· 3 min read · Updated 31 Aug 2026
By Correct Editorial — Compliance Research Desk
What Can We Expect from the Labour Codes?
Published on: April 30, 2025
Businesses in India have long faced regulatory disincentives for expanding their workforce. Indian labour regulations have historically penalized growth by imposing incremental legal burdens as firms cross certain employee thresholds. As Dr. Arvind Panagariya, former Vice-Chairman of NITI Aayog, observed:
“When you go from six workers to seven in a firm, the Trade Unions Act kicks in. When you go from nine to ten, the Factories Act kicks in. And when you go from 19 to 20, something else kicks in… The biggest killer is the Industrial Disputes Act, which says that if you are a manufacturing firm with 100 workers or more, you cannot dismiss any of them under any circumstances unless you get prior approval from the government.”
Despite clear evidence that labour reforms lead to higher employment, wages, and productivity, such reforms have historically been stalled by political inertia. Research from Brookings Institution, Indian Statistical Institute, and NCAER shows that:
- States with entrepreneur-friendly labour regulations enjoy higher employment and wages
- Industries in such states are 25.4% more productive
A Turning Point: The Four Labour Codes
In October 2020, India took a significant step by consolidating 44 central labour laws into four comprehensive codes:
- Code on Wages
- Code on Social Security
- Industrial Relations Code
- Occupational Safety, Health and Working Conditions (OSHWC) Code
These reforms mark the first fundamental overhaul of India’s labour law framework. Here's what's changing:
1. Leaner, Simpler Legal Structure
According to TeamLease RegTech, the new codes:
- Reduce the number of sections from 1,232 to 480 (a 67% drop)
- Consolidate 44 laws into just 4 codes
This creates a simplified compliance environment and reduces legal clutter.
2. Incentives for Scaling Businesses
The codes raise regulatory thresholds, helping smaller businesses avoid excessive compliance early on:
- Contract labour regulation threshold raised from 20 to 50 workers
- Threshold for requiring government approval to dismiss workers raised from 100 to 300
- States are empowered to further increase these thresholds
3. Clarity in Definitions
Key terms like "wages", "worker", and "establishment" are now uniformly defined across codes.
- Previously, “wages” had at least 10 conflicting definitions
- Uniformity removes ambiguity and reduces compliance errors
4. Lower Compliance Burden
- Code on Social Security: Reduces 36 returns to 1 consolidated return
- OSHWC Code: Merges 11 registrations into 1 common registration, with a 30-day turnaround
This will significantly cut down on administrative costs, time, and the need for legal consultants.
5. Proportional Penalties
The new codes introduce graded penalties based on the severity of the violation:
- Previously, minor and major violations invited the same harsh penalties
- Now, non-critical issues (e.g., not maintaining a register) may result in fines only
- Serious violations (e.g., safety breaches) can still lead to imprisonment
Looking Ahead: Implementation & State-Level Action
The Government of India plans to implement the codes next year. As per TeamLease RegTech, labour laws account for 47% of all compliance obligations faced by Indian entrepreneurs.
States now have around 5 months to frame rules that make these reforms meaningful:
- Digitize filings, registrations, and approvals
- Reduce inspector interference and approval delays
- Allow flexibility in recordkeeping, service rules, and work conditions
Opportunities for Further Reform
GoI can strengthen the reform agenda by:
- Bringing overtime wages (currently 2x normal wage) closer to the ILO limit of 1.25x
- Empowering states further to set thresholds for compliance and define working hours
- Extending state control over Standing Orders compliance thresholds
Labour costs jump by 35% when hiring the 10th worker—reforms can mitigate this spike and incentivize job creation.
Conclusion
With the introduction of the labour codes, India has taken a landmark step toward improving its business environment and employment ecosystem. These reforms have the potential to:
- Lower compliance burdens
- Encourage scale
- Improve transparency
- Foster job creation
The task now lies in effective implementation and progressive state-level rulemaking to ensure this historic change leads to real-world impact.
India Inc. is ready to move. Let’s keep going.
Frequently asked questions
- Which laws do the four labour codes replace?
- In October 2020 India consolidated 44 central labour laws into four codes: the Code on Wages, the Code on Social Security, the Industrial Relations Code, and the Occupational Safety, Health and Working Conditions Code. This was the first fundamental overhaul of the country's labour law framework rather than an amendment to the existing structure.
- How do the codes change employee thresholds?
- The codes raise the points at which heavier regulation begins. The contract labour regulation threshold moves from 20 to 50 workers, and the threshold at which government approval is required before dismissing workers moves from 100 to 300. States are further empowered to raise these thresholds. The intent is to remove the long-standing disincentive against a firm growing past a particular headcount.
- What reduction in administrative burden do the codes deliver?
- The consolidation cuts the number of sections from 1,232 to 480, a drop of about 67 percent. Beyond the structural simplification, the Code on Social Security reduces 36 returns to a single consolidated return, and the Occupational Safety, Health and Working Conditions Code merges 11 registrations into one common registration with a thirty-day turnaround.
- Why did the definitions in the codes matter so much?
- Terms such as wages, worker and establishment are now defined uniformly across all four codes. Previously the term wages alone carried at least ten conflicting definitions across different statutes, which meant the same payroll could be computed differently depending on which law was being applied. Uniform definitions remove a common and largely invisible source of compliance error.