India's four Labour Codes stopped being a "coming soon" story a while ago. They came into force on 21 November 2025, the draft Central Rules were published at the end of that year, and the final Central Rules were notified on 8 May 2026. Twenty-nine central labour statutes that Indian employers had worked under for decades — the Factories Act, the Minimum Wages Act, the Payment of Wages Act, the EPF Act, the ESI Act, the Contract Labour Act and the rest — now sit inside four consolidated Codes with one set of definitions.
For a large company with a legal team, that was a project. For the owner of a 14-person restaurant, a 30-person retail chain or a 60-worker fabrication unit, it mostly arrived as a rumour on WhatsApp about "basic salary must be 50 percent now". This guide is the version that was missing: a complete, standalone compliance checklist written for the person who signs the salary cheques, with the dates, the formulas and the one question that decides which rules actually apply to your establishment.
Nothing here assumes you read anything earlier. If you want the historical framing — how the pre-Code statutes worked and what the transition looked like before the final Rules landed — our labour law guide for Indian employers covers that background, and our earlier guide to overtime calculation under the Factories Act and state Shops Acts describes the framework as it stood before the OSH Central Rules were finalised. Both are still useful context. Neither is the current operating manual. This is.
What Actually Changed, and When
Four dates matter, and confusing them is the single biggest source of bad advice circulating among Indian SME owners right now.
- 21 November 2025 — the Codes commenced. The Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions (OSH) Code, 2020 all came into force on this date. The Ministry of Labour & Employment's announcement is on the Press Information Bureau. This is not a proposal. It is the law that governs your payroll today.
- 30 December 2025 — draft Central Rules published for public objection, with 30 days for the IR Code rules and 45 days for the other three.
- 8 May 2026 — final Central Rules notified. The Code on Wages Rules, the Social Security Rules, the OSH Rules and the IR Rules. This is what turned broad statutory language into working numbers: which register you keep, which return you file, how many hours of overtime you may require in a quarter.
- Rolling through 2026 — state rules.Labour is on the Concurrent List, so every state and union territory frames its own rules. Progress is uneven. Gujarat is furthest along, with final rules under all four Codes; Maharashtra, Karnataka and Uttar Pradesh have notified some Codes and left others at draft. A handful of states have barely begun. Check your own state labour department's notifications before assuming the central position applies to you.
The One Question That Decides Which Rules Apply to You
Before any of the checklist below, answer this: is your establishment in the central sphere or the state sphere?
The central sphere covers mines, major ports, railways, oilfields, air transport, banking and insurance, central public sector undertakings, and establishments operating in more than one state. Almost every other Indian SME — the shop, the restaurant, the clinic, the single-state factory, the gym, the logistics yard — is in the state sphere.
This matters enormously for working hours. The OSH (Central) Rules, 2026 set a quarterly overtime cap of 144 hours. That number has been reported everywhere as "the new limit". It is the new limit for central-sphere establishments. If you are in the state sphere and your state has not yet notified its own OSH Code rules, the existing state cap — commonly 50 hours a quarter, up to 125 in some states — continues to bind you.
The 12-Point Labour Code Compliance Checklist for Indian SMEs
1. Issue a written appointment letter to every single worker
This is the change with the widest reach and the least attention. Every worker — permanent, fixed-term, contract, apprentice, part-time — must hold a written appointment letter. Not an offer letter, not a verbal agreement, not a WhatsApp message confirming a start date.
For a large share of Indian SMEs this is a genuine first. The letter should carry the role, category of employment, wage rate and structure, date of joining, hours of work, leave entitlement and notice period. If you employ 20 people and have written letters for four of them, you have 16 letters to produce, and each one has to reflect the wage structure described in point 2, not the structure you used last year.
2. Restructure salary for the 50% wage rule
The Code on Wages introduces one definition of "wages" that applies across PF, ESI, bonus, gratuity, overtime and retrenchment compensation. The mechanism is simple to state and expensive to ignore:
Wages = Basic + Dearness Allowance + Retaining Allowance. If the excluded allowances (HRA, conveyance, special allowance, and so on) exceed 50% of total remuneration, the excess is added back into wages.
In practice this means allowances are capped at half of total pay for statutory purposes. The classic Indian CTC structure — a small basic and a large special allowance, engineered to keep PF liability down — no longer works. If your structure is 30% basic and 70% allowances, 20 percentage points get pulled back into the wage base whether you restructure or not.
Worked example. An employee on Rs 40,000 a month, structured as Rs 12,000 basic and Rs 28,000 allowances:
- Excluded allowances = Rs 28,000 = 70% of Rs 40,000
- The 50% ceiling = Rs 20,000
- Excess = 28,000 − 20,000 = Rs 8,000, added back into wages
- Statutory wage base = 12,000 + 8,000 = Rs 20,000, not Rs 12,000
Every downstream calculation now runs on Rs 20,000.
3. Recalculate PF, ESI, bonus and gratuity on the new wage base
The contribution rates have not changed — PF is still 12% employer and 12% employee. The base has. Continuing the example above, employer PF on Rs 20,000 is Rs 2,400 a month against Rs 1,440 on the old base: an extra Rs 11,520 a year for one employee, before ESI and gratuity provisioning.
Gratuity moves the most. Because gratuity is 15 days' wages for every completed year, and the revised wage definition applies from the commencement date of 21 November 2025, exit payouts for long-tenured staff can rise substantially — reported increases of 40% to 70% are common for employees who were on heavily allowance-loaded structures. Provision for this now rather than discovering it at someone's resignation.
Take-home pay typically falls 2% to 5% for high-allowance employees, because more of their gross now flows into PF. Tell your team before the first payslip lands, not after. An unexplained drop in net salary is how good employees start job-hunting.
4. Move your overtime trigger from 9 hours to 8
Under the Factories Act the daily cap was 9 hours. Under the OSH Code the normal working day is 8 hours, inside a normal week of 48 hours, and overtime is due past whichever of those two thresholds is more favourable to the worker.
If your rosters were built around 9-hour shifts — extremely common in Indian retail, hospitality and manufacturing — the ninth hour of every shift is now overtime at 2x. On a six-day week that is six overtime hours per worker per week that your payroll may currently be recording as ordinary time. For a 20-person team on Rs 18,200 basic plus DA, the ordinary hourly rate is Rs 87.50, the overtime rate is Rs 175, and six unrecognised hours a week across 20 people is roughly Rs 21,000 a week of unpaid statutory liability.
The formula itself is unchanged: Overtime pay = ((Basic + DA) ÷ (26 × 8)) × 2 × OT hours. What changed is when the meter starts.
5. Cap the spread-over at 12 hours
Spread-over is the total elapsed time from first clock-in to last clock-out on a day, including unpaid breaks. Under the OSH Code it must not exceed 12 hours.
This one catches restaurants and clinics hardest. A split shift running 10 AM to 3 PM and 6 PM to 11 PM is 10 hours of work inside a 13-hour spread-over. The hours worked are fine. The spread-over is not. Either the break narrows or the second shift starts earlier.
6. Track overtime against the right quarterly cap
Paying 2x correctly is only half of compliance. You also may not requiremore overtime than the cap allows — 144 hours a quarter in the central sphere, your state's figure otherwise, per the decision chart above. Overtime also requires the worker's consent; refusal is not a disciplinary matter.
A cap you cannot see is a cap you will breach. If your overtime lives in a spreadsheet that gets totalled at month end, you will find out you crossed the quarterly limit in the quarter after the one you crossed it in.
7. Fix leave accrual and the 180-day eligibility
Annual leave with wages accrues at one day for every 20 days worked. The eligibility threshold has come down: a worker qualifies after 180 days of work in a calendar year, against the 240 days that applied under the Factories Act. Shorter-tenure and seasonal staff who previously fell outside the entitlement now fall inside it.
Carry-forward and encashment rules follow the applicable Code and your state rules. What you cannot do is run an informal "we give leave when it is quiet" policy and hope nobody counts.
8. Pay full and final settlement within two working days
Section 17(2) of the Code on Wages requires all wage components due on exit to be paid within two working days of the last working day — whether the employee resigned, was removed, dismissed or retrenched. That covers unpaid salary, leave encashment, bonus and reimbursements. Gratuity retains its own 30-day timeline.
Two working days is the requirement that most Indian SMEs are furthest from meeting. A 30-to-45 day settlement cycle, waiting for the next payroll run, is now a statutory breach on every exit. The only way to hit it is to have the attendance, leave balance and outstanding advance figures already reconciled on the day the person walks out — which is a systems problem, not a diligence problem.
9. Gratuity for fixed-term employees after one year
Fixed-term employment is now formally recognised, and a fixed-term employee earns gratuity on a pro-rata basis after one year of continuous service rather than five. Permanent employees remain on the five-year rule.
Fixed-term staff must also receive the same wages, hours, and statutory benefits as a permanent employee doing the same work. If fixed-term contracts were a cost-saving device in your business, they are no longer one — but they remain a legitimate way to staff genuinely seasonal demand.
10. Register on Shram Suvidha: single registration, single licence, single return
One of the real simplifications. In place of separate registrations and multiple periodic returns across statutes, the Codes move to a single electronic registration, a single licence where one is required, and a single return, filed through the government's Shram Suvidha portal. Confirm your establishment's registration is live and that the responsible person in your business can actually log in — a portal nobody has credentials for is not a compliance system.
11. Gig and platform workers: eShram and the aggregator contribution
If you engage gig or platform workers through an aggregator model — delivery, ride-hailing, home services, on-demand logistics — the Social Security Code brings you into scope. Aggregators must register on the eShram portal, onboard their platform workers there, and contribute 1% to 2% of annual turnover to the Social Security Fund, subject to a ceiling of 5% of the amount payable to gig and platform workers in that financial year.
Every gig worker aged 16 and above registers with Aadhaar seeding, which generates a Universal Account Number so benefits are portable across states and platforms. Most SMEs are not aggregators and can skip this point — but read it twice before concluding you are not one.
12. Keep the registers that make all of this provable
The Codes retain the register obligations in consolidated form: an employee register, a wage register, an attendance record, and payslips issued to every worker. A labour inspector does not assess whether you believe you paid correctly. They read the register.
In a wage dispute, the burden of proof sits with the employer. An unverified paper muster roll or a WhatsApp group where staff type "in" and "out" is not evidence that a specific person was at a specific place at a specific time, and it can be — and routinely is — rejected.
The Record Chain That Survives an Inspection
Every item on the checklist above eventually resolves to the same question: can you prove it? The chain has one shape, and it breaks at whichever link is manual.
What This Costs an Indian SME — and Where It Doesn't
Honest accounting, because the reassuring version helps nobody.
It costs more. A wider wage base raises employer PF, ESI, bonus and gratuity liability. On a 25-person team with allowance-heavy structures, the annual increase is realistically in the low lakhs. The two-day settlement rule removes float you may have been using. The 8-hour overtime trigger converts hours you were treating as ordinary into hours priced at 2x.
It also removes cost. Single registration, single licence and single return replace a scatter of filings across statutes. One definition of wages replaces the old situation where PF, ESI, bonus and gratuity each ran on a slightly different base and every payroll query became an argument. For a small business that never had the compliance staff to keep four parallel interpretations straight, consolidation is a genuine gain.
What it changes permanently is the standard of proof. Under the earlier framework, a small employer with untidy records was usually a low-priority case. Under a consolidated framework with electronic filing, an inspector opens one record for your establishment and reads the whole picture. Untidy records are now visible records.
How Shiftelio Covers This Checklist
Points 1 through 12 divide cleanly into two groups. Some are one-time legal work — restructuring salary bands, drafting the appointment letter template, confirming your registration on Shram Suvidha. A competent labour consultant does those once, and should.
The rest are not one-time. They are a monthly obligation to produce a defensible record, and that is where an SME either builds a system or accumulates exposure. Shiftelio was built for exactly that half:
- Verified attendance at the source. Each punch is a live selfie with GPS geofencing and mock-location detection, so the hours entering every calculation below are hours actually worked at the workplace — the evidentiary standard a register needs, on the phones your staff already own, with no biometric machine at the door.
- An 8-hour overtime trigger and 12-hour spread-over, per roster.Ordinary hours are set on the shift pattern; anything beyond is flagged as overtime automatically and priced at 2x on Basic + DA, with the divisor configurable for your state's rules. Split shifts show their full spread-over, so a 13-hour restaurant day is visible before it becomes a finding.
- Running quarterly overtime totals. Overtime per worker per quarter is tracked continuously with a warning well before the cap, so the limit is something you steer around rather than discover afterwards.
- Leave accrual and balances. Accrual runs off the same verified attendance record, so the 180-day eligibility and the one-day-per-20-worked rate are applied without anyone maintaining a parallel leave sheet.
- Payroll on the current wage base. Salary structures are configured per employee, PF and ESI compute on the statutory base, and overtime appears as its own payslip line showing hours and rate — the version a worker can read and an inspector can audit.
- Same-day full and final. Because attendance, leave balance, salary advances and loan deductions are all reconciled continuously, the settlement figure exists on the last working day instead of taking three weeks to assemble. Two working days becomes achievable rather than aspirational.
- Appointment and HR letters. Offer, appointment, warning and experience letters generate as branded A4 PDFs from employee records, so the point-1 backlog of missing letters is a batch job rather than a fortnight of typing.
All of it sits in flat annual pricing with no per-employee fee — Rs 5,999 a year covers 25 employees across three locations. Compliance features are not a premium tier, because the businesses most exposed to this transition are the ones least able to pay a per-seat surcharge for it.
Frequently Asked Questions About Labour Code Compliance in 2026
My state has not notified its rules. Can I ignore the Codes?
No. The Codes themselves are in force nationwide from 21 November 2025. State rules govern procedural detail — forms, registers, specific caps — and until they are notified, the corresponding existing state provisions continue to operate. The substantive obligations, including appointment letters, the wage definition and the 2x overtime rate, apply now.
Does the 50% wage rule mean basic salary must be exactly half of CTC?
Not exactly. It means excluded allowances cannot exceed 50% of total remuneration for the purpose of computing statutory dues. If they do, the excess is treated as wages regardless of what the salary slip calls it. You may keep any structure you like; the calculation will simply not follow it.
Do these rules apply if I employ fewer than 10 people?
Partly. Thresholds vary by Code and by obligation — some provisions attach at 10 or 20 workers, others apply to any establishment with even one employee. The appointment-letter requirement, the wage definition and timely payment of wages have very broad reach. Assuming a blanket small-business exemption exists is the most common and most expensive misreading of the Codes.
Is PF payable on overtime wages?
Overtime has historically been excluded from the PF base and is treated as wages for ESI. With the consolidated wage definition now in force, confirm the current treatment against your state rules and your PF consultant before the next filing rather than carrying an old assumption forward.
What happens if I simply do not comply?
Penalties under the Codes are graded, with higher monetary penalties than the statutes they replace and an opportunity to remedy first-time contraventions in several cases. The practical risk for an SME is rarely a dramatic prosecution — it is a worker complaint or an inspection that reveals no verifiable record, which shifts the burden of proof onto you for every disputed rupee.
Where do I check the current official position?
The Ministry of Labour & Employment publishes the Codes, rules and notifications at labour.gov.in, and your state labour department's site carries the state rules. For anything with money attached, read the notification rather than a summary — including this one.
The Bottom Line
India's labour law transition is no longer pending. The Codes commenced in November 2025, the final Central Rules were notified in May 2026, and state rules are arriving through the rest of the year. For an Indian small business the practical checklist is short: issue appointment letters, restructure salary against the 50% wage rule, recompute statutory dues on the new base, move the overtime trigger to 8 hours, cap the spread-over at 12, track overtime against the cap that actually binds you, fix leave accrual, settle exits in two working days, register on Shram Suvidha, and keep a wage register you would be comfortable handing to an inspector.
Ten of those twelve items resolve to one underlying capability: knowing, provably, who worked which hours. Every business already has that data. The question is only whether it lives somewhere that can be read back six months later, or in a spiral notebook behind the counter.