The Labour Codes Redefine Wages, Empower The Worker

The Labour Codes: An Uneven Step Towards Financial Inclusion

The implementation of India's new labour codes has been hailed as a landmark policy intervention aimed at achieving financial inclusion across its workforce. However, while these reforms promise income security and social protection for workers, they simultaneously raise profound structural questions about federal governance, informal sector integration, and the delicate balance between worker welfare and industry competitiveness. The codes, by redefining wages and expanding social security coverage, do hold transformative potential, but the optimism masks deep systemic challenges that risk undermining their impact.

The Institutional Landscape: Redefining Labour Governance

The four labour codes—the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety Code (2020)—seek to consolidate 29 fragmented labour laws into a comprehensive framework. Among the most consequential provisions is the uniform definition of ‘wages’, which mandates basic pay to account for at least 50% of total remuneration. This structural redefinition affects provident fund contributions, gratuity, and pensions, ultimately enhancing workers' long-term financial security.

Universal minimum wages, an ambitious provision within the Code on Wages, aims to establish a national floor wage below which no state can set its minimum wage. The recognition of gig and informal workers under the Code on Social Security (2020) is equally noteworthy, formally bringing unorganised workers within the ambit of social protection policies. Added reforms include improved workplace safety standards, timely wage disbursement, limited deductions, and benefit portability across states.

These codes signal a shift towards digital compliance via unified portals for registration and reporting, ostensibly decreasing bureaucratic harassment and encouraging transparency. Additionally, with the threshold for layoffs requiring government approval raised from 100 workers to 300, the Industrial Relations Code favours greater hiring flexibility for large enterprises—though at a controversial cost to trade union power.

The Argument: Reform as Financial Inclusion

The claims of financial inclusion are certainly not baseless. By mandating that gratuity eligibility extend to fixed-term workers after one year of service, the reforms align with progressive income protection norms. Workers earning higher basic pay—thanks to the revised wage definition—are projected to accumulate more robust retirement savings, estimated to increase provident fund inflows by 25% nationwide, according to EPFO data from 2022.

The resolution of wage disparities via national floor wages could indeed benefit migrant and underpaid workers, particularly in lesser-developed states such as Bihar and Odisha, where disparities are stark. The inclusion of platform and gig workers, ostensibly benefiting 15 million people (NITI Aayog, 2021), represents a bold regulatory step that sets India apart in the global gig economy.

Moreover, formalising grievances through industrial tribunals and conciliation mechanisms provides faster dispute resolution. This, coupled with mandatory social security contributions, can deepen domestic savings rates, which hover at 30% of GDP (RBI, 2023). By ensuring salaried workers' income circulates within the economic system more effectively, the codes can spur macroeconomic growth.

The Counter-Narrative: Policy as Political Tool

Yet the strongest economic argument against the codes comes from MSMEs, which employ 11 crore people (MSME Ministry 2023). Higher mandatory wage components and social security contributions significantly raise compliance costs for small-scale enterprises struggling to recover from post-pandemic slowdowns. Employers now face static salary components without room for flexible wage restructuring. This risks labour informalisation, undermining the very benefits the codes intend to offer.

Trade unions have called out the Industrial Relations Code’s provisions, such as increased strike restrictions, as an assault on worker rights. The realignment of thresholds for government approval on layoffs disproportionately empowers large-scale establishments, reducing collective bargaining authority. Critics point to the possibility of these codes being ideologically aligned with pro-business agendas rather than worker welfare.

An International Perspective: Lessons from Germany

Germany’s Labour Code, governed by its Works Constitution Act, presents a contrasting model emphasizing cooperative federalism and robust labour protections. Unlike India’s national floor wage approach, Germany enforces sector-specific minimum wages negotiated through collective bargaining agreements, ensuring higher worker representation. India's adoption of static thresholds for layoffs contrasts Germany's gradual reductions tied to incremental worker rights expansions.

Furthermore, Germany’s Betriebsrat (works council) system empowers workers to co-manage enterprises, including layoffs, ensuring participatory governance. This casts a long shadow over India's fragmented trade union framework, wherein unions face political interference and weakened autonomy.

Assessment: Opportunity Entangled with Risk

Where India falters is not in ambition but execution. Addressing informal sector dynamics remains the Achilles’ heel of the labour codes. With over 80% of India's workforce employed informally (NSSO 2019), creating enabling frameworks for documentation and access remains imperative. Without robust financial literacy campaigns, provident fund and gratuity benefits may remain dormant for vast swathes of workers.

States must expedite their rule frameworks for uniform implementation—only 12 states out of 28 have notified these rules, highlighting perennial issues in federal fiscal coordination. Policymakers must engage more meaningfully with MSME resistance to prevent unintended compliance burdens leading to evasion or informalisation.

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