New labour code changes and why companies are making one-time provisions

MUMBAI: Most companies reporting their financial results for Q3FY26 are reporting a large one-time provison towards employee benefits attributing it to the new labour code. TOI takes a look at what brought about these changes and how does it affect stakeholders.


1. What is the new labour code change that is forcing companies to make one-time provisions?

The change relates mainly to gratuity payments under the Code on Social Security, 2020. The new rules redefine “wages” for calculating gratuity and expand eligibility for fixed-term employees.




Under the revised rules, wages used to calculate gratuity must form at least 50% of an employee’s total cost-to-company (CTC). If allowances exceed 50% of CTC, the excess must be added back to wages for gratuity calculation. This increases the base on which gratuity is calculated.


The law also allows fixed-term employees to become eligible for gratuity after completing one year of service instead of the earlier five-year requirement. Because of these changes, companies must account for higher future gratuity payouts, forcing them to create one-time provisions in their financial statements.

2. When did the government change the law?

The government introduced the change through the Code on Social Security, 2020, which forms part of four consolidated labour codes replacing 29 older labour laws. The codes were passed by Parliament in 2020, but detailed implementation rules were notified later.


3. What triggered the change?

The reform aimed to simplify labour laws, improve social security coverage and reflect modern employment practices. A key concern was that many companies structured salaries with a low basic pay and high allowances to reduce statutory payouts such as provident fund and gratuity. The new definition of wages reduces this flexibility.


Another trigger was the growing use of fixed-term employment across industries. The government sought to extend social security benefits to such workers, especially in sectors with high attrition and contractual hiring.


4. When did the changes come into effect?

The new labour codes, including the Social Security Code, came into force on November 21, 2025. While the central framework became effective from that date, states continue to finalise detailed implementation rules.

5. How do the changes benefit employees?

Employees benefit mainly through higher gratuity payouts and wider eligibility. Because gratuity calculations now use a broader wage base, many employees will receive higher retirement or exit benefits.


Fixed-term employees, who earlier did not qualify unless they completed five years of service, can now receive gratuity after one year. This benefits workers in sectors with short-term or project-based employment.


The changes also aim to bring more transparency to salary structures and expand social security coverage.


6. How do the changes impact different industries?

The financial impact varies depending on salary structure and workforce composition.


Manufacturing and heavy industries: These sectors rely heavily on contract and fixed-term workers. The new rules increase gratuity liabilities and could push companies to review workforce models.


Technology and IT services: These companies often use allowance-heavy salary structures. They may need to restructure compensation to meet the wage definition norms.


Banking and financial services: The sector may see higher statutory benefit costs and increased liabilities for outsourced and contractual staff.


Construction: The sector employs a large informal workforce. The new rules increase compliance requirements and settlement obligations.


Retail and e-commerce: Companies with seasonal hiring and gig-based employment may face higher employee benefit costs and classification challenges.


Healthcare: Round-the-clock operations and contract staffing could raise wage and benefit compliance costs.


7. Which sector is expected to make the highest provisions?

Manufacturing and heavy industries are expected to make the largest one-time provisions. These sectors typically have a large contract workforce, lower basic salary structures and higher dependence on fixed-term employment, which significantly increases gratuity liabilities.


Technology and financial services companies are also likely to see sizeable increases due to changes in salary structure norms, though typically less than manufacturing.
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