The Great Reset: Will the Labour Codes improve ease of doing business?

The employees’ compensation act, which kicks in when an employee is injured in an accident at the workplace, was enacted way back in 1923.

It has remained in force even as India’s economy underwent a structural transformation—from a British colony attaining Independence in 1947, to experimenting with nationalisation in 1969, liberalisation in 1991 and, more recently, demonetisation, the introduction of the goods and services tax (GST), the outbreak of the Covid-19 pandemic and now the emergence of the digital economy.

To keep pace with that change, the government started working on modernising the archaic labour laws nearly a decade ago. Those efforts culminated in the four Labour Codes enacted in 2019 and 2020—the Code on Wages, 2019, Occupational Safety, Health and Working Conditions Code, 2019, the Industrial Relations Code, 2020, and the Code on Social Security, 2020.

The government aimed to subsume and codify 29 central labour laws that were brought about over the last century and needed an overhaul to bring them in sync with the requirements of the modern economy and the needs of employers and workers.

For employers, the minutiae of labour laws and compliance with them have been a sore point—these pertain to everything from meeting much needed norms for toilets and working hours to monthly returns for provident fund contributions. Several provisions carried penal and even criminal provisions in case of non-compliance.

But the Codes were kept on hold for five years faced with massive opposition from trade unions and at least some concerns of employers. All that changed when the government finally decided to implement the Codes with effect from November 21.

Union Labour Minister Mansukh Mandaviya had said the Codes are both pro-worker and pro-growth, establishing a strong foundation for universal social security, fair and timely wage payment, safer workplaces, formal recognition for emerging segments such as gig and platform workers, and greater empowerment for Yuva (youth) and Nari Shakti (women).

This marks a significant milestone since land and labour reforms have for long been key demands of investors and were seen as the logical next steps to improve the country’s attractiveness as an investment destination, boost its flailing manufacturing sector and create jobs for its teeming workforce.

Significantly, the decision to finally implement the Codes comes at a time when Indian goods face a stiff tariff of 50% from the US, which is disrupting most labour-intensive export sectors and micro, small and medium enterprises. This has raised worries of a possible slowdown of economic growth.

In fact, the current push for the Codes must be seen as part of a series of measures the Centre has announced over the past few months, like the rationalisation of the GST, the introduction of the Export Promotion Scheme along with relief measures for exporters that together aim to offset the impact of the US tariffs.

The Fine Print

The four Codes aim to cut down compliances and streamline laws, making the regulatory environment more employer-friendly, while ensuring that more benefits accrue to workers through provisions for universal social security, providing fixed-term employment, enabling women to work in night shifts and recognising gig and platform workers. Inspectors have been replaced with inspector-cum-facilitators.

Former Labour Secretary Arti Ahuja, who worked extensively on the Codes, noted that they will cut down on compliances for employers since many forms have been merged and quite a few rules have either been done away with or simplified. The definition of wages has become consistent across the four Codes.

Rishi Agrawal, Co-Founder and CEO of TeamLease RegTech, says the Codes reduce the compliance burden by collapsing a multi-regulator, multiple laws system into a unified, digital and standardised framework.

“The simplification is visible in forms, registers, definitions, registrations, inspections, penalties, and applicability thresholds,” he explains, adding that there has been a 75% reduction in the procedural burden as rules have been reduced to 351 from 1,436 earlier. The forms have also been reduced from 181 to 73 and registers from 84 to just eight.

Agrawal adds that employers had to earlier maintain separate registrations under different labour Acts. For instance, a manufacturing unit with contract labour, apprentices, and permanent workers needed to register under as many as six different laws. “The new Codes introduce a ‘Single Registration, Single License, Single Return’ framework,” he elaborates.

Anshul Prakash, Partner, Employment, Labour and Benefits, White Collar Crimes & Investigations, at Khaitan & Co, highlights other positives, including provisions on strikes and lockouts. “On strikes, the prior 60-day notice has been brought in. This used to exist only for public utility services or essential services but is now applicable for the entire industry,” he says. The Codes streamline what was scattered across different statutes for several years, he says.

Industry is happy with the Codes, says Rajiv Memani, President of the Confederation of Indian Industry. “The government has addressed the industry's demand for simplified compliance while making the framework inclusive and equitable by extending vital benefits to permanent, gig, and women workers alike,” he said.

Though there were some concerns about the payment of social security and keeping basic salary at 50% of compensation, this was necessary, says TV Mohandas Pai, Chairman, Aarin Capital and former CFO of Infosys. “Many companies were trying to give higher allowances to ensure employees had cash in hand… People are living longer and need money for retirement,” Pai says.

However, not everybody is enthused by the changes. Several trade unions have opposed the Codes, calling them anti-worker. “The Codes are pro-employer with provisions to weaken trade unions,” says Amarjeet Kaur, General Secretary of the All India Trade Union Congress, which is associated with the Communist Party of India. She contends that the labour ministry held few discussions on the Codes.

Provisions of 12-hour work, minimum wages and enabling women to work at night have also raised concerns and 10 central trade unions have planned a nation-wide strike against the Codes in February.

Other trade unions, though, have come out in support, accusing those opposing the Codes of being politically motivated. Hiranmay Pandya, President of the Bharatiya Mazdoor Sangh (BMS), which is affiliated to the Rashtriya Swayamsevak Sangh, says, “We are of the view that the Codes will benefit workers, which is why we and other unions have supported them,” he says.

Pandya notes that provisions like universal social security, recognition of gig workers and employment letters to all, including those under fixed-term employment are pro-worker. The BMS does have some concerns and is in talks with the labour ministry, which has assured that rules will be drafted to benefit workers.

It’s not just unions, small businesses, too, aren’t very pleased. The MSME lobby, Association of Indian Entrepreneurs (AIE), has expressed serious concerns that the Codes could significantly increase operating costs for small firms and disrupt business continuity.

In particular, the AIE has expressed reservations about the improved social security net for workers, which, it says, will result in a sharp increase in employee-related expenditure for thousands of micro and small enterprises. “Many MSMEs may be forced to restructure workforce size, absorb higher social security payouts, invest in safety equipment and periodic medical checks and upgrade HR systems to comply with the new digital requirements,” said KE Raghunathan, National Chairman of the AIE. Though these are good measures, Raghunathan says, there needs to be more clarity, financial support during the transition, and a flexible implementation mechanism to help MSMEs.

Implementation Challenge

Now, the Centre and states need to frame rules since labour falls in the Concurrent List of the Constitution. Plus, the digital infrastructure has to be rolled out to enable online registrations and return filing. Union Labour Secretary Vandana Gurnani says that is underway.

In the interim, companies and workers alike are trying to assess the impact of on their own work, and how salaries and payrolls would be restructured. Experts say much will also depend on the rules framed by the states.

Prakash of Khaitan & Co says whether the compliance is going to eventually ease is still to be seen. “The central rules are yet to be notified. The whole process of circulation of draft central rules under different Codes is going to be initiated again because a substantial amount of time has elapsed. It will take anywhere between 45 to 60 days for the central rules to be finalised.”

Since both the Centre and the states have to come out with rules, there could be states where the rules are a replica of the central ones and some where it is a departure. “The most important point is that the provisions pertaining to leave encashment, overtime and working hours for commercial establishments, are also mentioned under a central law now,” Prakash points out, adding that it was always supposed to be covered under state law, which is the Shops and Commercial Establishments Act. “And the irony here is that under no circumstances can one say that the existing state legal regime has been completely repealed,” he adds. Thus, the divergence is likely to continue till there are efforts to harmonise the rules.

Companies must treat the Labour Codes as a structural compliance reset, not a procedural update, explains Agrawal of TeamLease RegTech. Preparation is mandatory across four fronts—compliance architecture, payroll and cost structures, workforce policies, and digital transformation—because the Codes alter definitions, thresholds, enforcement models, and documentation requirements simultaneously. They will have to redesign payroll and CTC structures and prepare for unified registration and return filing, among other issues.

Costs of annual health check-ups, gratuity to fixed-term employees who work for a period of one year, creche facilities at establishments with over 50 workers and safety measures for women who work night shifts, and a fund for re-skilling workers are other issues under discussion in most offices. The definitions of employee and employer have also been broadened bringing more workers under the law, including contract labour hired by companies.

However, Gurnani underlines that formalisation of workers should not be seen as a cost. Rather the benefits will ensure a more productive workforce.

Impact on Investment and Jobs

A report by the think tank National Council of Applied Economic Research, titled India’s Employment Prospects: Pathways to Jobs, says India needs to urgently overcome bottlenecks to raise both the quality and quantity of workforce participation and productivity.

“Since 2017–18, India’s working-age population has grown by nearly 90 million, but the economy has created only about 60 million jobs in that period (PLFS, 2024). This translates to a shortfall of 5 million jobs per year, even as roughly 10–12 million people enter the labour force annually,” the report states. Of those who are employed, only one in four enter the formal economy.

The manufacturing sector, considered a historical bulwark of the transition from an agrarian to a high productivity economy, has seen its share in employment stagnate or decline in several states in recent years. Besides, it is becoming more capital-intensive.

The Codes may help here, Ahuja, the former labour secretary, says. They make the Factories Act 1948, which was not in sync with a modern economy, redundant. “This is likely to give an impetus to the manufacturing sector and will also be positive for the services sector,” she avers.

Rumki Majumdar, Economist at Deloitte India, says enabling women to work in night shifts will help manufacturers access a bigger pool of workforce, improving overall productivity. “Some of the biggest beneficiaries would be the Tier II and III towns, which have a high concentration of MSMEs,” she says. She adds that the Codes will substantially improve working conditions and standards at MSMEs, which in turn, will help broad-base growth as these cities will attract investments.

One of the highlights and, perhaps, the most contentious provision is in the Industrial Relations Code, 2020. This is the tripling of the threshold for lay-off, retrenchment, and closure to 300 workers from 100 earlier, enabling “smaller industrial establishments employing fewer than 300 workers to restructure operations based on their requirements without needing complex government approvals”.

While unions have called this an attack on workers’ rights, the threshold could be too low to be truly meaningful for big businesses.

“From a broader business sentiment standpoint, 300 is a relatively small number, particularly when compared with workforce sizes in major manufacturing or industrial operations. However, the threshold cannot be viewed solely from the lens of ease of doing business—worker protection remains an equally important consideration in the Indian context,” Prakash notes. He feels a more nuanced approach might have been preferable with industry-specific thresholds.

The labour ministry is confident that the Codes will boost investment and employment by providing predictability and stability and by cutting the compliance burden for firms. Gurnani says exports, too, will get a boost as provisions on social security and welfare now align with those in developed countries. Labour standards have been one of the contentious issues for many of India’s exports and free trade agreement negotiations.

A recent note by Cyril Amarchand Mangaldas sums up that the transition to the new regime, whilst demanding, presents an opportunity to modernise employment practices, enhance transparency, and build trust with the workforce. “In an increasingly competitive talent landscape, robust compliance is not merely a legal obligation—it is a strategic advantage,” it sums up.

Nirmal K Minda, President of the industry lobby Assocham, says the Codes replace outdated and fragmented laws with a clearer, more uniform framework, which means fewer filings, simpler compliance, clearer hiring and retrenchment rules, and closer alignment with global standards. “However, the real impact will depend on timely state-level adoption, clarity of rules, and effective manage-ment of transition costs and compliance changes.”

The biggest test of the Codes will be in whether they actually lower the compliance burden and convince investors to set up plants and expand operations.

@surabhi_prasad