Labour law reforms: A step-by-step compliance guide for founders

For over a decade, Indian founders have urged policymakers for one thing: simplicity. Labour compliance, fragmented across outdated statutes, stifled growth and left startups guessing where flexibility ended and penalties began.

That era seems to be almost over. India’s four labour codes, the most significant rewrite of workplace rules since Independence, deliver clarity and uniformity but demand greater accountability.

For manufacturing, e-commerce, gig platforms, or multi-state operations, these reforms reshape hiring, compensation, exits, and capacity planning.

Critical: Prioritise these in 30 days

Payroll discipline is non-negotiable

The risk: Many startups use allowance-heavy structures (60-70% basic pay, with the rest in HRA/transport/special allowances) to minimise Provident Fund (PF) contributions. This is now a compliance red flag.

Key changes:

• Single wage definition for PF, gratuity, and bonus calculations.
• Allowances are now capped, increasing PF contributions by 15-25%.
• Salary delays incur penalties of Rs 50,000+ per violation.
• Appointment letters are mandatory for all employees, including blue-collar and gig workers.

Cost impact: A 50-person team could see monthly compliance costs rise by Rs 75,000–1.5 lakh, depending on the current structure.

Action this week:

• Audit salary structures with a chartered accountant to identify allowance exposure.
• Generate appointment letters for any employee hired without one.
• Set up automated payroll alerts to prevent delays.
• Budget for a 15-20% increase in statutory contributions.

Exits are cleaner but costlier

The upside: Companies with up to 300 employees (previously 100) can now restructure without government approval, saving 3-4 months of regulatory negotiation.

The tradeoff: Poorly managed exits now carry higher penalties.

Key changes:

• Notice periods and severance are strictly regulated.
• Fixed-term employees receive nearly identical benefits to full-time staff, including pro-rated gratuity.
• A streamlined dispute framework accelerates enforcement.

Real-world scenario: Letting go of 15 employees now requires:

• Mandatory 30-90 day notice (or payment in lieu).
• Statutory severance: 15 days’ wages per year of service.
• Full documentation.

Action this week:

• Review standard separation agreements with legal counsel.
• Calculate severance liability for your current headcount.
• Document performance issues formally (not just in Slack or verbal discussions).
• Budget for 2-3 months’ salary per departing employee.

Strategic: Plan these in 90 days

Gig and platform workers enter compliance framework

Who’s affected: Marketplaces, logistics networks, mobility platforms, delivery apps, and service-on-demand businesses.

The shift: Gig workers are now recognised in the labour framework, closing the "employee vs. contractor" loophole.

New obligations:

• Mandatory contributions to a gig-worker welfare fund (rates vary by state; expect 1-2% of payout value).
• Digital records are required for hours worked, payouts, and vendor classifications.
• Increased government scrutiny of misclassification.

Real-world scenario: A logistics platform with 5,000 delivery partners paying Rs 15,000/month each could face welfare fund contributions of Rs 7.5–15 lakh monthly.

Action this quarter:

• Audit contractor classifications: Who’s actually an employee?
• Implement tracking systems for gig worker hours and payouts.
• Revise vendor agreements with explicit classification language.
• Budget 1-2% of gig worker payouts for welfare contributions.

Inclusive workforce = Mandatory infrastructure

Key changes:

• Women can work night shifts only with security, transport, shift rotation, and grievance mechanisms.
• Equal pay enforcement now carries penalties up to Rs 50,000 + Rs 1,000/day for ongoing violations.
• Transgender equal-opportunity policies must be published.

Why it matters: Enterprise clients increasingly audit vendors for Diversity, Equity, and Inclusion (DEI) compliance. Missing policies can cost contracts.

Infrastructure costs:

• Night shift transport: Rs 15,000–25,000 per employee/month.
• Security measures: Rs 2–5 lakh one-time + Rs 50,000 monthly.
• Policy documentation: Rs 1–2 lakh for legal/HR consulting.

Action this quarter:

• Draft and publish equal opportunity policies.
• If running night shifts, arrange transport and security vendors.
• Conduct a pay equity audit (by gender/role).
• Add DEI compliance to vendor RFP responses.

Operational: Build these into culture (6 months)

Workplace safety gets standardised

Who’s most affected: Manufacturing, warehousing, chemical processing, and construction.

The shift: Uniform safety rules across sectors, with mandatory record-keeping and clearer audit processes.

Common mistake: Treating safety as a "later" investment. It’s now a liability, not just a risk.

Action this quarter:

• Document current safety practices (even basic ones).
• Designate a safety officer (mandatory for 500+ workers).
• Schedule annual safety audits.
• Budget Rs 500–2,000 per employee for compliance upgrades.

The governance mindset: It’s part of product-market fit

Old playbook: Build fast → Hire fast → Fix compliance later. 

New playbook: Build fast → Hire responsibly → Document correctly → Operate transparently.

Why it matters: Investors now conduct deeper governance diligence, reinforced by high-profile startup failures. Labour code rollout accelerates this shift.

What VCs check in due diligence:

• Employment contract compliance rate.
• Statutory payment timeliness.
• Contractor classification accuracy.
• Safety and DEI policy existence.
• Dispute/litigation history.

One red flag can delay funding or investors might back out of the funding round. 

Your 30-60-90 day compliance checklist

Week 1:

• Audit all employment contracts for compliance gaps.
• Review salary structures with your CA; identify allowance exposure.
• Generate missing appointment letters.
• Check contractor classifications.

Month 1:

• Revise standard employment agreements.
• Set up payroll automation/alerts.
• Calculate severance liability exposure.
• Budget for increased PF contributions.

Month 2:

• Draft and publish DEI policies.
• Implement gig worker tracking systems.
• Conduct a pay equity audit.
• Arrange night shift infrastructure (if applicable).

Month 3:

• Document safety practices.
• Schedule annual compliance audit.
• Train managers on new exit procedures.
• Update investor deck with governance metrics.

Resources

• Official documentation: Ministry of Labour & Employment – Labour Codes

• State-specific timelines: Check your state labour department (Karnataka, Maharashtra, Tamil Nadu, Telangana, Delhi, Haryana, Gujarat, Rajasthan, Uttar Pradesh, West Bengal, Kerala, Andhra Pradesh).

• Compliance tools: Razorpay Payroll, Zoho Payroll, GreytHR, Keka, ClearTax, Darwinbox, PeopleStrong, Qandle, SumHR, ZingHR, Kredily, factoHR, Opfin, BambooHR, Rippling, Deel.

• Legal/advisory: AZB & Partners, Trilegal, Khaitan & Co, Big 4 firms (EY, Deloitte, PwC, KPMG), Cyril Amarchand Mangaldas, Shardul Amarchand Mangaldas, JSA, IndusLaw, Nishith Desai Associates, Lakshmikumaran & Sridharan, Kochhar & Co., BDO India, Grant Thornton, Protiviti, ANB Legal.

The bottom line

India’s new labour framework delivers what founders wanted: clarity, uniformity, and flexibility to scale. But that flexibility comes with sharper expectations, cleaner contracts, timely payrolls, transparent exits, and stronger safety and inclusion frameworks.  

Adapt early: Hiring becomes simpler, fundraising smoother, and operations less risky. Delay: Non-compliance becomes a business risk, not just a legal issue.