New Labour Codes 2026:Employer-Friendly Rules for MSMEs

India’s four Labour Codes are no longer a future compliance event — they are the operating law today. Here is what changed for hiring, layoffs, wages, and standing orders, and what Chennai-based startups and MSMEs should check first.

Key Facts — India's New Labour Codes (2026)

India's four 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 central labour laws.
The Central Government notified the final Central Rules under all four Codes on 8 May 2026, completing the framework needed for full enforcement.
Under Section 77 of the Industrial Relations Code, prior government permission for layoff, retrenchment, or closure is now required only for establishments with 300 or more workers, up from the earlier threshold of 100.
The standing orders threshold has also risen to 300 workers under Section 28 of the Industrial Relations Code, with the Central Government's Model Standing Orders available under Section 29 for establishments that adopt them directly.
Fixed-Term Employment is now formally recognised, and the minimum service period for a fixed-term employee to qualify for gratuity has been reduced from five years to one year under the Code on Social Security.
The Code on Wages introduces one definition of "wages" across all four Codes and caps non-wage allowances at 50% of total remuneration; any amount paid above that cap counts as wages for PF, ESI, gratuity, and bonus purposes.

Are India's New Labour Codes Now in Force?

Yes. 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 took effect on 21 November 2025, consolidating 29 separate central labour laws into four. The Central Rules giving full operational detail to all four Codes were notified on 8 May 2026.

Some establishments will also fall under state-specific rules, and those timelines vary by state. For Aran Law’s debt recovery and business compliance clients, this matters because employment contracts, severance terms, and wage structures drafted under the old laws may no longer match what the Codes now require.

What Is the New Threshold for Layoffs and Retrenchment?

Section 77 of the Industrial Relations Code raises the threshold for prior government permission before layoff, retrenchment, or closure from 100 workers to 300 workers. An establishment with 299 workers can now restructure its workforce without seeking government approval first — a change that affects most mid-sized manufacturing and services MSMEs that previously had to navigate that approval process.

This is not unconditional flexibility. Employers below the 300-worker threshold still owe retrenchment compensation of 15 days’ average pay for every completed year of service, must give the required notice, and must keep proper documentation of the process. Non-compliance can still attract penalties under the Code.

How Does Fixed-Term Employment Work Now?

The Industrial Relations Code formally defines Fixed-Term Employment (FTE), letting an employer hire a worker for a specific duration, project, or seasonal need. FTE workers are entitled to the same benefits and working conditions as permanent employees, on a pro-rata basis, but their employment ends automatically when the contract period expires — no retrenchment notice or compensation is required at that point.

The Code on Social Security adds a significant change for FTE workers specifically: the minimum service period needed to qualify for gratuity has dropped from five years to one year. A Chennai-based food processing or textile MSME hiring extra staff for a festival-season production run can now do so on FTE terms, with the workers eligible for gratuity after just one year of service if their contract runs that long.

What Changed for Standing Orders?

Under Section 28 of the Industrial Relations Code, the requirement to prepare and certify standing orders now applies only to establishments employing 300 or more workers, up from 100 under the earlier Industrial Employment (Standing Orders) Act, 1946. Establishments that adopt the Central Government’s Model Standing Orders, issued under Section 29, are treated as certified without going through the separate certification process. For MSMEs with 100–299 workers, this removes a compliance step entirely.

How Has the Definition of "Wages" Changed?

Before the Codes, different laws defined “wages” differently for PF, ESI, gratuity, and bonus purposes, which fed years of disputes over what counted as wages for each calculation. The Code on Wages now applies one definition across all four Codes and caps non-wage allowances — items like special allowances and conveyance — at 50% of total remuneration.

Any amount paid above that 50% cap is treated as wages, which increases the base on which PF, ESI, gratuity, and bonus are calculated. MSMEs that have historically structured a large share of compensation as allowances should review their salary structures against this cap.

What Are the New Rules on Strikes and Lockouts?

Section 62 of the Industrial Relations Code requires 60 days’ notice before a strike or lockout can begin, and the action still cannot start within 14 days of that notice being given. Strikes are also barred during conciliation proceedings and for seven days afterward, and during arbitration or tribunal proceedings and for 60 days afterward. These restrictions apply to all industrial establishments, not only public utility services as under the earlier law.

This is a regulatory restriction on how and when a strike can occur, not a restriction on a constitutional right — the Supreme Court has held that the right to strike is not a fundamental right under the Constitution (Kameshwar Prasad v. State of Bihar, AIR 1962 SC 1166), which is part of why Parliament can regulate strikes through ordinary legislation like the Industrial Relations Code.

Has the Labour Inspector's Role Changed?

Yes. The Codes recast the inspector as an “Inspector-cum-Facilitator,” with an expanded role that includes advising establishments on compliance and encouraging voluntary correction before initiating prosecution, alongside web-based inspections that reduce physical site visits. For a startup facing its first inspection under the new framework, this means there is now a formal channel to seek compliance guidance before, not only after, an issue arises.

Are Labour Law Violations Now Decriminalised?

Largely, for first-time and procedural violations. The Codes shift many offences from criminal prosecution toward compounding through financial penalties, giving employers room to correct minor compliance gaps without facing automatic criminal proceedings. Violations that affect worker safety remain more serious and can still carry criminal liability.

What Should Chennai-Based Startups and MSMEs Do Now?

With the Central Rules in force, this is a documentation exercise, not a wait-and-watch one. Three steps matter most: review existing employment contracts to see where FTE terms now apply and ensure pro-rata benefits are documented; check salary structures against the 50% wage-definition cap, since this affects PF, ESI, gratuity, and bonus exposure; and confirm whether your establishment’s worker count places you inside or outside the 300-worker thresholds for standing orders and retrenchment approval.

Businesses searching for labour code compliance for MSMEs in Tamil Nadu are typically trying to answer exactly these three questions before their next audit or inspection. At Aran Law, we review employment contracts and compliance documentation as part of our broader civil litigation and business advisory work, and we help clients understand how changes like these intersect with existing recovery and dispute matters.

Frequently Asked Questions

When did India's new Labour Codes come into force?

The Code on Wages, Industrial Relations Code, Code on Social Security, and OSH Code came into force on 21 November 2025. The Central Government notified the final Central Rules under all four Codes on 8 May 2026.

What is the new threshold for layoffs without government permission?

Under Section 77 of the Industrial Relations Code, establishments with fewer than 300 workers no longer need prior government permission for layoff, retrenchment, or closure. The earlier threshold was 100 workers.

Can MSMEs hire workers on fixed-term contracts now?

Yes. Fixed-Term Employment is formally recognised. FTE workers get pro-rata benefits similar to permanent staff, and employment ends automatically at contract expiry without retrenchment notice or compensation.

How has the definition of "wages" changed under the new Codes?

The Code on Wages caps non-wage allowances at 50% of total remuneration. Any amount paid above this cap is treated as wages for PF, ESI, gratuity, and bonus calculations across all four Codes.

Are labour law violations now punished with fines instead of jail?

Most procedural and first-time violations are now compoundable through financial penalties rather than automatic prosecution. Serious violations affecting worker safety can still attract criminal liability.

For Enquiry

Adv.Suresh Kumar

Aran Law

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About the Author

Founding Advocate and Senior Partner

Adv. Suresh Kumar is the Founder and Managing Attorney of Aran Law, with over 18 years of litigation and legal advisory experience. He is enrolled with the Bar Council of Tamil Nadu and Puducherry and practises before the Madras High Court, City Civil Court, DRT Chennai, NCLT Chennai Bench, and district courts across Tamil Nadu. He holds a BA, BL (Hons), an M.Sc in Criminology, and postgraduate qualifications in Victimology and Juvenile Justice.