India replaced 29 central labour laws with four codes on wages, industrial relations, social security and occupational safety, reported in force from 21 November 2025, with rules and state-level implementation still being finalised. For a US employer, three differences matter most. There is no at-will employment: notice, cause and, for larger establishments, formal procedure apply to termination. The definition of wages now requires that wages make up at least half of total remuneration, which raises the base for provident fund, gratuity and bonus calculations unless allowances are restructured. And fixed-term employment is recognised on terms equal to permanent staff, with gratuity after one year. Treat the numbers on this page as a summary from secondary reports and check the current rules and your state's notification before you issue contracts.
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Key facts
| Status | Four codes reported in force from 21 November 2025; central and state rules still developing |
|---|---|
| At-will employment | Not available; notice, cause and procedure depend on the contract, the establishment size and the role |
| Wage definition | Wages should be at least 50% of total remuneration; excluded allowances are capped; affects provident fund, gratuity and bonus |
| Fixed-term | Allowed with benefits equal to permanent staff; gratuity after one year of service |
| Retrenchment | Government permission thresholds raised to 300 workers in the industrial relations code; notice and compensation apply below |
| Hours | Daily and weekly limits with overtime at twice the wage rate; state rules vary |
| Social security | Wider coverage including gig and platform workers; provident fund and state insurance |
| Action | Review contracts, salary structure and policies against the codes and your state rules |
Why the codes matter to a US employer
US companies often enter India with an offer letter modelled on a US template, a salary in two or three heads and a clause that either side may end employment on notice. Under the labour codes, and the older laws that they replaced, that template leaves gaps. The salary structure can cause under-payment of provident fund and gratuity if the new wage definition is not applied. The termination clause may not give the procedural protection that Indian law requires. And an offer letter that is silent on working hours, leave and overtime leaves the company exposed to claims. A one-time review at the start, repeated when rules change, costs far less than a claim.
The wage definition and the 50% rule
The code on wages defines wages to include basic pay, dearness allowance and retaining allowance, and excludes a list of items such as bonus, house rent allowance, overtime, conveyance and employer contributions, but caps the excluded part: if excluded items exceed half of total remuneration, the excess is added back to wages. The result is that a package with a small basic and large allowances has a larger wage base for provident fund, gratuity and bonus than before. For employers, the cost is higher contributions; for employees, higher retirement benefits and lower take-home. Salary structures that were built to keep the basic low need to be re-cut, and the changes should be explained to staff. Confirm the current definitions and any state variation in the rules.
Fixed-term employment
The code on industrial relations recognises fixed-term employment, which lets a company hire staff for a defined period without conversion to permanent status, provided they receive wages, hours and benefits equal to permanent colleagues, and gratuity if they serve for one year. A US company can use fixed-term contracts for projects and for tests of a new market, but it should not use them to avoid permanent status for long-running roles, because inspectors and courts will look at substance. Keep each contract in writing with a start and end date and a clear scope.
Termination, retrenchment and notice
| Situation | Rule in broad terms | Practical step |
|---|---|---|
| Resignation by an employee | Notice under the contract; commonly one to three months for professionals | Set notice by grade in the contract |
| Termination of a manager or supervisor | Contract and state law govern; termination for misconduct needs an inquiry | Document performance issues; follow the policy |
| Retrenchment of a worker in a smaller establishment | Notice and compensation under the industrial relations code | Calculate compensation; keep records |
| Retrenchment, lay-off or closure in an establishment at or above 300 workers | Prior government permission in the code as reported | Plan well ahead; consult counsel |
| Termination for misconduct | Show cause, inquiry and a reasoned order | Keep minutes; apply the policy consistently |
Most professional and technology employees in a small Indian subsidiary are managers or supervisors and not workers under the industrial relations definition, so contract and common law govern their termination, with state shops and establishments law as a backstop. The distinction is a legal question, not a title, so confirm it for each role. See hiring and payroll for the contract basics.
Working hours, overtime and leave
- The codes set daily and weekly limits, commonly eight hours a day and forty-eight hours a week, with state rules that allow flexible patterns within the weekly limit.
- Overtime is paid at twice the ordinary wage rate in the code as reported.
- Annual leave, casual and sick leave and public holidays follow the central code and the state shops and establishments act.
- Women may work night shifts subject to consent and safety conditions in the rules.
- Maternity benefit and creche rules apply above stated sizes.
- Keep attendance and overtime records; inspectors ask for them.
Social security: provident fund, state insurance and gratuity
The social security code consolidates the provident fund, state insurance, gratuity and maternity benefit laws, and extends coverage to gig and platform workers through a social security fund. For a typical subsidiary the practical rules are a registration with the provident fund organisation and, if wages are below the threshold, the state insurance corporation, contributions by the 15th of the month, and gratuity after five years of service, or one year for fixed-term staff. International workers from countries without an agreement may be covered from the first day on full wages. See the expat guide.
Checklist for a US employer
- Re-cut the salary structure against the wage definition and model the cost.
- Replace the US offer template with an Indian employment agreement.
- Set notice periods by grade and make probation terms explicit.
- Write an employee handbook covering hours, leave, conduct, anti-harassment and grievance.
- Constitute the internal committee for sexual harassment if the headcount requires it.
- Register for provident fund and state insurance before the first hire where required.
- Keep wage, attendance and overtime registers in the form the state requires.
- Review the setup against the rules of the state where the office is located.
Mistakes to avoid
- Assuming that at-will language in a US template works in India.
- Keeping a low basic salary and ignoring the 50% wage rule.
- Using successive fixed-term contracts to disguise a permanent role.
- Treating managers and workers the same, or the reverse.
- Terminating a long-serving employee without legal advice.
- Relying on a press summary of the codes instead of the current rules.
Official sources
Check the rules at the primary sources: Income Tax Department (India), Reserve Bank of India, Ministry of Corporate Affairs, Internal Revenue Service (US), Bureau of Industry and Security (US) and the Ministry of External Affairs (India).
Frequently asked questions
Is there at-will employment in India?
No. Notice, cause and, for larger establishments, formal procedure apply, depending on the contract, the role and the state.
When did the labour codes come into force?
They were reported in force from 21 November 2025, with central and state rules still developing. Confirm the current position.
What is the 50% wage rule?
Excluded allowances are capped so that wages make up at least half of total remuneration, which raises the base for provident fund, gratuity and bonus.
Can I hire staff on fixed-term contracts?
Yes, with wages and benefits equal to permanent staff and gratuity after one year. Do not use them to avoid permanent status for ongoing roles.
What is the retrenchment threshold?
The industrial relations code, as reported, requires prior government permission for lay-off, retrenchment and closure in establishments with 300 or more workers.
How much overtime is paid?
Twice the ordinary wage rate in the code as reported.
Is a notice period standard?
No. It comes from the contract and state law. One to three months is common for professionals.
Do managers have the same protection as workers?
Not in the same way. Managers and supervisors are generally governed by contract and state law, but the classification depends on duties.
Are gig workers covered?
The social security code extends coverage to gig and platform workers through a fund. Confirm the rules if you use them.
Related guides
Hiring and payroll in India
Contracts, statutory benefits and the monthly payroll cycle.
Read the guide →Employer of record or subsidiary
When an employer of record is enough and when to incorporate.
Read the guide →Expat visa
Employment visas and registration for US staff.
Read the guide →Compliance calendar
Annual and monthly filings for an Indian subsidiary.
Read the guide →Sources
Last updated 2 November 2026. General information only, not legal or tax advice. Indian and US rules change often; confirm current requirements before acting.