What Happened
- Major Indian IT services companies have set aside provisions for increased payroll costs arising from the implementation of India's four Labour Codes, with estimates placing the incremental cost at under 3% of total payroll for most large IT firms.
- The four Labour Codes — Code on Wages 2019, Industrial Relations Code 2020, Code on Social Security 2020, and Occupational Safety, Health and Working Conditions Code 2020 — came into major effect from November 21, 2025, after years of delays.
- The cost impact primarily stems from the revised definition of "wages" under the codes, which mandates that basic pay must constitute at least 50% of total remuneration, increasing gratuity, provident fund (PF), and overtime calculations.
- Despite the below-3% headline cost figure, actual payroll cost increases for IT firms could range 5-10% depending on existing pay structure composition.
- IT firms are adopting varied strategies: some earmarking separate budgets for the added liabilities, others absorbing costs within existing salary pools, with marginal impact on annual salary hike cycles.
Static Topic Bridges
The Four Labour Codes — Consolidation and Key Changes
India consolidated 29 central labour laws into four comprehensive codes to simplify compliance, extend social security coverage, and modernise labour regulations. The four codes are: (1) Code on Wages, 2019; (2) Industrial Relations Code, 2020; (3) Code on Social Security, 2020; and (4) Occupational Safety, Health and Working Conditions Code, 2020. After receiving Presidential assent, all four codes were implemented nationally from November 21, 2025.
- Code on Wages, 2019: Consolidates four wage laws; uniform definition of "wages" — basic pay + dearness allowance + retaining allowance; all other components (HRA, bonus over 50% cap, etc.) excluded from wage definition; establishes National Floor Wage.
- Industrial Relations Code, 2020: Merges Trade Unions Act 1926, Industrial Employment (Standing Orders) Act 1946, Industrial Disputes Act 1947; raises threshold for government approval of retrenchments/closures from 100 to 300 workers; introduces two-member Industrial Tribunals.
- Code on Social Security, 2020: Merges nine laws; extends EPF, ESI, gratuity, maternity benefits to gig workers, platform workers, and unorganised sector; Aadhaar-linked universal accounts for portability.
- Occupational Safety Code, 2020: Merges 13 laws; permits women to work night shifts (with consent and safety measures); standardises factory safety and welfare norms.
Connection to this news: The 50% basic pay floor under the Code on Wages is the primary driver of IT payroll cost increases, as many IT firms historically structured compensation with a low basic salary and high allowances to minimise PF and gratuity outgo.
Impact on IT Sector Payroll — The 50% Basic Pay Rule
The IT sector is particularly affected by the Labour Codes because Indian IT companies have historically structured employee compensation with a relatively low basic salary (often 30-40% of CTC) and high allowances to minimise statutory obligations. The new 50% basic pay floor fundamentally alters this calculation.
- Under the new "wages" definition, basic pay must be at least 50% of gross wages/CTC.
- Higher basic pay → higher EPF contribution (12% of basic for employee and employer each), higher gratuity accrual, higher overtime rates.
- EPF contribution: employee 12% of basic + employer 12% of basic (3.67% to EPF, 8.33% to EPS); higher basic = higher absolute EPF amount.
- Gratuity formula: (Last drawn basic × 15/26) × years of service — a higher basic directly increases gratuity payouts.
- IT sector employee expenses typically constitute 60-70% of total revenue costs — making payroll changes significantly margin-sensitive.
- A 5-10% rise in effective payroll costs could affect operating margins by 1-3 percentage points for large IT firms.
Connection to this news: The "under 3% of payroll" cost cited by top IT firms refers to the incremental provision for additional liabilities, not the total structural payroll increase — reflecting that large firms had partially anticipated and restructured compensation ahead of implementation.
Gig Economy and Social Security Expansion
One of the most significant structural changes in the Labour Codes is the formal recognition of gig workers and platform workers as a distinct category entitled to social security benefits. This is directly relevant to India's technology sector, which is a major user of gig and contractual labour.
- Gig workers: workers outside traditional employer-employee relationships who earn from work arrangements through digital platforms (e.g., cab drivers, delivery agents, freelance IT workers).
- Code on Social Security, 2020: Aggregators (platform companies like Ola, Uber, Swiggy, Zomato) must contribute 1-2% of their annual turnover (capped at 5% of the amount payable to gig workers) to a National Social Security Fund for gig workers.
- India has approximately 7.7 million gig workers (NITI Aayog 2022 estimate), projected to reach 23.5 million by 2030.
- IT firms employing fixed-term contractors and gig-mode workers face new social security obligations even for non-permanent employees.
- Fixed-term employees are entitled to equivalent wages and benefits as permanent employees; gratuity on pro-rata basis after one year.
Connection to this news: Large IT firms' earmarking of Labour Code costs partly reflects new provisions for contract and gig workers — a significant and growing part of the IT workforce — whose social security obligations were previously minimal or absent.
Key Facts & Data
- Four Labour Codes implementation date: November 21, 2025
- 29 central labour laws consolidated into 4 codes
- Key cost driver for IT: 50% basic pay floor under Code on Wages, 2019
- IT firms' incremental Labour Code provision: under 3% of payroll (headline figure for top firms)
- Actual payroll cost increase range for IT sector: 5–10% (depending on existing pay structure)
- IT sector: employee expenses constitute 60-70% of total costs
- EPF contribution: 12% employee + 12% employer of basic wages (employer split: 3.67% EPF + 8.33% EPS)
- Gratuity formula: (Basic × 15/26) × completed years of service
- Gig workers in India (2022): 7.7 million (NITI Aayog); projected 23.5 million by 2030
- Aggregator contribution to National Social Security Fund: 1–2% of annual turnover (capped at 5% of gig worker payouts)
- Threshold for government approval of retrenchment/closure: raised from 100 to 300 workers (Industrial Relations Code)