Summary: India's four Labour Codes came into force on 21 November 2025, replacing 29 central labour laws. The final Central Rules were notified on 8 May 2026. For MSMEs, the codes cut both ways: compliance thresholds go up and paperwork comes down, but payroll cost goes up because of the new definition of wages. This article explains what changed, which changes actually matter for a business under 300 workers, what it does to your salary structure, and a stepwise plan to get compliant in the next 90 days.
Most founders I speak to have heard the phrase "new labour codes" and filed it under "something my CA will handle."
It is not a CA problem. It is a payroll and people problem.
And it has already started. The codes are live. The Central Rules are notified. Your state is somewhere in the queue. Meanwhile every appointment letter you issue, every salary structure you design, and every exit you process is now being measured against a framework most small companies have not read.
Here is the practitioner's version. No legalese.
1. What exactly are the four Labour Codes?
The four Labour Codes consolidate 29 separate central labour laws into a single framework. They came into effect on 21 November 2025.
The Central Rules under all four codes were notified on 8 May 2026. Those rules apply where the Central Government is the appropriate government. That means banking, insurance, telecom, mines, railways, air transport, major ports and central PSUs.
Read that again if you run a factory in Bhiwandi or an agency in Andheri. You are almost certainly a state-jurisdiction establishment. Your operative rulebook is your State Rules, and states are at very different stages of notification.
This is the single most misread part of the whole transition.
2. What changed for a business with fewer than 300 workers?
The thresholds moved up, and most MSMEs now sit below them. That is the headline benefit.
The old 100-worker cliff was a real thing. Founders deliberately kept headcount at 95 to avoid crossing it. That fear is gone for most small firms. You can now hire past 100 without inviting a different regulatory regime.
The second benefit is administrative.
If you have ever spent a Tuesday chasing a licence renewal, you know what this is worth.
3. Which change actually costs you money?
The definition of wages. This is where MSMEs get hit, and most have not modelled it yet.
The codes apply one uniform definition of "wages" across all four laws. The rule is simple to state and expensive to implement:
Your excluded allowances cannot exceed 50% of total remuneration. If they do, the excess gets added back into wages.
In practice, this means basic plus DA must be at least 50% of CTC.
Most Indian MSME salary structures were built the other way round. Basic at 30% or 35%, and the rest loaded into HRA, special allowance, conveyance, LTA and a dozen other heads. That structure was designed, quite deliberately, to keep PF and gratuity liability low.
That structure no longer works.
Once basic rises to 50%, three things move at once:
Take a simple example. An employee on ₹50,000 CTC with basic at ₹17,500. Under the codes, basic moves to ₹25,000. That is a 43% jump in the base on which PF, gratuity and bonus are calculated.
Multiply that across 60 employees and it is no longer a rounding error.
There is a second-order effect that nobody warns founders about. When basic goes up and CTC stays flat, take-home pay falls. Your employee sees a smaller number in the bank account and assumes you cut their salary. If you have not communicated this before the first restructured pay cycle, you will spend a month firefighting instead of working.
4. What new obligations did MSMEs pick up?
Higher thresholds do not mean fewer duties. Several new obligations apply regardless of size.
None of these are hard. All of them require a system. That is exactly the gap in most MSMEs.
5. What is the honest trade-off for an MSME?
You get administrative relief and you take on financial cost. Anyone telling you it is a pure win is selling something.
The businesses that will struggle are not the ones with the highest headcount. They are the ones with the loosest documentation. If you do not have signed appointment letters, structured attendance records, or a defined salary architecture, the codes will not simplify anything for you. They will expose you.
6. How should an MSME get compliant? A 90-day sequence
Work through these in order. Skipping the audit is where most rollouts break.
Check Which Rules Actually Apply to You
Confirm whether the Central Rules or your State Rules govern your establishment. If you operate in more than one state, map each location separately. Note what is operative and what is still pending.
Audit Your Salary Structure Against the 50% Test
Take every CTC band. Calculate excluded allowances as a percentage of total remuneration. Flag every band where exclusions cross 50%. This is the exercise most companies skip, and it is the one that determines the size of the problem.
Rebuild the Salary Architecture
Compute the amount to be folded back into wages for each band. Redesign the structure so basic plus DA crosses 50%. Model the PF, gratuity and bonus impact before you sign off, not after.
Communicate Before You Implement
Write to employees in plain language explaining why take-home is changing and why their retirement corpus is going up. This is a five-minute email that prevents a six-week attrition problem.
Fix Documentation
Issue appointment letters in the prescribed format to every employee, including existing ones. Move registers to digital. Set up structured attendance, wage slips and employee records.
Rewrite the Exit Process
Two-day full and final settlement is not possible with a manual process. Pre-compute leave encashment and bonus on the notice date. Build the trigger into your payroll cycle.
Handle Contract Labour and Vendors
Check contractor licences against the new 50-worker threshold. Where you are the principal employer, confirm wage payment, records and social security compliance at the contractor's end. Their lapse becomes your liability.
Build the Review Cadence
State rules are still being notified. Put a quarterly review in the calendar. Assign it to a named person.
7. What should you do this month?
Start with the salary audit. Everything else follows from it.
If you employ more than 20 people and you have not yet run your CTC bands against the 50% test, you are carrying an unquantified liability on your books. It is not urgent in the sense that someone is knocking on your door today. It is urgent in the sense that the number only gets larger the longer you wait, because gratuity accrues.
The founders who handle this well will treat it as a one-time infrastructure project. The ones who handle it badly will treat it as a series of emergencies.
Where Does Your Business Actually Stand?
At Kensho HR Solutions we do this work as an embedded team, not a report. Start with our free HR Health Audit to see where you stand before you commit to anything.
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