Athena Legal Key Highlights On The Impact Of The New Labour Codes On The IT/ ITES & Services Sector

1. INTRODUCTION

• The Government of India's notification implementing the four Central Labour Codes, namely, the Code on Wages, 2019 ("Wage Code"), the Industrial Relations Code, 2020 ("IR Code"), the Code on Social Security, 2020 ("SS Code"), and the Occupational Safety, Health and Working Conditions Code, 2020 ("OSH Code"), effective from November 21, 2025, represents a fundamental restructuring of India's labour ecosystem.
• For the Services Sector, including Information Technology ("IT") and Information Technology Enabled Services ("ITES") industries, this transition necessitates immediate, strategic adjustments to the established compensation models, workforce management policies, and operational structures. The legislative intent is to streamline 29 existing laws into a unified framework, enhancing worker welfare while promoting ease of business.
• This update summarizes the key legal and compliance implications for Services Sector, including IT and ITES industries.

2. REDEFINED "WAGES" – MAJOR IMPACT ON STATUTORY CALCULATIONS

• The Codes introduce, unified definition of "wages" across all four Labour Codes. Wages include basic pay, dearness allowance, and retaining allowance, but specifically exclude bonus, HRA, conveyance allowance, overtime allowance, commission, gratuity, and retrenchment compensation among other components.
• The Critical 50% Threshold Rule: If the excluded allowances and payments exceed 50% (or such other percentage as may be notified by the Central Government) of total remuneration, the amount exceeding such threshold shall be deemed as wages and added back for statutory computation purposes. This ensures at least 50% of the total remuneration constitutes "wages" for statutory purposes.

Impact: This provision directly affects calculation of PF, ESIC, gratuity, retrenchment compensation, overtime wages, and bonus. This may significantly increase employer statutory contribution costs for the Services Sector, including IT/ITES companies with allowance-heavy salary structures, characterized by high variable pay and minimal basic pay components. Companies should, therefore, comprehensively review all salary structures, recalculate gratuity provisions, update HRMS/payroll systems for new wage calculations.

3. TIMELINE FOR PAYMENT OF WAGES

• As per the Wage Code, Employers are legally mandated to strictly adhere to the following payment schedules based on the employment cycle:
• 1. Daily Basis: At the end of the shift.
  2. Weekly Basis: On the last working day before the weekly holiday.
  3. Fortnightly Basis: Within two days after the end of the fortnight.
  4. Monthly Basis: Before the 7th day of the succeeding month.
• In all cases of separation (resignation, dismissal, retrenchment, or closure), all outstanding wages must be settled within two (02) working days of the employee's exit.

Impact: The statutory requirement to settle final dues within two (02) days, forces a drastic departure from the IT sector's standard 30–45 day exit cycles. This compressed timeline compels companies to rapidly accelerate asset recovery and complex pay calculations, ensuring IT, Finance, and HR teams coordinate in real-time to meet the strict 48-hour deadline.

4. OVERTIME AT DOUBLE RATE WITH MANDATORY EMPLOYEE CONSENT

• Under the new labour codes, overtime work is governed by a strict framework of voluntary consent and mandatory compensation.
• Section 25 of the OSH Code read with Rule 34 of the Draft Occupational Safety, Health and Working Conditions (Central) Rules, 2025 ("Draft OSH Rules") establishes that no employee can be compelled to work beyond the standard eight (08) hour per day, and forty-eight (48) hours per week. Section 27 of the OSH Code read with Rule 62 of the Draft OSH Rules, further provides that, where in an establishment, an employee works for more than eight (08) hours in any day as daily wager, or for more than forty-eight (48) hours in any week, as the case may be, he/she shall in respect of such overtime work be entitled to wages at the rate of twice the rate of wages. No worker shall be allowed to work overtime exceeding one hundred forty four (144) hours in any quarter of a year. Furthermore, no employee shall be required to work overtime without their explicit consent, prioritizing worker autonomy and well-being. When the employee consents to work overtime, then in accordance with Section 14 of the Wage Code, the employer shall pay the employee for every hour or for part of an hour so worked in excess, at the overtime rate which shall not be less than twice the normal rate of wages. Section 50(1) of the Wage Code read with Rule 51 of the Draft Code on Wage (Central) Rules, 2025 requires every employer to maintain electronically or in physical form: i) Employee Register in Form I; ii) Register of Wages, Overtime, Advances, Fines and Deductions for Damage and Loss in Form IV, and iii) Attendance Register-cum-Muster Roll in Form IX.

Impact: For IT and BPO companies with 24/7 operations, the new labor codes introduce significant changes. Overtime work is now strictly voluntary, meaning employees must explicitly agree to it, and it must be paid at twice the normal rate of wages. This shift complicates workforce planning during peak times and increases operational costs. To adapt, organizations must improve shift planning to reduce reliance on overtime, implement strict tracking for consent and work hours, and revise vendor contracts to reflect these new compliance and cost requirements.

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