New Labour Codes Will Impact MNC Bottom Lines

Multinational Corporations (MNCs) operating in India are preparing for a significant overhaul of their compensation strategies as the central government moves closer to implementing four landmark labour codes.

These codes—covering Wages, Social Security, Industrial Relations, and Occupational Safety—aim to consolidate 29 existing central labour laws.

While the reforms are designed to improve the ease of doing business, experts warn that the new definitions of “wages” will trigger a massive restructuring of payroll systems, impacting both employer costs and employee take-home pay.

The 50% Basic Salary Mandate

The most transformative aspect of the New Wage Code is the revised definition of “wages.”

Under the new regulations, an employee’s basic pay, along with certain fixed allowances, must constitute at least 50% of their total compensation (CTC).

Currently, many MNCs keep the basic salary low—often between 25% and 35%—to minimize their liability for social security contributions.

By mandating a higher basic pay component, the government is effectively forcing a hike in Provident Fund (PF) and Gratuity contributions.

For MNCs with large workforces, this change will lead to a substantial increase in the “cost to company,” while employees may see a reduction in their net monthly take-home pay as a larger portion of their earnings is diverted to long-term retirement savings.

Labour Codes Impact on Gratuity and Leave Encashment

The restructured payroll will also significantly inflate long-term liabilities for corporations.

Since the law bases Gratuity calculations on the last drawn basic salary, the 50% basic pay floor will increase Gratuity payouts when an employee exits or retires.

Furthermore, the New Labour Codes propose changes to leave policies.

Companies may have to pay out (encash) any excess leave if an employee carries over more than 30 days at the end of a calendar year.

This shifts leave from being a “benefit” to a “financial liability” on the company’s balance sheet, prompting many MNCs to revise their “use it or lose it” leave policies.

Gender Neutrality and Social Security for Gig Workers

The reforms also introduce a progressive shift toward gender-neutral pay and the formalization of the gig economy.

The new labour codes extend social security benefits to gig and platform workers for the first time, directly impacting MNCs in the tech, food delivery, and e-commerce sectors.

These companies will now likely contribute to a social security fund managed by the government, adding another layer to their operational costs in the Indian market.

The Labour Codes Compliance Challenge for MNCs

MNCs are currently conducting “impact assessments” to model how these changes will affect their global budgets.

The challenge lies in the transition: how to increase basic pay without drastically cutting the net pay of employees, which could lead to talent attrition.

Human Resource departments are exploring “flexible benefit plans” to offset the reduction in take-home pay while remaining compliant with the 50% basic salary rule.

While the implementation date has seen multiple delays as states finalize their respective rules, the consensus among policy analysts is that the codes will be notified shortly, leaving corporations with a narrow window to overhaul their legacy payroll software and employment contracts.

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