Skip to main content
main content, press tab to continue
Article | Global News Briefs

India: New labor codes affect employer-provided benefits including provident funds, and industrial relations

By Jehangir Damkevala and Ritobrata Sarkar | October 29, 2020

Four new labor codes will give some employers more flexibility in dismissing employees and could significantly increase employers’ benefit costs and liabilities.
Health and Benefits|Retirement|Ukupne nagrade

Employer Action Code: Act

Parliament has recently approved three separate codes on social security; industrial relations; and occupational safety, health and working conditions. Together with the Wages Code approved in 2019 (but not yet implemented), these codes consolidate and streamline, as well as introduce several changes to, 44 existing federal laws. Some of the changes could have a significant effect on employer costs and liabilities. While the government has yet to formally announce when the four new codes will be implemented, they are all expected to be in force by April 1, 2021.

Key details

Changes under the Social Security Code (SSC — further details can be found on our page Code on Social Security 2020.)

  • Nine different social security laws will be consolidated (Employees' Provident Fund and Miscellaneous Provisions Act, Employees' State Insurance Act, Employment Exchanges Act, Maternity Benefit Act, Payment of Gratuity Act, Employees' Compensation Act, Unorganized Workers Social Security Act, Cine-Workers Welfare Fund Act, and Building and Other Construction Workers Act).
  • The mandatory employer provision of a defined benefit gratuity scheme (GS) end-of-service payment will be extended to employees on fixed-term employment contracts, on a pro rata basis without the need to complete five years of service (which is required for permanent staff in the case of retirement or resignation). Clarification from the government is needed regarding whether fixed-term service prior to enactment of the SSC should be reflected in the GS benefit calculation. The changes also extend statutory benefit eligibility to fixed-term employees, on the same basis as permanent employees, irrespective of statutory vesting or other service-based eligibility requirements.
  • Aligning with the change introduced in the Wages Code, the definition of wages used for statutory and mandatory benefits will be expanded to include certain additional elements of compensation (e.g., various common allowances, pension contributions) if these elements total more than 50% of the employee’s total compensation. This may result in an increase of employer and employee contributions to the social security Employees' Provident Funds (EPF) and Employees’ Pension Scheme (EPS) as well as a decrease in employee take-home pay. It may also result in an increase in mandatory GS amounts and employer liabilities (dependent on the gratuity formula, employee demographics and assumptions). For an employer where basic pay represents about 35% of gross pay, Willis Towers Watson estimates that the GS employer liability could potentially increase by about 40% as a result of this wage definition change.
  • A social security fund will be set up to provide welfare benefits to gig and unorganized workers (home-based and the self-employed). Benefits will include maternity, cash benefits in case of sickness, a termination indemnity (after five years of insured service) and compensation in the case of occupational injury or illness. Benefits will be financed from federal or state government revenues.
  • Currently, employers with 50 or more workers are required to provide or arrange for childcare facilities at or near the workplace that mothers may visit at least four times per day. A new provision will allow different employers to utilize a common crèche. A group of establishments may also pool their resources for setting up a common crèche in the manner mutually agreed upon.

Changes under the Industrial Relations Code (IRC)

  • Three different labor relations laws will be consolidated (Trade Unions Act, Industrial Employment [Standing Orders] Act and Industrial Disputes Act).
  • Employers will be required to recognize a registered union for the purposes of employee representation if one is established within an enterprise. In the event two or more unions are present, recognition will apply to the union supported by at least 51% of the workers. If none have 51% support, a negotiating council should be established with representatives of each union representing at least 20% of the workers.
  • Employers will be required, in the event of retrenchment (i.e., collective dismissals), to contribute to a new “re-skilling” fund at a rate of 15 days’ pay per employee made redundant. Workers will be able to claim 15 days’ wages from the fund within 45 days of being made redundant.
  • The threshold for the total number of workers at which industrial establishments must obtain permission from the central government in order to lay off or dismiss workers will increase from 100 to 300.

Employment-related changes under the Occupational Safety, Health and Working Conditions Code, which will consolidate 13 existing laws, include the requirements that 1) employers provide a free annual health checkup for all their employees, 2) employers with at least 100 workers (250 currently) provide an onsite cafeteria, and 3) employers extend statutory benefits and annual journey allowance to interstate workers. Moreover, women will be entitled to be employed in all establishments for all types of work, including hazardous operations subject to adequate safeguards, and can be employed, with their consent, before 6:00 a.m. and beyond 7:00 p.m. subject to appropriate conditions relating to safety, holidays and working hours.

The Wages Code aims to create a more uniform legal framework on basic wages. In addition to the change noted above regarding the inclusion of certain additional compensation elements within the definition of “wages” (if they represent more than half of the worker’s total compensation), the code also creates a binding national minimum wage floor yet to be determined (higher rates could be set at the state or regional level) and allows employers to fix the payment of wages on a daily, weekly, fortnightly or monthly basis. It also stipulates the time limit (seven days) following the defined pay period, irrespective of the size of the workforce.

Employer implications

Though the re-codification has left many existing laws intact, it also introduces some reforms that could result in more significant changes to the future employee pay and benefit landscape. Employers should review the reforms to ensure compliance and to understand and plan for any potential effects on cost and liability. In particular, employers may wish to consider options to rebalance the various elements of their salary structures to minimize the impact of the changing definition of “wages” on employees’ take-home pay and to mitigate retirement liability effects.


Jehangir Damkevala
Retirement Trust Consulting Leader
email Email

Head of Retirement, India
email Email

Contact us