Employment Law Newsletter – Debunking Myths: A Clear Guide to the New Labour Codes
1) Introduction
The Indian labour ecosystem is undergoing a monumental transformation with the introduction of the New Labour Codes; a comprehensive set of reforms aimed at simplifying and modernizing the country’s labour laws. These reforms are designed to bring greater transparency, enhance workers’ rights, and improve the ease of doing business by consolidating multiple labour laws into just four key Codes. By addressing the challenges of a rapidly evolving workforce and diverse industrial sectors, the Labour Codes aim to foster a more conducive environment for both employers and employees.
However, alongside these positive changes, several misconceptions have emerged surrounding the implementation of these new provisions. These myths, if left unchecked, can create confusion, lead to compliance errors, and even expose employers to legal risks. In this newsletter, we aim to debunk some of the most pervasive myths surrounding the New Labour Codes, offering clarity on what these laws actually entail and how they impact businesses and workers. By separating fact from fiction, we hope to equip all stakeholders with the knowledge necessary to navigate the complexities of the new regulatory landscape.
2) Debunking the Myths
a) Myth: “Consultants Are Now Entitled to Social Security Benefits Like Gratuity.”
The Reality: This myth is based on a misunderstanding of the terminology used in the New Labour Codes. Under the Code on Social Security, the definition of “employee” is clearly delineated, and social security benefits such as Gratuity and Provident Fund (PF) are exclusively available to employees who meet certain criteria. An independent consultant, engaged on a “contract-for-service” basis, does not qualify as an employee in the legal sense. Therefore, they are not entitled to benefits such as gratuity, PF, or other social security provisions.
The misclassification of workers as “consultants” to avoid statutory obligations is a practice that has been prevalent in some industries, but it carries significant legal and financial risks. If an individual working on a consultancy basis is, in fact, performing duties similar to that of an employee, the employer may be violating labour laws by denying them the entitled benefits. This can result in fines, penalties, and the requirement to backpay benefits that should have been provided. It is important for businesses to ensure that their workforce is properly classified to comply with the legal provisions and avoid any future legal entanglements.
b) Myth: “The New PF Rule Will Drastically Reduce Take-Home Salary.”
The Reality: This myth has gained traction in certain quarters, particularly among employees concerned about the revised rules regarding the definition of “wages” and how it affects Provident Fund (PF) contributions. While it’s true that the new rules bring certain allowances (such as special allowances, bonuses, and commissions) into the wage calculation for PF, the notion that this will drastically reduce take-home pay is largely exaggerated.
For some employees, especially those with a basic salary below ₹15,000/month, the changes could result in a slightly higher deduction for PF, as these allowances will now be factored into
the calculation of their contribution. However, this increase in deductions is typically modest, and in many cases, it could be offset by a reduction in taxable income, as the additional PF contributions will be eligible for tax exemptions under Section 80C of the Income Tax Act.
Additionally, employers have the flexibility to adjust salary structures in a way that can help mitigate the impact of these higher deductions. For example, an employer may choose to reduce other components of the salary package to maintain the overall take-home pay, thus ensuring minimal disruption to employees’ finances. The net impact on employees is likely to be marginal, with many even benefiting from the long-term savings and financial security associated with increased PF contributions.
c) Myth: “Working Hours Are Now Strictly 12 Hours Per Day.”
The Reality: The assertion that the new Labour Codes mandate a 12-hour workday is an oversimplification. The Occupational Safety and Health (OSH) Code, which governs working hours and conditions, indeed sets a limit of 12 “spread over” hours per day. However, this does not mean that employees are required to work 12 hours every day.
The “12-hour” rule refers to the total span of time that an employee may be required to be at the workplace, including any rest or meal breaks. The OSH Code continues to enforce the fundamental principle that the maximum working hours per day for employees should be 8 hours, excluding breaks. The 12-hour “spread-over” rule provides flexibility to employers, allowing them to stagger work hours, introduce flexible schedules, or accommodate varying shifts, but it does not imply that workers must be on the job for 12 hours continuously.
This provision is aimed at accommodating modern work arrangements, including remote work and shift work, while still safeguarding the health and well-being of employees. By regulating the “spread over” time, the law ensures that employees are not overworked and that their rights to adequate rest and recuperation are respected.
d) Myth: “The OSH Code Only Applies to Factories, Mines, and Construction Sites.”
The Reality: One of the most significant changes under the new Labour Codes is the expansion of the scope of the Occupational Safety and Health (OSH) Code. Contrary to previous laws such as the Factories Act of 1948, which applied primarily to industrial workplaces like factories, mines, and construction sites, the new OSH Code covers a much broader range of establishments.
The definition of an “establishment” under the OSH Code has been extended to include all types of workplaces, ranging from offices, IT companies, and retail outlets to educational institutions and healthcare facilities. This broadens the coverage of safety and welfare provisions to include sectors that were previously outside the purview of industrial-specific laws. As a result, businesses in the service sector, including IT, hospitality, and retail, now have a legal obligation to ensure the health, safety, and welfare of their employees, including implementing safety protocols, providing necessary work conditions, and offering training on safe practices.
This comprehensive approach reflects the changing nature of the Indian workforce and the increasing importance of employee well-being across all industries. Businesses must be
mindful of their obligations under the OSH Code, which includes providing a safe working environment, addressing risks, and complying with regulations for worker protection.
e) Myth: “All Employees Will Now Get Gratuity After Just One Year.”
The Reality: This myth stems from a misunderstanding of the provisions related to fixed-term employees. Under the new Code, fixed-term employees—those hired for a specific period or for a project—are indeed entitled to pro-rata gratuity if they complete at least one year of continuous service. This provision aims to offer financial security to employees on temporary contracts, who were previously not entitled to gratuity benefits.
However, for regular, permanent employees, the original requirement of five years of continuous service to qualify for gratuity remains unchanged. Fixed-term employees’ eligibility for gratuity after just one year is an exception, not a blanket rule. This distinction ensures that permanent employees, who are typically more deeply integrated into an organization, continue to receive the same long-term benefits under existing terms.
3) Conclusion:
The introduction of the New Labour Codes is an important step toward modernizing India’s labour laws, enhancing worker protections, and improving the ease of doing business. These changes are long overdue and are designed to strike a balance between fostering economic growth and ensuring that workers’ rights are respected. However, as with any major overhaul, misunderstandings and myths can cloud the true intent and implications of the law.
By dispelling the most common myths surrounding the Labour Codes, we hope to provide clarity to employers and employees alike. As these reforms continue to be enforced, it is essential for businesses to stay informed and compliant with the new provisions to avoid legal complications and promote a fairer, safer, and more productive work environment.
Understanding and adapting to these changes will not only help businesses avoid penalties but also contribute to the development of a more progressive and sustainable labour market in India. Ensuring that all employees, regardless of their job type or industry, receive the protections and benefits they are entitled to is essential for fostering trust, improving productivity, and advancing the country’s overall socio-economic development.
