Understanding New Labour Code Changes and the Impact on Companies’ One-Time Provisions
Most companies reporting their financial results for the third quarter of FY26 are facing significant one-time provisions related to employee benefits, primarily due to the recent changes in the labour code. This shift, particularly concerning gratuity payments, has prompted businesses to reassess their financial statements. The new regulations redefine wage calculations and expand eligibility for fixed-term employees, leading to increased gratuity liabilities and impacting various sectors differently.
Understanding the New Labour Code Changes
The recent changes in the labour code, specifically the Code on Social Security, 2020, have redefined how gratuity is calculated for employees. Under the new rules, wages must constitute at least 50% of an employee’s total cost-to-company (CTC) when calculating gratuity. If allowances exceed this threshold, the excess must be added back to the wage calculation. This adjustment effectively raises the base for gratuity calculations, resulting in higher future payouts for companies. Additionally, fixed-term employees are now eligible for gratuity after just one year of service, a significant reduction from the previous five-year requirement. These changes compel companies to account for increased gratuity liabilities, leading to the necessity of one-time provisions in their financial results.
Implementation Timeline and Government Intentions
The government introduced these changes through the Code on Social Security, 2020, which consolidates 29 older labour laws into four new codes. While Parliament passed the codes in 2020, the detailed implementation rules were notified later, with the new regulations coming into effect on November 21, 2025. The primary goal of these reforms is to simplify labour laws and enhance social security coverage, particularly for fixed-term employees. The government aims to address the trend of companies structuring salaries with low basic pay and high allowances to minimize statutory payouts. By redefining wages, the new rules reduce this flexibility, ensuring that more employees receive fair benefits.
Impact on Employees and Industries
The changes brought about by the new labour code are expected to benefit employees significantly. With a broader wage base for gratuity calculations, many workers will receive higher retirement or exit benefits. Fixed-term employees, who previously had to complete five years of service to qualify for gratuity, can now access these benefits after just one year. This adjustment is particularly advantageous for workers in sectors characterized by short-term or project-based employment. Furthermore, the reforms aim to enhance transparency in salary structures and expand social security coverage across various industries.
The impact of these changes varies by sector. Industries such as manufacturing and heavy industries, which rely heavily on contract and fixed-term workers, may see increased gratuity liabilities. Technology and IT services, known for their allowance-heavy salary structures, might need to restructure compensation to comply with the new wage definitions. Similarly, the banking and financial services sector could face higher statutory benefit costs, while the construction industry may encounter increased compliance requirements due to a large informal workforce.
Projected Financial Implications for Different Sectors
Manufacturing and heavy industries are anticipated to make the largest one-time provisions due to their significant reliance on contract workers and lower basic salary structures. This sector’s dependence on fixed-term employment will likely lead to substantial increases in gratuity liabilities. Technology and financial services companies are also expected to experience notable increases in provisions, although typically less than those in manufacturing. Other sectors, such as retail and healthcare, may face challenges related to seasonal hiring and compliance costs, respectively, as they adapt to the new regulations. Overall, the financial implications of these changes will require companies across various industries to reevaluate their workforce models and compensation structures to align with the updated labour code.
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