The New Labour Code are Live: The one payroll Rule Most companies are Still Getting Wrong

If your Basic pay is still Sitting at 30-40% of CTC, your payroll is already out of step with the law even if nothing on your salary slip has changed. On 21 November 2025, the Government of India brought all four Labour Codes into force at once, replacing 29 separate laws. Buried inside is a rule that quietly overrides how most Indian companies have built compensation for two decades: the 50% wage rule under Section 2(y) of the Code on Wages, 2019. This isn't a background legal update someone else is tracking. It changes what counts as “wages” for PF, gratuity and retrenchment calculations automatically, without you doing anything - which is exactly why it catches companies off guard. Here's what changed, the one number every payroll structure now has to clear, and the mix-up currently confusing employers across every state.

A new rule says at least half of every employee's salary must be counted as “basic pay.” If your company pays most of the salary as allowances instead, you could already be breaking the law even if your salary slips look exactly the same as before. On 21 November 2025, the Indian government put four new labour laws into effect at once, replacing 29 older laws. One small change buried inside them affects almost every company in India: the 50% salary rule. This isn't some small paperwork update that someone else in your company is handling. It changes how much money your company must set aside for provident fund and gratuity automatically, without you doing anything different which is exactly why so many companies are getting caught out. Here's what changed, the one number you need to check, and the common mistake almost every employer is making right now.

What Actually Changed on 21/November/ 25?

The government put four new laws into effect together: the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code (usually called the OSH Code). Together, they replace 29 older laws including some that had been around since the 1930 and 1940. The plan was to fully roll this out by 1 April 2026. But some states, like Gujarat, have already made their own detailed rules, while other states are still working on theirs. This gap - where the central law is in effect but state rules aren't finished yet is exactly where most of the confusion is happening right now.

The 50% Rule, Explained Simply

This is the change that matters most for how companies pay their employees, and it comes from a small change in wording, not a new tax. Under this law, an employee's “wages” include basic pay, and a category called dearness allowance. Other parts of the salary like house rent allowance, travel allowance, overtime pay, and bonuses can be counted separately, but only up to a limit. Here's the limit: if all those other allowances add up to more than half the total salary, the extra amount automatically gets counted as “wages” again for the purpose of calculating provident fund and gratuity. In plain terms: basic pay must be at least 50% of an employee's total salary package, whether or not the paperwork says so. Many companies keep basic pay low often just 25-40% of the total package because it reduces how much they have to contribute to PF and gratuity. That old approach no longer works. It's not a form you forgot to fill out; it's a mismatch between the salary structure already written into every employee's contract and what the law now requires.

The Trap: a law being “in effect” doesn’t mean its fully enforced in your state.

This is where most employers are getting confused right now, and the confusion goes both ways. Some employers wrongly think nothing applies to them yet. But the four laws came into effect nationally on 21 November 2025, and the salary rule is a central rule it doesn't wait for a state to catch up the way some other rules do. Other employers wrongly think they're fully exposed everywhere, right now. In reality, many state-level rules are still being finalised, and the new laws include temporary relief for companies while states catch up so how much of this applies to you can genuinely depend on which state your employees work in. The safest approach isn't to wait and see what happens. It's to treat the 50% salary rule as already active, and separately check whether your specific state has finished making its own rules.

Others Changes Employers Are Missing

The salary rule gets the most attention, but three other changes affect everyday HR work just as much:

1. Written appointment letters are now required by law for every employee. A verbal job offer or a quick email is no longer enough companies without a proper letter are technically breaking the law from an employee's very first day.
2. Fixed-term employees (people hired for a set period) must now get the same pay, benefits, and working conditions as permanent employees doing similar work - including gratuity once they complete a year.
3. Gig and delivery-app workers are now covered by social security laws for the first time. This is a new responsibility for companies that run apps or platforms and have always treated these workers as outside the usual employer-employee relationship.

What Happens if you don’t comply?

The older laws relied heavily on court cases and prosecution. The new laws lean more toward fines that companies can pay to settle a violation but that doesn’t mean the risk is small. If your allowances go above the 50% limit, the extra amount is automatically treated as wages the moment anyone audits your payroll, which can mean you owe back-payments for PF and gratuity, plus interest and penalties. If your company is trying to raise funding, this exact kind of mismatch is something investors' due-diligence teams look for turning a simple payroll fix into a reason your funding round gets delayed.

What to do Now?

1. Check your salary structure. For every employee, see whether basic pay plus dearness allowance already adds up to at least 50% of their total salary.
2. Fix it before an audit finds it for you. If basic pay is too low, move some of the other allowances into basic pay instead of waiting for this to be discovered during an inspection.
3. Give every employee a written appointment letter, including anyone currently working without one - this is now a legal requirement, not just good practice.
4. Check your specific state's progress. Don't assume the national rollout date applies the same way everywhere - find out if your state has finished its rules, is still drafting them, or hasn't started.
5. If you use fixed- term or gig workers, make sure they're getting the benefits and social security coverage they're now entitled to under the new laws.

Frequently asked questions

1. Do these new laws apply to my company right now?

Yes, partly. The laws came into effect nationally on 21 November 2025. Rules made by the central government, like the 50% salary rule, apply now. Rules that depend on each state apply once that state finishes its own version.

2. What exactly is the 50% salary rule?

If allowances (like HRA, travel allowance, and similar items) add up to more than half an employee's total salary, the extra amount is treated as basic wages for calculating PF and gratuity. So basic pay plus dearness allowance needs to be at least 50% of the total salary.

3. Nothing has changed on our salary slips. Are we still breaking the law?

Possibly, yes. The rule looks at the real split between basic pay and total salary — not what your paperwork says. A salary structure set up years ago can already be non-compliant, even without a single change being made to it.

4. Is a 4-day work week now compulsory?

No. Companies can choose to offer it under the new rules, but it is optional, not required.

5. Do fixed-term employees get the same benefits as permanent staff?

Yes. They must now get the same pay, benefits, and working conditions as permanent employees doing similar work, including gratuity after one year of service.

6. Are appointment letters really required by law now?

Yes. Every employee must be given a written appointment letter. Hiring someone without one is a violation from their very first day of work.

7. Does this affect delivery-app workers too?

Yes. platform workers are now entitled to social security coverage for the first time a new responsibility for companies running apps or platforms.

8. What happens if we don't fix our salary structure in time?

If an audit or inspection finds that your allowances are above the 50% limit, the extra amount is automatically counted as wages. This can mean back-payments for PF and gratuity, plus interest and penalties — and it can also raise concerns during investor due diligence.

9. Where can I check how far along my state is?

The Ministry of Labour and Employment's official compliance guide and your state labour department's notifications are the best places to check before assuming you're either fully compliant or fully exempt.