Revised Labour Codes Reform Wage Structures and Empower Workers

After Reading This Article You Can Solve This UPSC Mains PYQ

Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in these regards? 250 Words (GS-3, Economy) (UPSC Mains 2024)

Context

• The implementation of the Four Labour Codes in India represents a paradigm shift from a fragmented, colonial-era regulatory framework to a cohesive, digitally-driven ecosystem.
• By consolidating 29 central labour laws, the reforms aim to balance the “ease of doing business” with a “universalization of social security.”
• At the heart of this transition is a structural intervention designed to foster financial inclusion, redefine the employer-employee relationship, and ensure that the fruits of economic growth are equitably distributed among the workforce.

Background: The Need for Reforming Labour Codes

Historically, India’s labour market was governed by a complex web of overlapping statutes that created compliance burdens for employers and left nearly 90% of the workforce (unorganized sector) without formal protection. The Second National Commission on Labour (2002) recommended consolidation to resolve:

• Systemic Complexity: Over 40 central and 100 state laws fostered an inefficient “Inspector Raj.”
• Legal Fragmentation: Inconsistent definitions of “wages,” “worker,” and “factory” led to endless litigation.
• Modern Exclusions: A total lack of recognition for the burgeoning gig and platform economy.

Key Provisions of Labour Codes Redefining Wages and Empowering Workers

The reform is built upon four pillars: the Code on Wages (2019), the Industrial Relations Code (2020), the Social Security Code (2020), and the Occupational Safety, Health and Working Conditions Code (2020).

1. Uniform Definition of Wages

• The Code on Wages, 2019 introduces a single, universal definition of “wages” applicable across all four labour codes, replacing the earlier fragmented and sector specific definitions used under precode laws.

• Under the earlier regime, ‘wages’ were defined inconsistently across statutes such as the Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Gratuity Act, 1972, and Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. These definitions often excluded various allowances, leading to a lower wage-base for social security calculations.

• Now, wages explicitly include basic pay, dearness allowance and retaining allowance, while certain components such as house rent allowance, conveyance allowance, employer’s contribution to PF/NPS and statutory bonus are treated as exclusions, subject to a cap.‑rent allowance, conveyance allowance, employer’s contribution to PF/NPS and statutory bonus

• A “50% rule” is embedded: wages must constitute at least 50% of total remuneration; if allowances exceed 50%, the excess is added back to wages for statutory calculations, thereby raising the wage share and expanding social security contributions.‑share and expanding social‑security contributions

2. Universal Minimum Wages and Timely Payment

• The Code mandates a floor wage (a national baseline set by the Central Government based on minimum living standards, below which no State Government can set wages) and statutory minimum wages (the legally lowest remuneration fixed by the appropriate government for specific regions or occupations, which must be equal to or higher than the floor wage) applicable to all workers, including permanent, fixed-term, contract, part-time, and gig workers, thereby eliminating earlier sectoral exclusions and wage ceiling thresholds.

• It also prohibits arbitrary deductions, requires timely payment of wages (often into bank accounts), and removes the earlier wage ceiling threshold that limited coverage, thus enhancing income security and financial inclusion.‑ceiling threshold that limited coverage, thus

3. Gratuity and Fixed Term Employment Term Employment‑Term Employment

• Under the revised gratuity provisions, fixed term employees become eligible for gratuity after completing one year of continuous service, instead of the earlier five year requirement under the Payment of Gratuity Act, 1972.‑term employees‑year requirement

• This change recognises the growing share of fixed-term and project-based employment and converts short-term work into a mechanism for terminal financial benefits and asset creation, thereby strengthening long-term income security.

4. Coverage of Gig and Platform Workers

• The Social Security Code formally recognises gig and platform workers, bringing them under the ambit of social security schemes, insurance and welfare funds for the first time, unlike the earlier framework which largely excluded them from statutory protections.

• It also provides portability of benefits across states and employers, which is particularly significant for migrant and informal workers, enabling continuous access to social security entitlements despite job or location changes.‑security entitlements

Significance of the Labour Reforms: Empowering the Modern Workforce

The consolidation of labour laws into four comprehensive codes is not merely an administrative exercise; it is a structural intervention aimed at aligning India’s economic growth with social justice and financial dignity.

• Enhanced Financial Inclusion and Social Security: By raising the wage share in total remuneration, the codes increase employer contributions to provident fund (PF), pension and gratuity, leading to higher long term savings and retirement security for workers.‑share‑term savings and retirement security
  • Furthermore, gratuity after one year for fixed term employees transforms short term contracts into structured income security mechanisms, reducing vulnerability during job transitions.‑term employees‑term contracts‑security mechanisms

• Formalisation of Informal and Gig Work: Extending minimum wages, social security and welfare benefits to gig, platform and unorganised workers helps formalise large segments of the informal economy and integrate them into the formal financial and social security architecture.‑security architecture
  • Additionally, portability of benefits reduces the risk of exclusion when workers migrate across states or switch between formal and informal engagements.

• Income Redistribution and Inclusive Growth: The redistribution of economic value from capital to labour through higher wages and contributions strengthens workers’ purchasing power, which in turn stimulates domestic demand and consumption led growth.‑security contributions strengthens ‑led growth
  • Unlike capital income that may flow into financial markets or external assets, labour income tends to circulate within the domestic economy, generating multiplier effects on employment and local demand.‑income that may flow into financial markets or external assets,

• Regulatory Simplification and Transparency: Consolidating 29 laws into four codes reduces compliance complexity, improves transparency, and creates a more predictable regulatory environment for both workers and employers.
  • The introduction of single registration, single licence, and single return mechanisms streamlines administration and reduces opportunities for regulatory arbitrage and non-compliance.

Multidimensional Impact of Labour Reforms: Workers, Employers, and the Economy

The transition to the unified labour codes generates a cascading effect across different stakeholders, shifting the focus from mere regulation to a sustainable economic partnership.

• Impact on Workers: Higher wage share and gratuity eligibility directly enhance income security, savings and long term social protection, especially for fixed term, contract and informal workers.
  • By establishing universal minimum wages and timely payment, the codes reduce wage-arbitrariness and protect vulnerable workers from exploitation and delayed remuneration. This formal recognition of the gig economy ensures that even non-traditional workers have a stake in the formal social safety net.

• Impact on Employers: The 50% wage rule and expanded gratuity coverage increase statutory liabilities for large firms, particularly those with high reliance on fixed term and contract workers (e.g., IT services, construction, manufacturing).
  • However, this increase in cost is balanced by simplified compliance and digital-first processes, which reduce administrative friction, minimize “Inspector Raj” interference, and improve labour-management predictability rule.

• Macroeconomic and Structural Impact: Greater financial inclusion of workers expands the formal savings base, deepens financial markets, and supports long-term investment in infrastructure and human capital.
  • By reducing labour-market segmentation and integrating gig and informal workers into social-security nets, the codes contribute to social stability and resilience against economic shocks.
  • The resulting boost in purchasing power creates a self-sustaining cycle of consumption-led growth, ensuring that economic progress is broad-based and inclusive.

Key Limitations of the New Labour Codes

Despite the transformative potential of the reforms, several structural and operational hurdles persist that could undermine the goal of universal worker empowerment.

1. Implementation and Enforcement Bottlenecks

• Uneven Adoption: While the Central Government has notified the codes, effective implementation remains inconsistent across Small and Medium Enterprises (SMEs), the informal sector, and remote geographical regions.
• Capacity Constraints: Weak inspection capacity and a lack of awareness among the grassroots workforce often lead to non-compliance.
• Diluted Oversight: The transition from “Inspectors” to “Inspector-cum-Facilitators” and the shift toward web-based inspections are perceived by some as a softening of enforcement, potentially allowing safety and wage violations to go unchecked.

2. Ambiguities in the Wage Definition and Legal Friction

• Calculation Uncertainty: The absence of a clear statutory definition for “total remuneration” makes applying the 50% wage-rule technically complex, leading to compliance uncertainty and high litigation risks.
• Interpretive Disputes: Ongoing disputes over which specific allowances fall under “exclusions” versus “wages” may lead to delayed benefit accrual for workers as companies await judicial clarifications.

3. Trade-Union Resistance and the Political Economy

• Perception of Bias: Major trade unions have launched nationwide strikes (such as the Bharat Bandh in February 2026), arguing that the codes favor corporate flexibility (e.g., easing hiring and firing norms) over long-term job security.
• Erosion of Bargaining Power: Restrictions on the right to strike and the requirement for extended notice periods are viewed as a dilution of collective bargaining rights, overshadowing the pro-worker social security gains.

4. Coverage Gaps and Operational Challenges

• Gig Economy Hurdles: While gig and platform workers are formally recognized, operationalizing their inclusion remains a logistical challenge. Current rules requiring a minimum of 90 days of engagement to qualify for benefits may exclude a significant portion of the transient workforce.
• Exclusion Thresholds: Raising the employee threshold for standing orders and retrenchment permission (from 100 to 300 workers) leaves employees in smaller establishments more vulnerable to arbitrary dismissals.
• Digital Divide: Registration for benefits via the e-Shram portal requires Aadhaar-linked documentation, which often excludes the most marginalized migrant workers who lack stable digital identities.

Way Forward: The Path to ‘Viksit Bharat’

To ensure that the transition to the new labour codes results in genuine empowerment rather than administrative friction, a multi-pronged strategy is required:

• Harmonized Federal Implementation: As “Labour” is a subject on the Concurrent List, there is an urgent need for the rapid notification of rules by all State Governments. This uniformity is essential to prevent regulatory arbitrage, where businesses might migrate to states with more relaxed enforcement, thereby creating a “race to the bottom” in worker protection.
• Leveraging Digital Public Infrastructure (DPI): The success of these reforms hinges on strengthening the e-Shram and EPFO portals. Enhancing digital literacy among the workforce will ensure that workers—especially migrant and informal labourers—can directly track their contributions and claim benefits via Aadhaar-seeded accounts, effectively eliminating exploitative middlemen.
• Institutionalizing a “Just Transition”: To mitigate the impact of automation and the gig economy’s volatility, the government must prioritize the establishment of a National Re-skilling Fund. This fund should facilitate continuous skill development, allowing workers to transition smoothly within a rapidly evolving, tech-driven job market without facing income loss.
• Support Ecosystem for MSMEs: Recognizing that Small and Medium Enterprises are the largest employers, the government should consider providing temporary subsidies or tax breaks. These fiscal incentives would help small businesses absorb the increased statutory liabilities of the new wage structure without compromising their financial viability or reducing their workforce.
• Strengthening Social Dialogue: To resolve the deadlock with trade unions, a continuous tripartite dialogue between the government, employers, and labour representatives is necessary. Transparent communication can help bridge the trust gap, ensuring that the codes are viewed not as a threat to rights, but as a modern tool for inclusive prosperity.

Conclusion

India’s labour codes are not merely a regulatory cleanup; they are a social contract for the 21st century. By prioritizing income security and dignity of labour, the reforms transition the Indian worker from a “variable cost” to a “valued stakeholder.” The long-term success of this framework will lie in its effective enforcement, ensuring that the “last mile” worker is the primary beneficiary of India’s growth story.