If you’re a founder, director or HR head in India right now, you’ve probably seen the charts doing the rounds on social media about the new labour codes. Basic salary up. Gratuity sooner. Salary date earlier. Overtime at double pay. Full & final within two working days.
It looks simple in a graphic. However, when you try to apply it to real employees, real cost and real systems, it suddenly becomes complicated. Old appointment letters don’t match. Salary structures feel outdated. Payroll cycles look risky.
The good news is: once you update your HRM Policies in a structured way, these changes stop being scary and start becoming a competitive advantage. You show employees that you are fair and compliant, and you show authorities that your documentation and processes are aligned with the new rules.
Let’s translate that “recent changes in labour laws” image into clear employer actions.
What the New Labour Codes Are Actually Asking You to Change
1. The wage definition, and what it really requires
What the Code actually says. Under section 2(y) of the Code on Wages, 2019, basic pay plus dearness allowance plus retaining allowance must together be at least 50% of total remuneration.
This is widely repeated as “basic salary must be 50% of CTC”. That is not what the provision says, and the difference matters if you are restructuring pay:
- It is three components together, not basic alone.
- It is measured against total remuneration as the Code defines it, not against cost to company. CTC typically includes employer PF and gratuity provisioning, which is not the same base.
- There was no earlier statutory rule setting basic at 30%. That figure is a common industry practice, not a repealed provision.
The practical consequence is still real. Structures built to suppress basic and inflate allowances no longer work, and because PF and gratuity are both calculated on basic plus DA, correcting the structure raises both.
2. Gratuity: From 5 Years to Just 1 Year
The cost impact is genuine, so it is worth modelling rather than guessing. Raising the basic component raises the PF base and the gratuity accrual base together, and it changes notice pay and leave encashment where those are calculated on basic.
One caution on sequencing: do not reduce an existing employee’s basic to rebalance a structure. Correct forward, applying the revised structure to new hires and to increments, and let the old one age out. Cutting a component someone already receives creates a fresh dispute and achieves the saving slowly anyway.
3. Salary Credit Date: From 10th to 7th of the Month
Old rule: Salary could be paid by the 10th of each month.
New rule: Salary must be paid by the 7th.
Therefore, your attendance cut-off, payroll processing timeline and bank payment cycles all need to move up. Any delay beyond the 7th can now create compliance risk and employee dissatisfaction.
4. Overtime: Consistent Double Pay Beyond 8 Hours
Old rule: Overtime rules differed by state and position.
New rule: Work beyond 8 hours per day should be paid at double pay.
Suddenly, informal “please stay back” culture becomes expensive and risky if it’s not documented and approved properly.
5. Weekly Work Limit: 48 Hours Instead of 60
Old rule: Up to 12 hours per day allowed, maximum 60 hours per week.
New rule: Up to 12 hours per day still allowed, but maximum 48 hours per week.
So, stretching people too many days in a row is no longer acceptable. You must track weekly totals, not just daily shifts.
6. Full & Final Settlement: From 30 to 60 Days to 2 Working Days
Old rule: F&F settlements were typically cleared within 30 to 60 days.
New rule: They must be cleared within 2 working days.
This is where many companies are most exposed. Slow F&F has been “normal” for years. Now it can clearly go against the spirit of the new code.
Why Your HR Policies Need a Serious Update
Because of these changes, it’s no longer enough to tweak a few Excel formulas. If your written rules and actual practices don’t match, you are creating a trail of contradictions.
- Appointment letters may still show old gratuity conditions.
- HR manuals may not mention full & final timelines correctly.
- Overtime rules may be unclear or inconsistent.
- Payroll cut-off dates may not support the 7th-of-month salary requirement.
When you update your HRM Policies once, carefully, you give your HR, finance and leadership team a common rulebook. Everyone stops guessing.
Step-by-Step: Where to Start Updating Policies
Step 1: Review salary structures against the wage definition
Check that basic plus dearness allowance plus retaining allowance reaches 50% of total remuneration, and model what that does to your PF and gratuity cost before changing anything. Apply the corrected structure to new hires and increments rather than cutting existing components.
Step 2: Get gratuity right, and be precise about who it applies to
The change is narrower than it is usually reported. A fixed-term employee is entitled to the same statutory benefits as a permanent employee doing the same work, pro-rated, and gratuity accrues after one year rather than five. For permanent employees the ordinary qualifying period continues to apply.
So if you use fixed-term contracts, cost gratuity from year one. The offsetting point is that expiry of the term is not retrenchment, so no compensation, notice or government permission is required when the term simply ends.
Step 3: Fix the payment deadlines in your policies
- Wages due by the 7th of the following month. The concession letting employers with 1,000 or more staff pay by the 10th has been removed.
- Deductions capped at 50% of wages in any wage period.
- Final settlement within two working days of removal, dismissal, retrenchment or resignation. A policy promising settlement in 45 days is now writing down your own breach.
Step 4: Overtime, checked against your own state
Overtime is payable at not less than twice the normal rate of wages. The central rules set an overtime ceiling of 144 hours per quarter.
Do not apply that figure nationally. Your state Shops and Establishments Act governs a commercial office, several states amended theirs during 2025 and 2026, and the caps genuinely differ - at least one state works on an annual ceiling rather than a quarterly one. Any compliance rule written as “overtime this quarter must be under 144” will pass employees in those states while the real limit is being breached.
Step 5: Update the documents, not just the spreadsheet
Appointment letters, the salary annexure, the leave policy and the exit policy all state numbers that may now be wrong. If your handbook cites the Payment of Wages Act or the Factories Act as live obligations, it is quoting statutes that no longer exist.
Step 4: Formalise Overtime Approvals and Double Pay
Your overtime policy now needs to mention:
- Normal working hours per day and per week.
- When overtime is allowed and who can approve it.
- How hours beyond 8 per day will be captured.
- That overtime is paid at double the normal rate.
Step 5: Rebuild Your Full & Final Settlement Process
Clearing F&F within two working days sounds impossible if your documents and approvals are scattered. You need:
- A fixed checklist for resignations and exits.
- Standard formats for F&F calculations.
- A clear workflow so finance, HR and reporting managers act quickly.
Conclusion
The new labour codes have raised the bar on how you handle wages, gratuity, overtime, working hours and exits. However, you don’t need to fight this change alone.
When you redesign your salary structures, documents and processes with HRTailor, you move from reactive firefighting to proactive compliance. Your people are paid right, your records are clean and your HRM Policies actually match what happens on the ground, month after month.
Frequently Asked Questions
Which HR policies need updating after the Labour Codes came into force?
Salary structure and CTC design (Code on Wages 50 percent rule), overtime and working-hours policy (OSH Code), gratuity policy (Social Security Code), and standing orders where applicable (IR Code). Leave, POSH and disciplinary policies mostly stay the same.
What is the wage code 50 percent rule and why does it matter?
Basic pay plus DA must be at least 50 percent of gross wages. Companies whose CTCs kept basic below 40 percent will see PF, gratuity and leave encashment liabilities rise. Rebalancing CTCs is the single biggest policy exercise triggered by the Codes.
How has overtime changed under the new Codes?
The OSH Code standardises daily and weekly hour caps and doubles the overtime rate for hours beyond the cap. States are amending their Shops and Establishments Acts during 2025 and 2026 with slightly different limits, so multi-state employers need per-state overtime settings.
When must gratuity be paid under the Social Security Code?
Within 30 days of the employee ceasing employment (retirement, resignation, death, disablement). Fixed-term employees now qualify for gratuity irrespective of the 5-year rule if they complete the fixed term.
FAQs
Because the rules around basic salary, gratuity, overtime, working hours and salary payment dates have changed. If your policies still reflect older rules, you may end up underpaying, delaying settlements or creating contradictions between what you write and what you do.
No. Even small and mid-size businesses are expected to comply. Employees are more informed, and digital records make it easier to spot late salaries, wrong overtime payments or slow full & final settlements.
An HRMS keeps attendance, working hours, overtime and payroll data in one place. Because of this, your calculations are more accurate, your payslips are consistent and you can show clear records if there’s an audit or dispute.
Since basic must now be at least 50% of CTC, your PF and gratuity contributions generally increase. This can raise your cost per employee if you don’t redesign your salary structures thoughtfully.
The spirit of the new rules is that F&F should be cleared within two working days. To get close to this, you need a defined exit process, clear responsibilities and standardised calculations.
Any work beyond 8 hours in a day is generally treated as overtime and should be paid at double the normal wage rate. However, you should still define internal approval processes and recording methods in your policies.
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