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How Well Do You Understand India’s Employment Laws?
India is currently running two labour law systems side by side. The four new Labour Codes, covering Wages, Industrial Relations, Social Security, and Occupational Safety, Health and Working Conditions, are now law, and the central government has notified detailed rules under all four. But labour sits on the Concurrent List in India's constitution, which means every state also has to notify its own rules before the codes actually apply on the ground.
Only a handful of states, including Gujarat, Haryana, Madhya Pradesh, Karnataka, and Uttar Pradesh, have finished that step so far. Maharashtra, Tamil Nadu, Telangana, and West Bengal, some of the largest employment hubs in the country, are still working from draft rules.
Why Global HR Teams Keep Misreading India's Employment Laws
Most HR leaders outside India assume the country runs on a single national labour code, the way smaller, more centralised jurisdictions do. It never has. Historically, an employer in India could be governed at the same time by the Industrial Disputes Act 1947, the Payment of Wages Act 1936, the Employees' Provident Fund and Miscellaneous Provisions Act 1952, the Employees' State Insurance Act 1948, the Payment of Bonus Act 1965, the Payment of Gratuity Act 1972, the Maternity Benefit Act 1961, and a state specific Shops and Establishments Act that varies by state and sometimes by city.
A company hiring five engineers in Bengaluru and five in Pune was, technically, complying with two different Shops and Establishments regimes for an identical job description.
The four new codes consolidate 29 central labour statutes into one unified structure. During this transition, HR teams still have to track both systems at once. The old acts remain operative law in any state that has not notified its rules, while states that have notified are already applying new provisions, such as the requirement that basic wages make up at least 50 percent of an employee's total cost to company. That single rule is already pushing up statutory costs for provident fund, gratuity, and bonus by an estimated 3 to 15 percent for companies with allowance heavy salary structures.
This confusion shows up most with companies opening a Global Capability Centers (GCC) or scaling a distributed engineering team across more than one Indian city. A payroll structure that was fully compliant in Karnataka last quarter can create a gap the moment it is applied to a new hire in a state still governed by the old Shops and Establishments framework. It is exactly this kind of multi-state complexity in India's employment laws that pushes companies toward a structured hiring partner rather than trying to manage compliance entirely from a foreign headquarters.
What Indian HR Talent Knows Well, and Where the Gaps Are
Delhi NCR, Bengaluru, and Pune have the deepest bench of HR professionals who are genuinely fluent in employment law rather than simply process compliant. Delhi NCR talent tends to be strongest on central statutory compliance, provident fund, ESI, bonus, and gratuity, because so many national and multinational shared services centres are based there.
Bengaluru's HR pool is unusually strong on IT and ITES specific carve outs, since Karnataka's Shops and Establishments Act has long included exemptions relevant to software companies that do not exist in every state. Pune and Chennai carry deep experience with contract labour law because of their manufacturing and engineering heavy employer base, so professionals there work with the Contract Labour Regulation and Abolition Act 1970 far more routinely than teams in pure services hubs.
What we consistently see even senior Indian HR candidates lack is fluency in translating India's employment laws for a foreign employer of record. An HR manager who has run payroll for an Indian company for a decade knows the Payment of Bonus Act inside out but has rarely had to explain gratuity accrual to a finance leader in Frankfurt who wants one defensible number for headcount cost forecasting. That is a different skill: converting statutory obligation into something a non-Indian finance or legal team can approve without a follow up call.
Contract Hiring vs Full-Time Hiring Under India's Employment Laws
The choice between contract hiring and full-time hiring in India is not just a cost decision anymore. It is a compliance decision, and India's employment laws now treat the two paths very differently.
Contract hiring, governed by the Contract Labour Regulation and Abolition Act 1970, works when a worker is genuinely engaged through a staffing or contracting entity rather than employed directly by the principal employer. The relationship needs real independence: separate supervision, separate tools, and no functional overlap with how full-time staff are managed.
If a foreign company treats an Indian contractor as functionally identical to a full-time employee, same reporting lines, same working hours, same performance reviews, Indian courts have repeatedly ruled that the principal employer can be held liable for statutory dues as if that person had been a direct employee all along.
Full-time hiring, whether through a local entity or an Employer of Record (EOR), brings a different set of obligations but more predictable ones: provident fund contributions, gratuity provisioning, statutory bonus where applicable, and leave entitlements that scale with tenure. Under the Industrial Relations Code, even fixed-term full-time employees now qualify for gratuity after just one year of continuous service, down from the previous five-year threshold, and they must receive wages, leave, and benefits equivalent to permanent staff doing comparable work. That single change has erased the cost advantage many companies once built their India hiring plans around.
The practical takeaway: contract hiring still makes sense for genuinely independent, project-based work, but it stops being cheaper the moment the day-to-day relationship starts looking like full-time employment. India's employment laws are increasingly written to catch exactly that gap.
How EOR, Direct Hiring, and Contract Structures Compare in Practice
Companies scaling engineering, AI, and cloud infrastructure teams out of India are increasingly choosing between three hiring paths, and each interacts differently with India's employment laws.
An Employer of Record becomes the legal employer for statutory purposes: payroll, provident fund, ESI, and gratuity filings run through the EOR. This reduces exposure but does not remove it. The client company remains responsible for making sure the actual working relationship, hours, reporting lines, exclusivity, matches what was declared to the EOR when the arrangement was set up. A mismatch between the paperwork and the reality is where liability quietly returns.
Direct entity hiring gives a company full control over structure and culture but means owning every layer of compliance in-house, from provident fund registration once headcount crosses 20 employees to state-specific leave rules.
Contract hiring through an agency sits somewhere in between, useful for flexible or specialised roles such as short-term AI model tuning work or cloud migration projects, but only when the independence of the arrangement is documented and real.
This is precisely why AnjuSmriti Global walks new clients through what an Employer of Record actually covers, and where their own obligations still sit, before a single offer letter goes out.
If you are building or reviewing a hiring structure in India right now, run a free compliance check on your existing setup here before your hiring state notifies new rules.
The India's Employment Laws Compliance Checklist Every HR Team Should Save
Before hiring anyone in India, whether as a contractor, an EOR employee, or a direct entity hire, run through this. It is the checklist used on every new mandate.
Compliance Area | Governing Law (Old / Transitional) | New Code Reference | Employer Action Needed |
Provident Fund | EPF Act 1952 | Code on Social Security 2020 | Register the establishment; contribute 12% of basic wages (employer) plus 12% (employee) once headcount crosses 20 |
State Insurance (health) | ESI Act 1948 | Code on Social Security 2020 | Applies where gross wages are ₹21,000/month or below; employer contributes 3.25%, employee 0.75% |
Gratuity | Payment of Gratuity Act 1972 | Industrial Relations Code 2020 | Now due after 1 year for fixed-term staff (previously 5 years); provision roughly 4.81% of basic wages |
Bonus | Payment of Bonus Act 1965 | Code on Wages 2019 | Minimum bonus of 8.33% of wages for eligible employees below the notified wage ceiling |
Working conditions and leave | State Shops and Establishments Acts | OSH Code 2020 | Confirm whether the hiring state has notified rules; if not, the old state act governs |
Wage structure | Various | Code on Wages 2019 | Basic pay must equal at least 50% of total CTC in states with notified rules; restructure salary breakdowns now |
Contract vs employee classification | Contract Labour Act 1970 | Industrial Relations Code 2020 | Document genuine independence in hours, tools, and exclusivity, or risk principal employer liability |
Maternity benefit | Maternity Benefit Act 1961 (amended 2017) | Code on Social Security 2020 | 26 weeks paid leave for the first two children, applies regardless of which framework is active |
Termination and retrenchment | Industrial Disputes Act 1947 | Industrial Relations Code 2020 | Notice and compensation thresholds differ by establishment size; verify before issuing termination |
This is exactly the kind of moving target that makes specialised HR support worth the cost for companies without dedicated legal counsel in India.
A Client Situation That Almost Went Sideways
Our compliance review on any new mandate follows a fixed timeline: three business days to map a client's intended role structure, contract, EOR, or entity, against current central and state rules for the specific hiring location; two days to draft a compliance memo in plain business language; and a standing quarterly review for any client with more than 10 India-based staff, since rule notifications keep shifting the underlying math.
One case stands out. A mid-size European industrial automation company, around 180 employees globally, wanted to scale an India engineering team from 8 to 35 people within two quarters, using fixed-term contracts issued directly from their EU entity. Their legal team had drafted the contracts using home-country templates, with a standard 90-day notice clause and no gratuity provision, on the assumption that the old five-year gratuity threshold applied.
When the structure was reviewed against the Industrial Relations Code's one-year gratuity threshold for fixed-term staff, it became clear that every hire in that batch would reach gratuity eligibility well before the contracts expired, and nothing had been budgeted for it. Left uncaught, the client would have faced an unbudgeted gratuity liability across 27 employees roughly nine months into the rollout, at the point where reversing the contract structure would have meant renegotiating with staff already on the ground.
The offer letters were restructured, the CTC breakdown rebuilt around the 50 percent basic wage rule, and gratuity provisioning built into the client's quarterly cost forecast from day one. The rollout finished on schedule, and the client's actual statutory cost landed within 2 percent of the revised forecast, against what would have been an 18 to 22 percent unbudgeted overrun under the original terms.
What Compliance Actually Costs Under India's Employment Laws
For a mid-level engineer in India earning ₹18,00,000 CTC per year, here is the statutory cost an employer actually carries, assuming a compliant salary structure under the 50 percent basic wage rule:
Provident fund (employer share): 12% of basic wages. With basic now near 50% of CTC, this runs roughly ₹1,08,000 per year, up from ₹65,000 to ₹75,000 under older, allowance-heavy structures
Gratuity provisioning: roughly 4.81% of basic wages, around ₹43,000 per year, now accruing from year one for fixed-term staff instead of year five
Bonus, where applicable: 8.33% to 20% of eligible wages depending on company performance and the statutory wage ceiling
ESI: not applicable at this salary level, since the ₹21,000/month gross threshold excludes most mid to senior technical roles
For a senior engineer at ₹32,00,000 CTC and a lead or architect at ₹52,00,000 CTC, statutory costs scale with basic wages, but gratuity and provident fund exposure per head roughly doubles and triples respectively. Add an EOR fee, typically 8 to 15 percent of CTC depending on headcount and service level, or an agency placement fee for direct-hire searches, and most clients land at a fully loaded cost of 18 to 28 percent above gross CTC.
That is still 45 to 55 percent below the equivalent fully loaded cost for the same seniority level in Germany, the Netherlands, the UK, or the US, even after the new codes push Indian statutory costs upward. Clients typically reinvest that gap into faster headcount scaling or a dedicated India-based engineering lead rather than treating it as pure margin.
Conclusion
Expect the remaining large states, Maharashtra, Tamil Nadu, Telangana, and West Bengal, to finish notifying their rules over the coming months, bringing Pune, Chennai, Hyderabad, and Kolkata fully under the new framework. Social security contributions for gig and platform workers are expected to be finalised soon, which will affect how companies structure flexible or project-based Indian talent, including short-term AI development and cloud engineering work that many global teams now source from India.
Hiring platforms are also becoming more AI-driven, with automated screening and payroll tools helping distributed teams manage multi-state compliance faster, though none of that removes the underlying legal review a real compliance check requires.
Building or reviewing an India hiring structure right now? Get a free compliance check on your existing setup before your next India hire goes out the door.
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FAQs
1.Do India's new Labour Codes already apply to my company, or is the old law still in force?
It depends entirely on where you are hiring. The four codes are law nationally, and central rules are notified, but each state must separately notify its own rules before they take effect there. States like Gujarat, Karnataka, Haryana, and Madhya Pradesh have notified final rules, while Maharashtra, Tamil Nadu, and Telangana remain on draft rules, so the old central acts still govern hires in those states.
2.How does the 50 percent basic wage rule affect my existing India payroll?
Under the Code on Wages, basic pay must equal at least 50 percent of an employee's total cost to company wherever rules are notified. Many companies built salaries around large allowance components to lower statutory contributions, since provident fund and gratuity are calculated on basic wages. Once this rule applies, basic wages rise and so does employer liability, typically by 3 to 15 percent.
3.If I hire through an Employer of Record in India, am I still exposed to compliance risk?
Partially. The EOR becomes the legal employer for statutory filings such as payroll, provident fund, and gratuity. But you remain responsible for how the relationship works day to day, including hours, reporting lines, and exclusivity. If the practical relationship looks like direct employment despite the paperwork, Indian authorities can still look through the EOR structure.
4.What changed for fixed-term contract employees under the Industrial Relations Code?
Gratuity previously became payable only after five years of continuous service. Under the Industrial Relations Code, fixed-term employees now qualify after just one year, and must receive wages, leave, and benefits equal to permanent staff doing comparable work. Companies using short fixed-term contracts to avoid gratuity exposure need to rebudget immediately, since that gap has closed.
5.Does the Contract Labour Act still matter if I hire through an agency rather than directly?
Yes, and it is one of the most commonly missed risks. The Contract Labour Regulation and Abolition Act can make a principal employer liable for statutory dues owed to contract workers if the arrangement lacks genuine independence, meaning separate supervision, separate tools, and no functional overlap with direct staff. This surfaces often in audits involving long-running "contractor" relationships.
6.How does maternity benefit work for an India-based employee working for a foreign company?
The Maternity Benefit Act, as amended, entitles eligible employees to 26 weeks of paid leave for their first two children, regardless of whether the employer is based in India or abroad. This applies whether the person is hired through an Indian entity, an EOR, or as a fixed-term contractor meeting eligibility rules, and it holds under both the old and new legal frameworks.
7.Which Indian states are furthest along in adopting the new Labour Codes, and does that affect where I should hire?
Gujarat, Haryana, Madhya Pradesh, Karnataka, and Uttar Pradesh have notified final rules for all four codes, while Maharashtra, Tamil Nadu, Telangana, Kerala, Punjab, and West Bengal remain on draft rules. Talent depth and market fit should still drive location decisions, but your compliance calendar and cost model will differ meaningfully depending on the hiring state.
8.What is the actual provident fund and ESI contribution split I should budget for right now?
Provident fund is 12 percent of basic wages from the employer and 12 percent from the employee, once an establishment crosses 20 employees. ESI applies where gross monthly wages are ₹21,000 or below, with the employer contributing 3.25 percent and the employee 0.75 percent. These percentages have not changed under the new codes; what changed is the base they are calculated on.
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