From Fragmentation To Certainty: How India's New Labour Codes Re-Engineer Wages, Exit Payments, And Employer Accountability

INTRODUCTION

Indian labour regulation has historically suffered from statutory fragmentation, allowance-heavy compensation structuring, and delayed exit payments masked as administrative necessity. Employers retained discretion over wage composition and timing, while employees were often compelled to litigate merely to recover earned dues.

The enactment of the Code on Wages, 2019¹ and the Code on Social Security, 2020² represents a decisive legislative intervention. These Codes do not merely consolidate prior enactments; they recalibrate the normative framework governing wages, terminal benefits, and employer liability. Time itself is transformed into a statutory right, while wage definitions operate as legislative anti-avoidance mechanisms. This blog examines these structural shifts and situates them within established judicial principles that have now been absorbed into the statutory framework.

1. Unified Definition of Wages and the Legislative Turn Against Avoidance

Section 2(y) of the Code on Wages, 2019 introduces a uniform definition of "wages³", mandatorily including basic pay, dearness allowance, and retaining allowance, while permitting exclusion of specified components only up to 50% of total remuneration. Any excess is statutorily deemed to be wages.

This provision is not a neutral drafting choice but a direct legislative response to persistent judicial concern regarding artificial wage fragmentation under earlier labour statutes. Courts had repeatedly intervened under the EPF regime to prevent employers from suppressing statutory contributions through allowance-dominated salary structures.

The Supreme Court, in Chairman-cum-Managing Director, Fertilizer Corporation of India Ltd. v. Rajesh Chandra Shrivastava, clarified that only payments forming part of enforceable terms of employment can qualify as wages for gratuity purposes, and that ad-hoc or interim payments lacking crystallised entitlement cannot be treated as wages⁴. This emphasis on legal substance over nomenclature finds statutory embodiment in the unified wage definition under the Code on Wages.

1. Consequential Expansion of Bonus and Gratuity Liability⁵
2. Statutory Bonus

The broader wage base necessarily expands the quantum on which bonus is calculated. Allowances reclassified as wages under the 50% rule increase employer liability but restore the protective purpose underlying bonus legislation.

1. Gratuity Computation

Gratuity, now computed on "wages" rather than merely basic pay and DA, substantially enhances terminal benefits. Judicial precedent strongly supports this expansion.

In Chittiboyina Bharata Rao v. Krishna District Cooperative Central Bank Ltd., the Andhra Pradesh High Court rejected the employer's plea of financial incapacity and held that statutory entitlements such as gratuity cannot be deferred due to administrative or monetary constraints, directing payment with interest⁶. Similarly, in Cuttack Central Cooperative Bank Ltd. v. Sarangi, the Orissa High Court held that gratuity cannot be withheld on the ground of pending vigilance proceedings, affirming gratuity as a vested statutory right⁷.

These decisions reinforce the legislative intent of the Code on Social Security, 2020, which imposes strict timelines and interest liability for delayed gratuity payments.

III. Expansion of Social Security Coverage to Gig and Platform Workers

The Code on Social Security, 2020 marks a structural shift by formally recognising gig workers and platform workers within the statutory framework. It empowers the Central Government to formulate schemes providing life insurance, health benefits, maternity protection, and old-age security, funded through contributions by the State and aggregators. This reform reflects a transition from employer-centric labour regulation to a broader ecosystem-based conception of social security.

1. Payment of Wages: Time as a Substantive Labour Right

The Code on Wages⁸ prescribes uniform, non-derogable timelines for wage payment. Most notably, Section 17 mandates that where employment is terminated for any reason, earned wages must be paid within two working days.

This represents a doctrinal shift from the Payment of Wages Act, 1936, where delayed payment was often treated as a remediable procedural lapse. Under the new regime, delay itself constitutes a statutory violation.

This approach aligns with the Supreme Court's reasoning in State of Uttar Pradesh v. Dinesh Kumar Sharma, where the Court unequivocally held that pension and terminal benefits are not charity or bounty but enforceable rights flowing from service rendered⁹.

1. Deconstruction of the "Full-and-Final Settlement" Practice

Significantly, the Labour Codes do not recognise "full-and-final settlement" as a legal category. Instead, they regulate each payable component independently, particularly wages, which are subject to strict timelines. The omission is deliberate. Any continuation of 30–45 day settlement cycles for wage payment is inconsistent with Section 17 of the Code on Wages and is vulnerable to legal challenge. Administrative convenience cannot override statutory command.

1. Gratuity, Provident Fund, and Deferred Benefits: No Defence of Administrative Delay

Under Section 53 of the Code on Social Security, gratuity must be paid within 30 days of becoming due, failing which interest liability arises automatically. Financial difficulty, verification delays, or internal processes do not excuse non-compliance. Judicial precedent uniformly rejects employer-side excuses. Courts have repeatedly emphasised that statutory benefits accrue by operation of law and are not contingent on employer convenience.¹⁰ Provident Fund compliance similarly shifts from a claim-centric to a duty-centric model, requiring proactive employer action in record maintenance, filings, and exit facilitation.

VII. Retrenchment Compensation and the Requirement of Contemporaneous Payment

Where termination amounts to retrenchment, compensation must be paid at the time of retrenchment. Subsequent payment does not cure illegality. This principle, long settled under industrial jurisprudence, is statutorily reinforced under the Code on Social Security. Non-payment at the time of retrenchment renders the action void ab initio, not merely procedurally defective.

VIII. Principal Employer Liability and the Limits of Outsourcing

Statutory responsibility under the Labour Codes rests with the employer, irrespective of contractual arrangements. In Air India Ltd. v. Appellate Authority, the Telangana High Court held that a principal employer cannot evade gratuity liability merely because workers were engaged through a contractor, where continuity of service and control rested with the principal employer¹¹. This reasoning applies with equal force under the new Codes. Outsourcing payroll or HR functions does not dilute statutory accountability.

1. From Contractual Governance to Status-Based Protection

The cumulative effect of the Labour Codes is a decisive shift from contract-based regulation to status-based statutory protection. Wage definitions, timelines, and exit entitlements are now non-derogable rights flowing from the fact of employment, not from negotiated terms. Judicial principles developed incrementally over decades have been legislatively absorbed, narrowing the scope for interpretive discretion and shifting future disputes towards factual compliance.

CONCLUSION

The new Labour Codes¹² represent a structural transformation of Indian labour law. By redefining wages, converting time into a substantive right, and eliminating employer discretion at exit, the Codes reconstruct the normative foundations of employment regulation.

Judicial doctrines on gratuity, wage protection, pension, and employer liability have been codified, signalling a move from adjudicatory correction to legislative certainty. For employers, compliance now demands structural recalibration; for employees, the Codes promise predictability, liquidity, and dignified social security. In substance and design, the Labour Codes do not merely reform labour law, they re-engineer employment justice in India.

Footnotes

1. Government of India, The Code on Wages, 2019, Ministry of Labour and Employment, https://labour.gov.in/sites/default/files/THE_CODE_OF_WAGES_2019.pdf

2. Government of India, The Code on Social Security, 2020, Ministry of Labour and Employment, https://labour.gov.in/sites/default/files/SOCIAL_SECURITY_CODE_2020.pdf

3. S. Narayan, Understanding the New Definition of Wages under the Code on Wages, 2019, Economic & Political Weekly, Vol. 55, Issue 3 (2020), available at https://www.epw.in/journal/2020/3/special-articles/new-code-wages.html

4. Chairman-cum-Managing Director, Fertilizer Corporation of India Ltd. v. Rajesh Chandra Shrivastava, (2022) 16 SCC 375.

5. TaxGuru, Impact of Code on Wages, 2019 on Salary Structure, PF and Gratuity, https://taxguru.in/corporate-law/impact-code-wages-2019-salary-structure.html

6. Chittiboyina Bharata Rao v. Krishna District Cooperative Central Bank Ltd., W.P. No. 8465 of 2016 (AP HC).

7. Cuttack Central Cooperative Bank Ltd. v. Sarangi, Orissa High Court, Aug. 2025.

8. Cyril Amarchand Mangaldas, Code on Wages, 2019: Key Compliance Obligations for Employers, https://www.cyrilshroff.com/insights/code-on-wages-2019-key-compliance-obligations/

9. State of Uttar Pradesh v. Dinesh Kumar Sharma, 2025 SCC OnLine SC 596.

10. Ibid

11. Air India Ltd. v. Appellate Authority, W.P. No. 6479 of 2019 (Telangana HC).

12. Press Information Bureau, Government of India, Labour Codes: Salient Features and Worker-Centric Reforms, PIB Release, https://pib.gov.in/PressReleasePage.aspx?PRID=1650714

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