Most Common Failures of Companies in Labour Law Compliances
- By Suresh Kumar, Aran Law Firm
- Tamil Nadu, India
- 12 min read
- Updated June 2026
Key Facts — Labour Law Compliance in India
- Four consolidated labour codes the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020, and the Occupational Safety, Health and Working Conditions Code 2020 — came into force on 21 November 2025, replacing 29 earlier central labour statutes.
- Central and several state rules under the four codes were still in draft as of early 2026, so employers must keep following procedures under the older laws until the new rules are finally notified.
- Any workplace with 10 or more employees, in any sector, must constitute an Internal Committee under the POSH Act, 2013, to handle sexual harassment complaints.
- The Industrial Relations Code, 2020 raised the threshold for prior government permission before retrenchment or closure from 100 workers to 300 workers.
- Gratuity is generally payable after five years of continuous service at 15 days' wages per completed year, though fixed-term employees may now be entitled to pro-rata gratuity on contract completion without serving five years.
- Misclassifying an employee as an independent contractor does not extinguish statutory dues — provident fund, gratuity, and insurance contributions can still be claimed retrospectively, along with penalties.
The most common labour law compliance failures among Indian employers fall into ten recurring categories:
Missing employment contracts, poor record-keeping, worker misclassification, underpaid wages, unpaid overtime, skipped provident fund and ESI contributions, mishandled terminations, missing POSH Internal Committees, denied statutory benefits, and ignored workplace safety duties. Each of these gaps carries more weight now that India’s four new labour codes are in force. On 21 November 2025, the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 replaced 29 older central labour statutes — and employers who haven’t reviewed their paperwork since are exposed in more places than before. For a wider view of how these disputes are handled once they reach court, see Aran Law’s civil litigation practice.
Why do employers need a written employment contract under Indian labour law?
Every employee should receive a signed appointment letter or employment contract before starting work. The Code on Wages, 2019 requires employers to maintain clear records of wages and terms of engagement, and several state rules go further by mandating a formal appointment letter for every worker.Without this document, an employer cannot prove what was agreed on pay, designation, probation, or notice period — and labour courts routinely read that gap against the employer.
At Aran Law Associates, our civil litigation advocates regularly see wage and wrongful-termination disputes that trace back to a missing or outdated contract rather than any actual wrongdoing by the employer.
How long should employers retain employee records under Indian labour law?
Retention periods are not uniform they depend on which record and which law applies, and specific periods vary by statute.What is consistent is that attendance, wage registers, leave records, and statutory contribution proofs must be available for inspection at any time. A missing register is treated as strong evidence against the employer in a labour dispute, not a neutral gap.
Digital HR systems help, but only if records are backed up and accessible offline during an inspection portal downtime is not accepted as an excuse by an inspecting officer.
A well-drafted employment agreement helps employers clearly define the rights and obligations of both parties while supporting overall labour law compliance.
What happens if an employer misclassifies an employee as an independent contractor?
Calling someone a “consultant” or “contractor” does not remove an employer’s statutory obligations if the actual working relationship looks like employment — fixed hours, direct supervision, exclusive engagement. Authorities and courts examine the substance of the relationship, not the label on the contract, and can order retrospective payment of provident fund, gratuity, and insurance contributions, along with penalties for the misclassified period.
Gig and platform workers now also fall within the Code on Social Security, 2020’s social security framework, which narrows the room for misclassification further.
What is the minimum wage employers must pay under the Code on Wages, 2019?
The Code on Wages, 2019 requires every employer to pay at least the minimum wage notified for that category of work, and sets a national floor wage below which no state government can fix its minimum wage.The Code also requires that at least 50% of an employee’s total pay be treated as “wages” when calculating provident fund, gratuity, and other statutory dues even if the employer structures pay with a large share of allowances.
Employers who restructure salaries to push down PF contributions through a low basic-pay component are now at direct legal risk because of this 50% rule.
How is overtime pay calculated under Indian labour law?
Employees who work beyond the standard daily or weekly hours are entitled to overtime pay, generally calculated at twice their ordinary rate of wages under the Occupational Safety, Health and Working Conditions Code, 2020.Employers cannot offset overtime dues with bonuses, informal compensatory leave, or verbal arrangements — the payment must be recorded and paid as wages.
Wage slips should show overtime hours and the applicable rate separately from regular pay, both to stay compliant and to avoid disputes over what was actually paid.
Do employers have to pay PF and ESI contributions for contract and temporary workers?
Yes provident fund and employee state insurance obligations attach to the worker, not to the label used in the contract. Once an establishment crosses the applicable employee threshold, contributions are due for every eligible worker, including those hired through a contractor, unless a specific exemption applies.
Employers who route workers through staffing agencies remain responsible for confirming the agency is actually depositing these contributions — the principal employer can still be held liable for the agency’s default. Every employer should follow employee termination legal requirements to ensure the separation process is fair, legally compliant, and properly documented.
What is the correct legal procedure for terminating an employee in India?
Before dismissing an employee for misconduct, an employer must conduct a fair domestic inquiry notice of the charges, an opportunity to respond, and a reasoned finding or risk a reinstatement order with full back wages from a labour court. For retrenchment of workers, as opposed to dismissal for misconduct, the Industrial Relations Code, 2020 raised the threshold for needing prior government permission from 100 workers to 300 workers, though notice, compensation, and procedural requirements still apply below that threshold.
Documenting the reason for termination and processing the final settlement promptly remain an employer’s strongest protection if the matter is challenged later.
Is a POSH Internal Committee mandatory for every company?
Yes. Under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, any workplace with 10 or more employees must constitute an Internal Committee, adopt a written policy, and conduct periodic awareness training. This applies regardless of sector or business size once the 10-employee threshold is crossed.
The absence of an Internal Committee is itself a compliance violation it does not wait for a complaint to be filed before it becomes one.
What statutory benefits like gratuity and maternity leave must employers provide?
Gratuity is generally payable to an employee who completes five years of continuous service, calculated at 15 days’ wages for every completed year. Fixed-term employees may now be entitled to gratuity on completion of their contract term even without five years of service.Maternity leave runs to 26 weeks of paid leave for the first two children, and 12 weeks for a third child or beyond, under the maternity benefit provisions now folded into the Code on Social Security, 2020.
Employers who skip these entitlements face both statutory penalties and a strong evidentiary disadvantage in any later dispute.
What workplace safety duties does the Occupational Safety, Health and Working Conditions Code impose?
Employers must register eligible establishments, provide safety equipment appropriate to the work, maintain hazard-free premises, and conduct safety audits where the law requires them — particularly in factories and hazardous processes. The Occupational Safety, Health and Working Conditions Code, 2020 carries penalties that include substantial fines and, for serious or repeated violations causing harm, imprisonment.
In Tamil Nadu, factory and establishment inspections are also carried out independently by state labour inspectors under the Tamil Nadu Shops and Establishments Act and the state’s factory rules, in addition to central labour law compliance so a Chennai employer can face two separate inspection regimes for the same workplace.
FAQ
1.Is a written employment contract legally required in India?
Not every law mandates one, but without a signed contract or appointment letter, employers cannot prove agreed wages, duties, or notice terms in a dispute. A written contract for every employee is strongly recommended.
2.Are India's four new labour codes already in force?
Yes. The Code on Wages, Industrial Relations Code, Code on Social Security, and OSH Code came into force on 21 November 2025, replacing 29 older labour laws. Detailed central and state rules were still being finalised.
3.Is a POSH Internal Committee mandatory for small companies?
Yes. Any workplace with 10 or more employees must set up an Internal Committee under the POSH Act, 2013, regardless of business size or sector.
4.What happens if an employee is dismissed without a domestic inquiry?
Dismissing an employee for misconduct without a fair domestic inquiry can lead to a reinstatement order with back wages from a labour court. Following due process before termination is essential.
5.Can an employer avoid PF and gratuity by hiring through contractors?
No. Misclassification does not remove statutory dues. Authorities can direct payment of provident fund, gratuity, and insurance contributions retrospectively, with penalties, regardless of how the contract is labelled.
