specific benefits and provisions applicable only to ‘workers.’ The definition of ‘worker’ closely aligns with the term ‘workman’ under the Industrial Disputes Act, 1947 (now superseded by the labour codes), encompassing individuals engaged in manual, unskilled, skilled, technical, operational, clerical or supervisory work, while excluding below:

• Individuals in managerial or administrative roles
• Persons in supervisory roles with monthly wages exceeding INR 18,000 (or an amount as may be notified by the central government from time to time).

While the definition under the Industrial Disputes Act, 1947 had limited applicability—primarily focused on industrial disputes and retrenchment—the definition under the labour codes has a significantly broader scope. Under the labour codes, workers are entitled to various benefits, including overtime pay and leave encashment, as stipulated in the Occupational Safety, Health, and Working Conditions Code, 2020. Specific provisions related to working hours, annual leave, and standing orders apply exclusively to ‘workers.’

Uniform definition of wages and its financial impact for employers

Under the previous labour laws, varying definitions of ‘wages’ and ‘salary’ complicated the calculation of benefits, leading to inconsistencies, multiple interpretations, and frequent litigation. To address these challenges, a uniform definition of ‘wages’ has been introduced which will apply uniformly across all four labour codes.

The new labour codes prescribe an inclusive definition of the term ‘wages.’ In accordance with the definition, wages include all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment. At a minimum, the wages include three specified components, namely basic pay, dearness allowance and retaining allowance. The Codes also provide list of items such as house rent allowance, overtime allowance, gratuity payable on the termination of employment and retrenchment compensation, which are not included in the definition of wages. Items not covered in exclusion list get included in the wages. The definition further mandates that items excluded from wages (except gratuity and retrenchment compensation) should not exceed 50% (or such other percentage as may be notified by the central government from time to time) of total remuneration. If there is an excess, then it is presumed that excess amount also constitutes wages and gets included in the wages.

This new definition aims to enhance compliance by providing clarity and consistency. However, it may also result in increased costs for entities. The new definition, among other matters, is relevant for calculating benefits such as those related to gratuity, employees’ state insurance, leave encashment and overtime.

Workforce models

The labour codes explicitly prohibit the use of contract labour for the ‘core activities’ of an organization, except in certain exceptional circumstances. Core activity means any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity.

Fixed-term employment has been officially recognized as a valid employment model, subject to specific conditions and compliance requirements. For instance, such a worker would be entitled to gratuity after one year of service on termination and all other statutory benefits available to a permanent worker, proportionately according to the period of service rendered by the worker

Leave encashment

Under the labour codes, workers who have worked for 180 days or more in a calendar year will earn one day of leave for every 20 days worked, with a carry forward limit of 30 days. Any leave balance over 30 days needs to be encashed at the end of each calendar year. Workers also have the right to demand encashment even for the 30 days of carry-forward leave at the year end.

Other Occupational Safety, Health and Working Conditions (OSH) compliance costs

The OSH framework may also increase recurring compliance costs (e.g., free annual health check-ups for workers above 40 years in factory, dock, mine, building and other construction work), which may require appropriate expense recognition and accruals based on the entity’s arrangements.

Social security for gig workers and unorganized sector

The labour codes empower the central and state governments to implement welfare schemes for gig workers, platform workers, and other individuals in the unorganized sector. These schemes may include life and disability coverage, health and maternity benefits, old-age protection and other relevant benefits.

For gig workers social security schemes, aggregators will be required to contribute 1% to 2% of their annual turnover, subject to a cap of 5% of amount paid or payable by an aggregator to gig workers, to the social security fund. The requirement for such contribution will apply from a date to be notified separately.

Draft rules and FAQs on Labour Codes

Following implementation of the four labour codes on 21 November 2025, the central government has pre-published the below draft rules on 31 December 2025 under the respective labour codes:

• The Code on Wages (Central) Rules, 2025 under the Code on Wages, 2019 (COW Rules)
• The Code on Social Security (Central) Rules, 2025 under the Code on Social Security, 2020 (COSS Rules)
• The Occupational Safety, Health and Working Conditions (Central) Rules, 2025 under the Occupational Safety, Health and Working Conditions Code, 2020 (OSHWC Rules)
• The Industrial Relations (Central) Rules, 2025 under the Industrial Relations Code, 2020 (IR Rules)

To ensure smooth implementation, the Ministry of Labour and Employment has also issued the Frequently Asked Questions (FAQs) on the four codes:

• FAQs on labour codes
• FAQs on Code on Wages
• FAQs on Social Security Code
• FAQ on Myths and Realities of Industrial Relation (IR) Code
• FAQs on Occupational Safety, Health and Working Conditions (OSH) Code

Once notified, the Central rules will apply to following establishments/sectors:

• Railways, including metro railways, mines, oil fields, major ports
• Air transport service
• Telecommunication
• Banking or insurance company
• Corporation or other authority established by a Central Act
• Central public sector undertakings or subsidiaries
• Autonomous bodies owned or controlled by the Central Government
• Establishment of contractors for the purposes of such establishment
• Establishments having departments or branches in more than one state (under Code on Social Security)

For other manufacturing and non-manufacturing establishments, State rules to be notified by respective State governments will be applicable, which are yet to be notified, except for few states which have already notified final rules.

The draft Rules propose several key clarifications and address areas which need to be covered under the Rules. For instance, in accordance with the Code on Social Security, 2020, gratuity is to be calculated based on rate of ‘wages’ last drawn by the employee concerned. The draft COSS Rules clarify that for the purpose of determination of gratuity, exclusions from ‘wages’ will also cover any amount payable on an annual basis that is linked to performance or productivity of an employee or of the establishment in which the person is employed and is not part of the remuneration payable under the terms of employment. Further, the following will not form part of the ‘wages’ for this purpose:

• Reimbursement of medical expenses
• Stock option benefit or cash equivalent of stock award
• Crèche allowance
• Telephone and internet reimbursement
• Value of meal vouchers

However, it remains to be clarified whether such components will be covered within the 50% exclusion limit under the definition of ‘wages.’

We trust these matters should get clarified in the final Rules. Until such clarity emerges, entities may need to consult legal professionals and take appropriate views on matters that remain unclear

The central government has invited objections and suggestions on these draft rules within 45 days or 30 days for the draft Industrial Relations Rules, 2025 (‘IR Rules’), i.e., by 14 February 2026 and by 30 January 2026 for the IR Rules. We recommend that entities should undertake a holistic review across human resources, finance, payroll, and legal functions of the draft Rules and raise comments, if any, so that the same may be addressed in the final Rules

Key financial reporting implications

Application of the new labour codes also gives rise to certain accounting/ financial reporting implications. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has issued Frequently Asked Questions (FAQs), providing guidance on key questions related to financial reporting aspects arising from the labour codes. Key clarifications provided by the ASB with regard to accounting under Indian Accounting Standards (Ind AS) notified under the Companies (Indian Accounting Standards) Rules 2015, (as amended):

1. Pursuant to the new definition of ‘wages’ and the requirement for payment of gratuity to fixed-term employees based on one year service, gratuity obligation is expected to increase for most entities. Gratuity is an employee benefit which is accounted for in accordance with Ind AS 19 Employee Benefits. Under Ind AS 19, changes to gratuity obligation resulting from the labour codes are plan amendments and they need to be treated as past service cost. Ind AS 19 requires past service cost to be recognised as an expense immediately in the Statement of Profit and Loss. The Standard does not provide any exemption/one time relief with regard to accounting for increase in liability arising from change in law. Accordingly, entities impacted by the labour codes should recognize increase in gratuity obligation arising from application of the labour codes as an expense in the Statement of Profit and Loss.
2. The ‘wage’ definition is applicable from the date of notification in the Official Gazette, viz., 21 November 2025. Considering this and requirements of Ind AS 34 Interim Financial Reporting, listed entities having 31 March year end need to recognize additional gratuity obligation arising from the labour codes in financial results for the period ending 31 December 2025. They cannot defer the accounting impact till financial year ending 31 March 2026.
3. It may so happen that an entity revises its salary structure to comply with the new labour codes and also decides to increase total remuneration at the same time. In such a case, the entity needs to identify (i) increase in remuneration vis-à-vis previous estimate, and (ii) change in salary structure, separately. The first component is change in actuarial assumption and the second component is a plan amendment. The entity should identify impact of these two components separately and account for them accordingly. It cannot treat the entire impact as arising from change in actuarial assumptions and, therefore, attributable to actuarial gains and losses which are recognised in the Other Comprehensive Income (OCI).
4. Like gratuity, the labour codes are also likely to impact leave obligations for entities. Leave obligations are treated as short-term/other long-term employee benefit obligations. Ind AS 19 requires past service costs in respect of other long-term employee benefits to be recognized immediately as an expense in the Statement of Profit and Loss.
5. With regard to presentation of additional expense arising from increase in gratuity/leave obligations due to the labour codes as an exceptional item in the Statement of Profit and Loss, attention is drawn to Ind AS Schedule III to the Companies Act 2013 (as amended) which requires separate presentation of exceptional items in the Statement of Profit and Loss. However, the term ‘Exceptional Item’ is neither defined in Ind AS Schedule III nor in Ind AS 1 Presentation of Financial Statements. Ind AS 1 has references to items requiring separate disclosure in paragraphs 85, 86, 97 and 98. The said guidance can be considered for identifying exceptional items. Based on the guidance given, exceptional items are those items which meet the test of ‘materiality’ (size and nature) and the test of ‘incidence.’

Way forward

Implementation of the labour codes is a significant and long-awaited reform. These codes are expected to impact nearly every organizational function. Given the extensive changes they introduce. It is essential for organizations to thoroughly assess the implications of these changes and prepare for a smooth transition to ensure compliance and operational efficiency. Also, entities should undertake a holistic review of the draft Rules and raise comments, if any, to the Government.

rom financial reporting perspective, a coordinated effort among human resources (HR), payroll, finance and actuaries will be critical to navigate changes and ensure compliance. The management should evaluate and discuss key impact areas and reporting implications with the auditors on priority to avoid last-minute surprises.