How to Navigate India's Labour Laws as a Foreign Company

Executive Summary

• India's four new Labour Codes -- the Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions Code (2020) -- became effective on November 21, 2025, consolidating 29 existing central labour laws into four unified statutes. Final Central Rules were issued in draft form on December 30, 2025, with full operational rules expected by April 1, 2026.
• The wage restructuring mandate is the single largest financial impact for foreign employers: the new definition of "wages" requires that basic pay constitute at least 50% of total remuneration. Employers who previously structured packages with low basic pay and high allowances face increased statutory contributions to Provident Fund (12%), ESI (3.25%), and gratuity -- adding an estimated 8-15% to total compensation costs.
• Termination rules have been relaxed for most companies: the threshold for requiring government approval for retrenchment has been raised from 100 to 300 workers, giving small and mid-sized foreign operations greater flexibility. However, a new Re-skilling Fund obligation requires employers to deposit 15 days' wages per retrenched worker within 45 days.
• State-level variation remains the most underestimated compliance risk. Labour is a concurrent subject under the Indian Constitution. A company hiring in Mumbai follows Maharashtra rules; the same company hiring in Bengaluru follows Karnataka rules. Minimum wages, professional tax rates, and leave entitlements differ materially across states.

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Introduction: Why Labour Law Compliance Is Non-Negotiable

For European and American companies establishing operations in India, labour law compliance is not a back-office concern -- it is a board-level risk. India's labour regulatory framework is enforced through criminal penalties (not just fines), mandatory filings with multiple government agencies, and a labour court system that heavily favours employees.

Non-compliance consequences include: criminal prosecution of company directors and responsible officers, penalties ranging from INR 50,000 to INR 10 lakhs per violation, inability to obtain government contracts, and reputational damage that affects hiring and business relationships.

The new Labour Codes, while simplifying the overall framework from 29 laws to 4, introduce several changes that directly affect payroll costs, hiring flexibility, and termination procedures. This guide explains what foreign companies need to know and do.

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The Four Labour Codes: What Changed

Code on Wages, 2019

What it replaces: The Payment of Wages Act (1936), Minimum Wages Act (1948), Payment of Bonus Act (1965), and Equal Remuneration Act (1976).

Key changes for foreign employers:

1. Universal minimum wage: Establishes a floor wage set by the Central Government, below which no state can fix its minimum wage. This creates a national floor for the first time.

2. Revised "wages" definition: Wages are defined to include basic pay, dearness allowance, and retaining allowance. Critically, allowances, overtime, house rent allowance, and bonuses are excluded from the definition only if they do not exceed 50% of total remuneration. If allowances exceed 50%, the excess is reclassified as wages for the purpose of statutory contributions.

   Practical impact: A compensation package of INR 1,00,000/month structured as INR 30,000 basic + INR 70,000 allowances would be non-compliant. The employer would need to restructure to at least INR 50,000 basic + INR 50,000 allowances, increasing PF and ESI contribution bases by 67%.

3. Payment timeline: Wages must be paid by the 7th of the following month (for establishments with fewer than 1,000 workers) or by the 10th (for larger establishments).

Industrial Relations Code, 2020

What it replaces: The Trade Unions Act (1926), Industrial Employment (Standing Orders) Act (1946), and Industrial Disputes Act (1947).

Key changes for foreign employers:

1. Retrenchment threshold raised: Government permission for layoffs, retrenchment, or closure is now required only for establishments with 300+ workers (previously 100). This gives small and mid-sized foreign operations significantly more flexibility.

2. Fixed-term employment recognised: Employers can hire workers on fixed-term contracts with the same benefits as permanent employees (including gratuity pro-rated for terms of one year or more). This provides legitimate project-based hiring flexibility without using contract labour.

3. 14-day notice for strikes and lockouts: Workers in all establishments must give 14 days' advance notice before striking. Strikes during conciliation and adjudication proceedings are prohibited.

4. Re-skilling Fund: A new obligation requiring employers to deposit 15 days' of the last drawn wages of retrenched workers into a government-administered Re-skilling Fund within 45 days of retrenchment. This is separate from statutory retrenchment compensation.

5. Standing Orders: Establishments with 300+ workers (up from 100) must have certified Standing Orders governing employment conditions. Smaller establishments can adopt Model Standing Orders.

Code on Social Security, 2020

What it replaces: The Employees' Provident Funds and Miscellaneous Provisions Act (1952), ESI Act (1948), Payment of Gratuity Act (1972), Maternity Benefit Act (1961), Employees' Compensation Act (1923), and four other social security laws.

Key changes for foreign employers:

1. Expanded PF and ESI coverage: The revised wage definition increases the base for PF (12% employer + 12% employee) and ESI (3.25% employer + 0.75% employee) contributions. ESI applies to employees earning up to INR 21,000/month.

2. Gratuity for fixed-term employees: Gratuity is now payable to fixed-term employees who complete one year of service (previously five years for regular employees). This is a significant cost increase for companies using fixed-term contracts.

3. Gig and platform worker coverage: Aggregators and platform companies must contribute 1-2% of annual turnover (capped at 5% of worker payments) toward social security for gig workers. While this primarily affects platform companies, foreign companies using gig workers for delivery, logistics, or field services must assess their exposure.

4. Compulsory gratuity insurance: Employers (other than government entities) must obtain compulsory gratuity insurance to cover their gratuity liability. Self-insurance is permitted only for establishments with 500+ employees and government approval.

Occupational Safety, Health and Working Conditions Code, 2020

What it replaces: The Factories Act (1948), Mines Act (1952), Building and Other Construction Workers Act (1996), and 10 other occupation-specific safety laws.

Key changes for foreign employers:

1. Single registration: One registration covers all establishments (factory, shop, or other), replacing the multiple registrations previously required under separate laws.

2. Working hours cap: Maximum 8 hours per day, with overtime limited and compensated at twice the ordinary wage rate. Weekly working hours must not exceed 48.

3. Annual health check-ups: Mandatory for workers in factories and hazardous processes. Employers bear the cost.

4. Inter-state migrant workers: Employers hiring workers from other states must provide travel allowance (for journeys to and from home state) and a displacement allowance. This is particularly relevant for manufacturing operations that draw workers from multiple states.

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Employer Cost Breakdown: Statutory Obligations

The following table shows the mandatory employer contributions as a percentage of wages under the new codes. These costs are non-negotiable and apply uniformly to all employers meeting the coverage thresholds.

Obligation	Employer Contribution	Employee Contribution	Threshold
Provident Fund (EPF)	12% of wages	12% of wages	20+ employees
Employee State Insurance (ESI)	3.25% of wages	0.75% of wages	10+ employees; employee salary up to INR 21,000/month
Gratuity	~4.81% of wages (accrual)	None	All establishments with 10+ employees
Professional Tax	Varies by state (INR 200-300/month typically deducted from employee)	Deducted from salary	State-dependent
Labour Welfare Fund	INR 10-30 per employee/half-year	INR 3-12 per employee/half-year	State-dependent
Bonus	8.33% to 20% of wages	None	Establishments with 20+ employees; employees earning up to INR 21,000/month

Total employer overhead above base salary: approximately 25-35%, depending on the employee's salary level, state of employment, and whether ESI and bonus thresholds are met.

Comparison with European benchmarks: German employer social security contributions are approximately 20-21% of gross wages (pension, health, unemployment, nursing care). French contributions are approximately 25-42%. Indian statutory obligations, at 25-35%, are broadly comparable but structured differently -- with a heavier concentration on provident fund (retirement savings) and a mandatory gratuity component that has no direct European equivalent.

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State-Level Variations: The Hidden Complexity

Labour is a concurrent subject under the Indian Constitution, meaning both the Central Government and State Governments can legislate on labour matters. In practice, this creates material compliance differences across states.

Minimum Wages

Minimum wages are set at both central and state levels. States can set higher minimums than the central floor. As of Q1 2026, examples of state-level minimum wage variations for unskilled workers:

State	Monthly Minimum Wage (Unskilled, Approximate)
Delhi	INR 17,494 (~$211)
Karnataka	INR 13,000-15,500 (~$157-187)
Maharashtra	INR 12,500-16,000 (~$151-193)
Tamil Nadu	INR 11,000-13,000 (~$133-157)
Gujarat	INR 11,500-12,500 (~$139-151)

These figures vary further by skill level (unskilled, semi-skilled, skilled, highly skilled) and by industry classification within each state.

Professional Tax

Professional tax rates and thresholds differ by state. Maharashtra caps it at INR 2,500/year. Karnataka charges INR 2,400/year. Some states (Rajasthan, Haryana) do not levy professional tax at all.

Shops and Establishments Acts

State-level Shops and Establishments Acts govern working hours, leave entitlements, and registration requirements for non-factory commercial establishments. Key differences:

• Working hours: Most states mandate 9 hours/day, 48 hours/week. Karnataka allows IT/ITES companies extended flexibility with 12-hour shifts under certain conditions.
• Leave entitlements: Annual leave ranges from 12-21 days depending on the state. Sick leave ranges from 7-12 days. National and festival holidays range from 10-17 days.
• Night shifts for women: Permitted in most states for IT/ITES with safety requirements (transport, security). Restrictions remain in some states for manufacturing.

Practical Implication

A European company hiring 50 employees in Bengaluru (Karnataka) and 30 employees in Mumbai (Maharashtra) must maintain two separate compliance frameworks: different minimum wage schedules, different professional tax filings, different leave policies, and different Shops and Establishments registrations. Many foreign companies underestimate this administrative overhead.

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Common Mistakes Foreign Companies Make

1. Treating India as a Single Labour Market

India has 28 states and 8 union territories, each with authority to modify central labour provisions. A compliance framework designed for one state does not transfer to another. Companies expanding from one Indian city to another must conduct a state-specific compliance assessment before hiring.

2. Structuring Compensation to Minimise Statutory Contributions

The historic practice of setting basic pay at 30-40% of total compensation (with the remainder as allowances) to reduce PF and ESI contributions is now non-compliant under the new codes. The 50% basic pay threshold is explicit. Restructuring takes-home pay will decrease for employees even as total employer cost increases -- requiring transparent communication.

3. Misclassifying Employees as Contractors

Indian labour law applies substance-over-form tests. If a "contractor" works exclusively for one company, follows company work schedules, uses company equipment, and reports to company management, courts will reclassify the relationship as employment -- with retrospective liability for PF, ESI, gratuity, and bonus. This reclassification risk is heightened under the new Social Security Code, which expands coverage to gig and platform workers.

4. Ignoring Gratuity Obligations

Gratuity is payable on termination (whether by resignation, retirement, death, or disability) after five years of continuous service for permanent employees or one year for fixed-term employees. The amount is calculated as: (last drawn wages x 15/26) x years of service. For a senior employee earning INR 2,00,000/month with 10 years of service, the gratuity liability is approximately INR 11.5 lakhs (~$13,900). This is a real cash outflow that must be provisioned and, under the new code, insured.

5. Assuming Termination Works Like It Does in Europe or the US

India does not have "at-will" employment. Termination of a "workman" (broadly, any non-managerial, non-supervisory employee) requires one month's notice (or wages in lieu), retrenchment compensation of 15 days' average pay per year of service, contribution to the Re-skilling Fund, and compliance with "last in, first out" principles. For establishments with 300+ workers, government permission is required -- and is frequently delayed or denied.

Managerial and supervisory employees can be terminated per their employment contract terms, but even here, Indian courts have imposed "principles of natural justice" requirements including written explanation of cause and opportunity to respond.

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Compliance Checklist for Foreign Companies

Before Hiring the First Employee

• Register under the applicable state Shops and Establishments Act (within 30 days of commencing business)
• Obtain EPF registration (mandatory for 20+ employees; voluntary for fewer)
• Obtain ESI registration (mandatory for 10+ employees)
• Register for Professional Tax in applicable state(s)
• Prepare employment contracts compliant with applicable Standing Orders
• Establish payroll with compliant wage structure (50% basic pay threshold)
• Obtain compulsory gratuity insurance policy
• Register under applicable Labour Welfare Fund(s)

Monthly Compliance

• PF contribution deposit by 15th of following month
• ESI contribution deposit by 15th of following month
• Professional tax deposit (state-specific deadline)
• Maintain prescribed registers (wages, attendance, overtime, leave)

Annual Compliance

• File annual PF returns
• File annual ESI returns
• File annual returns under Shops and Establishments Act
• Calculate and pay annual bonus (for eligible employees)
• Update minimum wage schedules (revised semi-annually in most states)
• Conduct annual health check-ups (for factory/hazardous-process workers)
• Review gratuity insurance coverage adequacy

On Termination

• Provide written notice (30 days or as per contract)
• Pay retrenchment compensation (15 days' average pay per completed year of service)
• Deposit Re-skilling Fund contribution (15 days' last drawn wages within 45 days)
• Calculate and pay gratuity (if eligible)
• Clear all final settlement dues within 2 working days of termination
• Issue experience/relieving letter
• Transfer/settle PF and ESI records

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Implementation Timeline: What to Expect

Milestone	Expected Date
Labour Codes notified (effective)	November 21, 2025 (done)
Draft Central Rules published	December 30, 2025 (done)
Final Central Rules expected	April 1, 2026
State-level Rules notification	Varies by state (several states have published draft rules; few have finalised)
Full operational parity across all states	H2 2026 (estimated)

The transition period creates an unusual compliance environment: the old laws have been repealed, the new codes are in force, but the detailed procedural rules for implementation are not yet finalised in most states. Foreign companies should comply with the codes as enacted while monitoring state-specific rule notifications through the Ministry of Labour and Employment portal (labour.gov.in).

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Conclusion: Labour Compliance as Competitive Advantage

The new Labour Codes simplify India's labour regulatory framework and, in several areas, increase employer flexibility -- particularly the raised retrenchment threshold (300 workers), fixed-term employment recognition, and single registration. However, the wage restructuring mandate and expanded social security coverage increase employer costs by an estimated 8-15% of total compensation.

Foreign companies that build compliant HR infrastructure from inception -- rather than retrofitting after receiving a regulatory notice -- gain three advantages: predictable labour costs (no retrospective liabilities), stronger employee trust (which reduces attrition in a competitive talent market), and clean due-diligence records for future investors or acquirers.

The April 2026 final rules deadline is the action trigger. Companies operating in India should use the current transition period to restructure wage components, update employment contracts, obtain gratuity insurance, and map state-level compliance requirements across all locations where they have employees.

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Tensor Advisory supports European and American companies with India labour law compliance structuring, payroll setup, and ongoing compliance management. For a state-specific compliance assessment, contact us at tensor-advisory.com.