For any company researching India labour laws for foreign employers right now, the honest starting point is this: the four Labour Codes are legally in force, but "in force" does not mean "uniformly enforced." That gap between notification and operation is exactly where foreign employers get caught out, either by assuming nothing has changed yet, or by assuming full enforcement is already underway everywhere. Vandey Global has been managing India employment compliance since 2017, an ISO-certified, India-first Employer of Record that has onboarded 600+ employees across 50+ international clients spanning Israel, Portugal, and Lithuania, and this is the single question our compliance team fields most often from prospective clients this year.
Where the Labour Codes Actually Stand Right Now
The Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code were notified as effective law on 21 November 2025, replacing 29 separate central labour statutes, some dating back to the 1920s. That part is settled.
What took longer was the machinery to enforce them. The Ministry of Labour and Employment published draft Central Rules on 30 December 2025 and opened them for public comment, then notified the final Central Rules on 8 May 2026, covering wages, industrial relations, social security, and occupational safety. The Ministry also notified Model Standing Orders for the manufacturing and services sectors on the same date, extending a compliance requirement that used to apply mainly to factories into IT, ITES, and other office-based businesses.
The detail that matters most for foreign employers is that the Central Rules apply only where the Central Government is the "appropriate government", largely banking, insurance, telecom, mines, railways, and central public sector undertakings. Most private companies fall under state jurisdiction instead, and state-level notification has been uneven. As of mid-2026, more than thirty states and union territories have notified rules for at least one code, with Maharashtra, Gujarat, and Karnataka among the furthest along, but there is still no single pan-India commencement date for state-dependent provisions.
Read more: 7 Critical Questions to Ask Before Choosing EOR Services in India
Practically, this means a foreign employer cannot rely on a single national compliance date. What applies depends on where your employees are actually working, not on your headquarters, your industry association's advice, or a generic global HR guide written for a different jurisdiction.
The Five Changes Foreign Employers Cannot Ignore
The 50% Wage Rule
Under the Code on Wages, allowances and benefits that push total compensation above 50% of an employee's cost to company can no longer be excluded from the definition of "wages." Basic pay plus dearness allowance must equal at least half of total compensation. This single rule reshapes payroll structuring across India, because it directly increases the wage base on which Provident Fund, gratuity, and bonus contributions are calculated. Employers who historically kept basic pay low and loaded compensation into allowances now carry a materially higher statutory cost per employee, even where total CTC stays the same.
Gratuity After One Year for Fixed-Term Employees
Under the old Payment of Gratuity Act, employees needed five years of continuous service before gratuity applied. That threshold still holds for permanent employees, but fixed-term workers are now entitled to gratuity on a pro-rata basis after just one year of service. For foreign companies that lean on fixed-term contracts for project-based hiring, or that hire through short initial contract terms before converting to permanent roles, this is not a minor footnote. It changes the budget math on every fixed-term hire that runs past twelve months.
The Retrenchment Threshold Moves from 100 to 300 Workers
The Industrial Relations Code raises the headcount at which prior government approval is required for layoffs, retrenchment, or closure, from 100 workers to 300. Establishments in the 100 to 299 range now have considerably more flexibility to restructure without seeking advance permission, though retrenchment compensation of one month's wages per year of service, along with notice requirements, still applies. For most foreign employers hiring through an EOR or a modest India entity, headcount rarely approaches this threshold, but it matters for any company planning to scale a captive India team past a few hundred employees.
Standing Orders Now Reach the Services Sector
Standing orders, the formal rules governing worker conduct and terms of employment, have historically applied to factories and industrial establishments with 100 or more workers. The Model Standing Orders notified in May 2026 raise that threshold to 300 workers and, for the first time, introduce a dedicated framework for the services sector, explicitly covering IT, ITES, and other office-based and client-facing businesses. Companies operating captive India teams at that scale need to either adopt the model framework or certify their own equivalent standing orders.
Faster Full and Final Settlement
The codes tighten the timeline for settling dues when an employee exits, generally requiring payment of final wages and dues within two working days of separation in most cases, down from the informal 30 to 45-day timelines many employers were used to. This puts real pressure on payroll teams to have exit calculations, including gratuity, leave encashment, and any bonus proration, ready far faster than before.
Old Rule vs New Rule, Side by Side
| Area | Before the Labour Codes | Under the Labour Codes |
|---|---|---|
| Wage definition | Allowances could be structured to minimize basic pay | Basic + DA must equal at least 50% of total compensation |
| Gratuity for fixed-term staff | Generally required 5 years of continuous service | Pro-rata gratuity after 1 year of service |
| Gratuity for permanent staff | 5 years of continuous service | Unchanged at 5 years, but calculated on a higher wage base |
| Retrenchment approval threshold | Government approval needed at 100+ workers | Threshold raised to 300+ workers |
| Standing orders applicability | Mainly factories and industrial establishments, 100+ workers | Extended to services sector, threshold raised to 300+ workers |
| Full and final settlement | Often 30 to 45 days in practice | Generally required within 2 working days |
| Weekly work structure | Fixed 6-day pattern common | 4-day workweek permitted with employee consent, within a 48-hour weekly cap |
Entity Versus EOR: Who Actually Has to Fix This
If you employ Indian staff through your own registered entity, the compliance burden sits entirely with you. Your HR and finance teams need to audit every compensation structure against the 50% wage rule, recalculate PF and gratuity provisioning, update employment contracts and standing orders where applicable, and track state-specific notification status for every location where you have employees, since rules are not uniform across states.
If you hire through an Employer of Record, that restructuring work is the EOR's responsibility, not yours. Your team continues managing day-to-day work while the EOR's own registered entity absorbs the compliance change: recalculating statutory contributions, reissuing compliant contracts, and monitoring which state and central rules actually apply to each employee's work location. This is one of the more concrete reasons foreign companies without an existing India entity choose an EOR structure over direct incorporation, particularly during a transition period where the rules themselves are still being finalized state by state.
Read more: How to Hire Employees in India Without a Legal Entity Using an Employer of Record
A Practical Checklist for This Quarter
- Audit every India payroll structure to confirm Basic + DA meets the 50% threshold, and model the increased PF and gratuity cost where it does not.
- Identify every fixed-term contract running past twelve months and calculate the pro-rata gratuity liability that now applies.
- Confirm which state your employees actually work in, and check that state's rule notification status rather than assuming a single national date applies.
- If your India headcount is approaching 300 workers in one establishment, review whether standing orders or retrenchment approval requirements now apply.
- Rebuild your full and final settlement process so exit dues can be calculated and paid within the new timeline.
- If you do not have an in-house compliance team tracking state-by-state rule notifications, put that responsibility with a partner who does.
Where Vandey Global Fits
This restructuring work is not new territory for us. Vandey Global has been the registered legal employer for foreign companies' India teams since 2017, out of Bengaluru with an additional Ahmedabad office, and every compensation structure, gratuity provision, and standing order requirement described above is something our in-house team updates as central and state rules land, not something we wait for clients to flag. Because compliance sits with our own registered entity rather than yours, the wage restructuring, contract updates, and state-tracking work described in this checklist is ours to carry, not yours.
Companies weighing whether to handle this transition through their own entity or through an EOR can see the cost difference directly using our Cost Estimator, and our Employment Services team can walk through what has already changed for your specific state and sector.
Conclusion
The Labour Codes are in force, the Central Rules are notified, and state-level rules are catching up unevenly across the country. For foreign employers, that combination is more, not less, demanding than a single clean commencement date would have been, because it means the compliance obligation changes depending on where your employees actually sit. The employers who come out ahead are the ones auditing wage structures and fixed-term gratuity exposure now, rather than waiting for a uniform date that may not arrive as a single event at all.
FAQs
1. Are the new labour codes already in effect in India?
Yes. All four codes were notified as effective law on 21 November 2025, and the Central Rules under them were finalized on 8 May 2026. State-level rules are still being notified unevenly across the country, so the practical compliance obligation varies by where your employees are based.
2. Does the 50% wage rule apply to every employer in India?
The rule applies broadly under the Code on Wages, requiring Basic plus DA to equal at least 50% of total compensation. Employers should confirm applicability against their specific state's notified rules, since implementation timelines differ by location.
3. Do fixed-term employees really get gratuity after one year?
Yes. Fixed-term workers are entitled to pro-rata gratuity after one year of continuous service, a significant change from the five-year threshold that still applies to permanent employees.
4. Does the retrenchment threshold change affect most foreign employers?
Only companies with 100 or more workers in a single establishment were previously affected by the approval requirement. Raising the threshold to 300 mainly benefits mid-sized and larger employers; most foreign companies hiring through an EOR or a small India entity will not reach this scale.
5. Who is responsible for implementing these changes if I hire through an EOR?
The EOR is the registered legal employer, so wage restructuring, contract updates, and compliance with the applicable central and state rules are the EOR's responsibility, not the client company's.
