08Hiring and labour law
Hiring under the new Labour Codes
Indian labour compliance is triggered by headcount. Two obligations apply from your very first hire.
Indian labour compliance is triggered by headcount. Most corporate registrations apply from day one; labour registrations switch on as you cross 10, 20 and 300 employees, and two of them apply from your very first hire.
India has also just been through its largest labour reform in decades. Four Labour Codes consolidating 29 existing laws were passed by Parliament, and the Central Government notified the rules under all four in February 2021. Implementation is rolling out state by state.
- Applies from the first employee
- Minimum wages, Shops and Establishments, and the POSH Act's employer duties
- 10 or more employees
- ESIC, gratuity, maternity benefits
- 20 or more employees
- EPF, payment of bonus, contract labour registration
- 300 or more workers
- Standing orders, re-skilling fund
- Basic pay floor
- At least 50% of total CTC under the new Codes
- Full and final settlement
- 2 working days in notified states, 30 to 45 days elsewhere
Why does basic pay have to be half the salary?
Under the new Codes, basic pay has to constitute at least 50% of total cost to company. Any allowance beyond that threshold is automatically reclassified as wages, which increases provident fund, gratuity and employee state insurance liability.
Every compensation structure has to be designed around this from the outset. It bites hardest on senior hires with large variable or allowance components, where a package built on the old assumptions can carry materially more statutory cost than budgeted.
Which registrations apply at which headcount?
Registrations have to be obtained as soon as the relevant employee threshold is reached. Everything in this table is mandatory once the threshold applies.
| Registration | Threshold | Obligation |
|---|---|---|
| Shops and Establishments Act | All establishments, from commencement | State legislation. Every commercial establishment registers with the local authority within 30 days of commencing business. Timelines vary by state. Covers working hours, leave, holidays and employment conditions. |
| Code on Wages, 2019 | From the first employee | Minimum wages as notified by central or state government. Overtime at double the ordinary rate. Timely payment of wages. Wage slips mandatory, regardless of headcount. |
| POSH | Employer duties from the first employee; Internal Committee at 10 or more | Every workplace needs a policy, awareness training and a displayed redressal mechanism. The Internal Committee itself, at least four members including an external member from an NGO or legal background, is required once you reach 10 employees. Below that, complaints go to the district Local Committee. |
| ESIC | 10 or more employees | Covers employees earning up to INR 21,000 a month, or INR 25,000 for persons with disability. Employer and employee both contribute. Lower thresholds apply in certain states and hazardous industries. |
| Gratuity | 10 or more employees | Continues to apply even if headcount later falls below 10. Payable to permanent employees after 5 years of continuous service, and proportionately from day one for fixed-term employees. The employer must hold gratuity insurance or maintain a designated fund. |
| Maternity benefits | 10 or more employees | 26 weeks of paid leave for the first two children, 12 weeks thereafter. A crèche facility is mandatory at 50 or more employees. Work-from-home must be offered post-maternity leave. |
| EPF | 20 or more employees | Employer and employee each contribute 12% of basic wages. Mandatory for employees earning up to INR 15,000 a month; those above may opt in voluntarily. |
| Payment of Bonus | 20 or more employees | Payable to employees drawing up to INR 21,000 a month, calculated on a ceiling of INR 7,000 a month or minimum wages, whichever is higher. Minimum 8.33%, maximum 20% of annual wages. |
| Contract labour registration | 20 or more contract workers | Registration as Principal Employer where contract workers are engaged through a contractor: IT support, facility management, security. |
| Professional tax | State-specific | Applies in Maharashtra, Karnataka, West Bengal, Andhra Pradesh, Telangana and others. Deducted from salaries and remitted to the state. Slabs and deadlines vary. |
| Labour Welfare Fund | State-specific | Applies in Maharashtra, Karnataka, Andhra Pradesh, Telangana and certain other states. Nominal contributions deducted and remitted to the State LWF Board. |
| Standing orders | 300 or more workers | Mandatory under the Code on Industrial Relations, 2020. Must cover working hours, shift timings, transfer policy and service records, published on the HR portal in English, Hindi and the local language. |
| Re-skilling fund | 300 or more workers, on retrenchment | 15 days of last drawn wages transferred to the designated authority within 10 days of separation. Applies only to industrial establishments. |
What changes under the new Labour Codes?
Beyond the registration thresholds, the new framework introduces obligations that apply from the very first hire, once the relevant state has notified its rules. Where a state has not yet notified, legacy obligations continue.
| Obligation | What it requires |
|---|---|
| Appointment letters | Issued in a prescribed standardised format from day one. No longer discretionary; failure to issue one in the correct format is a compliance violation. |
| Full and final settlement | Completed within 2 working days of resignation or termination in notified states. Where a state has not notified, the legacy practice of 30 to 45 days under the Industrial Disputes Act continues. |
| Wage structure | Basic pay at least 50% of total CTC. Allowances above that threshold are reclassified as wages for PF, gratuity and ESI. |
| Electronic wage slips | A formal legal obligation rather than a best practice. Issued electronically with prescribed particulars after each payment cycle. |
| Annual health checks | Mandatory for all employees above 40 years of age. The employer organises and pays for the examination. |
Does POSH apply to a two-person office?
The Act does. The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 is standalone legislation that was not subsumed into the Labour Codes, and it binds every workplace whatever its size. What changes with headcount is who hears a complaint.
From your first employee
- Put a POSH policy in place and display it at the workplace, along with the penal consequences of harassment and the details of the redressal mechanism.
- Run awareness and sensitisation sessions for employees.
- Assist a complainant who wants to take the matter further, including with a police complaint, and treat a proven case as misconduct under your service rules.
- Tell employees where to complain. Below 10 employees there is no Internal Committee, and complaints go to the Local Committee that the District Officer constitutes for the district.
At 10 or more employees
- Constitute an Internal Committee of at least four members, headed by a woman and including an external member from an NGO or legal background.
- Display the constitution of the committee alongside the policy.
- File the committee's annual report with the District Officer, by 31 January where the state rules set that date.
- Maintain records of all complaints and proceedings.
What is optional, and worth doing anyway?
| Benefit | What it is |
|---|---|
| EPF voluntary coverage | Employees earning above INR 15,000 a month may voluntarily opt into EPF coverage. |
| National Pension System | Can be offered as part of CTC structuring. Contributions up to 10% of basic salary are tax-deductible under Section 80CCD(2). |
| Group health insurance | Not mandatory, and strongly recommended for attracting talent and covering higher-wage employees outside ESIC. |
| Employee stock options | Subject to SEBI and RBI guidelines for listed and unlisted entities. Voluntary, with specific tax and compliance implications. |
What does ongoing payroll compliance involve?
Registration is the beginning. These obligations arise from the first payroll cycle and run parallel to the registration thresholds above.
- Monthly PF and ESI filings and remittances within the prescribed deadlines.
- TDS on salaries under Section 192 of the Income-tax Act: deduction, deposit, and quarterly and annual returns.
- Statutory registers maintained under the relevant Codes: muster roll, wage register, leave register, overtime register and others as applicable.
- Annual returns under the various statutes: PF, ESI, bonus, gratuity, professional tax and LWF.
- Labour inspection readiness. Registers and records have to be available for inspection by government authorities at any time, including without notice.
India follows a dual federal structure, so central and state laws apply simultaneously and registrations may be required at both levels. Payroll compliance runs alongside registrations from the first cycle.
Can you use contractors instead?
Many subsidiaries engage independent contractors before making their first employee hire. Contractors do not trigger the PF or ESIC thresholds, and they are not compliance-free.
- TDS applies at 10% under Section 194J for professional services, or under Section 194C for works contracts.
- Contractors billing above the GST registration threshold must charge GST, which the company reclaims as Input Tax Credit.
- A long-running, full-time, exclusive contractor carries misclassification risk. An authority can recharacterise the relationship as employment, with back-dated PF and ESI exposure.
Put a written contract behind every engagement, and review the classification once somebody works exclusively for you.
Should you hire through an entity at all?
If the plan is one or two people, an employer of record is usually the better first move and an entity is premature. The entity earns itself once you need to invoice Indian customers, hold IP locally, take Indian investment, or grow past the point where an EOR's per-head fee stops making sense.
Our entity vs EOR calculator puts numbers on the comparison, and the introduction covers where in India to hire.
