India’s leading industry bodies have raised serious concerns over the implementation of the new Labour Codes, warning that changes to the definition of wages and gratuity provisions could substantially increase employment and compliance costs for companies.
The concerns were flagged during a meeting held on Wednesday with the Ministry of Labour and Employment, chaired by Labour Secretary Vandana Gurnani. Representatives from major industry associations participated in the discussions and sought greater clarity on key provisions before the rules are formally notified.
Wage Definition Emerges as Key Concern
Industry representatives said the revised definition of wages under the new Labour Codes has created uncertainty for employers, particularly with respect to cost structures and payroll planning.
Under the new framework, at least 50 per cent of an employee’s total remuneration must be classified as wages, with the remaining portion allowed as allowances. Any amount exceeding this threshold would automatically be treated as wages.
A senior industry official said this change would directly impact statutory payouts.
“If at least half of the compensation has to be treated as wages, it will significantly increase the employer’s liability towards provident fund, gratuity and other social security contributions,” the official said.
Until now, companies had flexibility in structuring salaries by allocating a larger portion to allowances, which helped reduce statutory contributions. The new rules are expected to eliminate that flexibility.
Gratuity Rules to Push Up Long-Term Costs
Another major concern raised by industry bodies relates to gratuity eligibility for fixed-term employees.
Under the new Labour Codes:
- Fixed-term employees will be eligible for gratuity after completing one year of service
- Earlier, gratuity was applicable only after five years of continuous service
- The provision applies regardless of the nature of employment contract
Industry groups warned that this could significantly raise costs, especially in sectors such as manufacturing, construction, logistics and services, where fixed-term employment is common.
“This change will increase long-term financial liabilities for employers, particularly those with large contractual workforces,” an industry representative noted.
Government Seeks Impact Assessment
Sources said the Labour Ministry has asked industry bodies to submit a detailed assessment of the financial impact of the proposed rules.
The ministry has sought inputs on:
- Expected increase in payroll costs
- Impact on hiring and job creation
- Practical challenges in implementing the new wage structure
- Areas requiring clarification or modification
Officials said the government is still in the consultation phase and has not taken a final call on the rules.
Industry Bodies Present at the Meeting
The meeting was attended by representatives from major industry associations, including:
Confederation of Indian Industry (CII)
Federation of Indian Chambers of Commerce and Industry (FICCI)
Associated Chambers of Commerce and Industry of India (ASSOCHAM)
Federation of Indian Micro and Small & Medium Enterprises (FISME)
The associations urged the government to adopt a phased or flexible approach, particularly for small and medium enterprises.
Government’s Position
Officials from the Labour Ministry maintained that the intent of the new Labour Codes is to strengthen employee welfare and bring uniformity across the labour ecosystem.
According to the ministry:
- The new wage definition aims to prevent artificial salary structuring
- Higher social security contributions will benefit workers in the long run
- The reforms are designed to improve transparency and compliance
Labour Secretary Vandana Gurnani had earlier stated that the changes are meant to ensure that employees receive fair social security benefits and that wages are not artificially suppressed.
What Lies Ahead
Sources indicated that:
- Further rounds of consultations are likely
- Some provisions may be clarified through rules or guidelines
- States may be given limited flexibility in framing implementation norms
- Final notification will follow only after stakeholder feedback is reviewed
While the new Labour Codes are being positioned as the most significant labour reform in decades, industry bodies believe the current framework could increase hiring costs and discourage employment if implemented without modification.
The coming weeks will be crucial as the government weighs industry concerns against its objective of strengthening worker protections. The final shape of the rules will determine how smoothly India transitions to the new labour regime.
