New Labour Codes in Payroll: the 50% Wage Rule, 1-Year Fixed-Term Gratuity and 2-Day Full-and-Final

On 21 November 2026, the four Labour Codes complete one year in force. Most employers I speak with have read the headlines and changed nothing in payroll. That gap is now the risk. Three provisions bite every month, not once a year: how much of a salary counts as "wages", when a fixed-term employee starts earning gratuity, and how fast a departing employee must be paid. Here is what to change this quarter, with the numbers worked out.

Under the new Labour Codes, wages — basic pay, dearness allowance and retaining allowance — must be at least 50% of total remuneration for PF, ESI and gratuity. Fixed-term employees earn gratuity after one year of service, and an exiting employee's wages must be paid within two working days.

What exactly does the 50% wage rule count?

Section 2(y) of the Code on Wages, 2019 gives one definition of wages for all four Codes — Section 2(88) of the Social Security Code repeats it: basic pay, dearness allowance and retaining allowance. Outside it sit HRA, conveyance, overtime, employer PF, statutory bonus, commission and a few others. The catch is the cap: if those excluded items together exceed 50% of total remuneration, the excess is deemed wages and added back.

Think of total pay as a one-litre bottle: basic, DA and retaining allowance are the drink, the rest is flavouring. The drink must fill at least half the bottle — pour in more flavouring than drink, and the excess flavouring counts as drink.

The Labour Ministry's Additional FAQs of 16 March 2026 settled the payroll arguments. Overtime counts inside the test, so a heavy-overtime month lifts that month's wage base. Employer PF and statutory bonus count in total remuneration; gratuity and retrenchment compensation stay outside the test. Performance incentives are not wages. And a generic "special allowance" is not on the exclusion list — in most structures it was already wages, whatever the payslip called it.

What does the 50% rule do to one real salary?

Take a ₹1,00,000 monthly CTC structured the way thousands of companies still do it: Basic + DA at 40%, PF on full Basic + DA, CTC unchanged.

Now the take-home line, honestly: the employee's PF deduction rises ₹1,200 a month, so take-home falls by ₹1,200 a month — ₹14,400 a year — before tax effects. The money is not lost; it moves into the PF account and returns with interest. Tell your employee before the first payslip lands, not after. Your cost moves the other way: employer PF up ₹1,200 a month, gratuity provision up ₹5,769 a year — at a five-year exit, gratuity is ₹1,44,231 against ₹1,15,385. Capped PF at the ₹25,000 statutory ceiling instead? The PF rows flatten at ₹3,000 — but gratuity follows the full wage definition, so that increase stays.

Do fixed-term employees really get gratuity after one year?

Yes. Section 53 of the Social Security Code still asks permanent employees for five years of continuous service, death and disablement excepted. But Section 53(2) directs pro-rata gratuity for fixed-term employees, and the Ministry's FAQs put eligibility at one year under the contract. A one-year fixed-term hire on these wages now leaves with ₹28,846; under the old Payment of Gratuity Act, the same person left with nothing.

So provision for fixed-term gratuity from month one. And look backwards: anyone on a fixed-term contract of a year or more who exited after 21 November 2025 without gratuity is an open item — check it now, not after a claim arrives. Our payroll compliance guide covers the monthly PF, ESI and professional tax routine this sits inside.

How fast must full-and-final settlement be paid now?

Section 17(2) of the Code on Wages is blunt: where an employee resigns, is dismissed or retrenched, or loses employment on closure, wages must be paid within two working days. The familiar 30-to-45-day settlement cycle is no longer compliant for the wages component.

Gratuity is not on that clock — it carries a separate 30-day timeline under the Social Security Code, and PF moves through EPFO on the employee's claim. So split the exit settlement: wages — salary to the exit date, leave encashment, arrears — within two working days; gratuity and the rest on their own timelines. That split only works if clearances happen during the notice period, not after exit. Section 18 caps deductions at 50% of wages, so holding back a whole settlement against an unreturned laptop is not a lever the Code gives you.

What should you change in your payroll this quarter?

• Re-run every salary structure against the 50% test — overtime-heavy roles included, since overtime counts inside it.
• Fix PF coverage and the ceiling. The PF wage ceiling rose to ₹25,000 on 17 September 2026 (S.O. 5109(E)). Enrol everyone in the ₹15,000–₹25,000 band and clear stale "excluded employee" flags — and fix registration gaps via your PF registration.
• Re-test ESI coverage on the new wage definition. ESIC's June 2026 clarification applies coverage using Section 2(88) wages — and the ESI ceiling stays at ₹21,000 (₹25,000 only for employees with disabilities). Check your ESI registration covers everyone the definition pulls in.
• Start gratuity provisioning for every fixed-term contract from month one.
• Split exit settlements into the two-day wages run and the 30-day gratuity run; move clearances into the notice period.
• Issue appointment letters in the prescribed format. The OSH Code makes a written appointment letter mandatory for every employee, and the Central Rules of 8 May 2026 prescribe its contents — designation, category, wages, social-security entitlements. Cover staff who never got one, not just new joiners.
• Reset leave settings: carry-forward caps at 30 days; encashment at separation carries no cap (Ministry FAQs).

Why this quarter, and not sometime next year?

The Codes took effect on 21 November 2025 and the Central Rules followed on 8 May 2026 — the machinery is no longer coming; it is running. Most states have finalised or pre-published their rules; the old rules survive only where they do not clash. Restructure now, on your own timetable. High-attrition businesses will find the same changes worked through in our PF and ESI guide for restaurants; the compliance fee calculator prices the filing work in the open.

FAQs

Does the Code force me to restructure every CTC so basic is 50%?

No. What exists is the add-back: leave the structure untouched and PF, ESI and gratuity are still computed on the higher wage base. Restructuring is just the cleaner route — CTC, payslips and provisions agree, instead of the liability surfacing at an exit or an assessment.

Has the ESI ceiling also gone up to ₹25,000?

No. ₹25,000 is the PF wage ceiling, effective 17 September 2026. The ESI ceiling remains ₹21,000 a month — ₹25,000 applies there only for employees with disabilities, as ESIC confirmed in June 2026.

Does the two-day rule mean gratuity must also be paid within two days?

No. Section 17(2)'s two-working-day deadline covers wages — final salary, leave encashment, arrears. Gratuity follows its own 30-day timeline under the Social Security Code; PF runs through EPFO on the employee's claim.

Do managers and supervisors get overtime now?

On the Ministry's March 2026 FAQs, yes — every employee whose minimum wage is fixed under the Code qualifies, supervisors and managers included, at twice the normal rate. If your overtime policy stops at junior staff, rewrite it.

Is gratuity for service before November 2025 recalculated on the new wage base?

Gratuity is calculated on wages last drawn when employment ends, and the Ministry's FAQs apply the revised definition from 21 November 2025 — so a long-serving employee exiting now is paid on the new wage base. Your provision should already reflect the 50% floor.

We renew fixed-term contracts back-to-back. Does the service add up for the one-year gratuity test?

Not yet clarified — the Ministry has not said whether service across renewed contracts aggregates for the one-year test. Do not assume a paperwork gap resets the clock; take advice on your pattern before relying on the break.