Labour Codes and Payroll: What Your HRMS Must Handle

For years, many Indian employers ran payroll on a mix of spreadsheets, an old payroll tool and the experience of one or two people in HR and accounts. That arrangement was fragile, but it worked because the rules changed slowly. That changed when the four Labour Codes came into force on 21 November 2025, and the central government notified its final rules under them on 8 May 2026.

The Codes replace 29 older labour laws with four: the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. Several changes land directly on payroll. If your HRMS or payroll software has not been reviewed since, this guide explains what to check.

A note before we start: labour law is a concurrent subject, and states are notifying their own rules on different timelines. Treat this article as a practical checklist, not legal advice, and confirm details for your state with your legal or compliance advisor.

The 50% Wage Rule and Your Salary Structure

The Code on Wages brings a single definition of "wages" that is used across the Codes. Wages broadly include basic pay, dearness allowance and retaining allowance. Several other payments, such as HRA, conveyance and certain other allowances, are excluded. However, if the excluded payments add up to more than half of total remuneration, the amount above that half is added back into wages.

In practice, this affects companies where basic pay was kept low and allowances were kept high. Because wages are the base for provident fund, gratuity and other contributions, the change can raise statutory costs and change take-home pay.

What to Check in Your HRMS

• Can the system test every salary structure against the 50% rule automatically?
• Does it flag employees whose excluded allowances cross the limit?
• Can you tag each pay component as included or excluded from wages, and change that tagging without a vendor's help?
• Does it recalculate PF and other contributions on the revised wage base?

Gratuity for Fixed-Term Employees

Under the Code on Social Security, fixed-term employees become eligible for gratuity after one year of continuous service, rather than the five years that apply to permanent employees. Organisations that use fixed-term contracts, which is common in projects, IT services and seasonal work, now need to track and provide for this liability.

What to Check in Your HRMS

• Does the employee master record the employment type (permanent, fixed-term, contract) clearly?
• Is contract start and end date tracked, with alerts before the one-year mark?
• Does the gratuity calculation apply different eligibility rules by employment type?
• Can finance pull a gratuity liability report for provisioning?

Full and Final Settlement Within Two Working Days

The Code on Wages requires that when an employee is removed, dismissed, retrenched or resigns, their wages must be paid within two working days. Many organisations are used to settling dues in 30 to 45 days, after collecting sign-offs from several departments. That process now needs to be much faster.

What to Check in Your HRMS

• Is there an exit workflow that starts clearance steps as soon as a resignation is accepted?
• Can the system calculate final dues, including leave encashment and deductions, on the last working day?
• Are asset recovery and department clearances tracked inside the same workflow?
• Does the system keep a dated record showing when final wages were paid?

Working Hours, Overtime and Attendance

Under the final central rules, the normal working week for most employees is capped at 48 hours, and overtime is paid at twice the ordinary rate of wages. The quarterly overtime limit and the way working days are arranged depend on the applicable rules for your establishment and state.

This makes accurate attendance data more important than before. If overtime is calculated from manual registers or approved in email, errors are easy to make and hard to prove later.

What to Check in Your HRMS

• Does attendance data flow directly from biometric devices, mobile check-in or shift rosters into payroll?
• Can overtime rules be set by state, establishment type and employee category?
• Does the system warn when an employee is close to weekly or quarterly limits?
• Are shift and leave policies stored as rules, not as manual adjustments?

State Rules Still Matter

Alongside the central rules, each state notifies its own rules, and state-specific items such as professional tax and labour welfare fund continue to apply. Maharashtra, for example, has its own professional tax slabs, which differ by gender and include a higher deduction in February. Organisations with staff in more than one state need a payroll system that can apply different rules by work location.

• Can the system apply state-wise professional tax and labour welfare fund rules?
• Is the work location stored per employee and used in calculations?
• Can new or revised rates be updated quickly when a state issues a notification?

Records, Registers and Audit Readiness

The Codes also move employers towards simpler, largely electronic registers and returns. A good HRMS should keep a full, time-stamped history of salary changes, attendance, leave, payments and settlements. When an inspector, auditor or employee raises a question, you should be able to produce the record in minutes rather than days.

A Quick HRMS Readiness Checklist

1. Salary structures tested against the 50% wage rule
2. Pay components tagged correctly as included or excluded from wages
3. Employment type and contract dates recorded for every employee
4. Gratuity rules configured for fixed-term staff
5. Exit workflow able to settle wages within two working days
6. Attendance integrated with payroll, with overtime rules configured
7. State-wise rules for professional tax and labour welfare fund in place
8. Audit trail and electronic registers available on demand

Frequently Asked Questions

Do the Labour Codes apply to small businesses?

Many provisions apply to all employers, while others depend on the number of employees or the type of establishment. The wage definition and timely payment rules are broad in scope. Check thresholds for your specific case with an advisor.

Will take-home salary go down under the new wage definition?

For some employees, yes, because a higher wage base can mean higher PF contributions. The actual effect depends on how each salary is structured and on the choices the employer makes when restructuring.

Can we keep using spreadsheets for payroll?

It is possible for very small teams, but the risk of error grows quickly. Rules that depend on employment type, location and timing are much easier to manage in a system that applies them automatically and keeps an audit trail.

How long does it take to update an HRMS for the Codes?

For a well-built system, configuration changes and testing can often be done within a few weeks. Older or heavily customised systems may need more work. Start with a gap review so you know where you stand.

How Affix Center Can Help

Affix Center builds and customises business software for Indian organisations, including HR, payroll and attendance systems that connect with the tools you already use. We can review your current setup against the checklist above, fix the gaps, or build a system around your policies. See our product engineering work, or read how our data and automation team builds automated reporting and compliance workflows.

If you want a clear picture of where your payroll setup stands, contact our team to arrange a review.