The intricate landscape of India employment laws presents a unique challenge for global employers. Unlike many unitary legal systems, India’s fragmented labour code operates on a dual framework, with significant reforms currently underway. Navigating these complexities—from central and state-level jurisdictions to evolving worker classifications—is essential for any HR, legal, or compliance manager aiming for compliant global expansion.
Decoding India’s Dual Legal System: Central vs. State Laws
India’s labour regulation falls under the Concurrent List of the Constitution. This means both the Central Government (Union) and the individual State Governments have the authority to enact and enforce labour legislation.
Central Government Legislation
Central laws establish the minimum national standards for key aspects of employment, such as wages, social security, and industrial relations. These are designed to ensure a basic floor of protection for workers across the country.
- Examples: The defunct laws that are being subsumed, such as the Minimum Wages Act, 1948, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Payment of Gratuity Act, 1972, were key central laws. The new Labour Codes (discussed below) are central laws designed to consolidate these.
State Government Variations
States have the power to both enforce central laws and legislate on certain subjects to address local conditions. This is where fragmentation and complexity arise.
- State-Specific Acts: Key state-level laws include the Shops and Establishments Acts, which govern working hours, rest intervals, holidays, and leave entitlements for commercial establishments within that state. These laws can vary significantly from state to state.
- Amendments to Central Laws: States can, and often do, introduce amendments to central laws to suit their regional industrial and social needs. For example, while the central government may set a floor wage, the state government may notify different minimum wages depending on the cost of living, skill level (unskilled, semi-skilled, skilled), and region. A daily minimum wage for unskilled labour in a metro like Delhi, for instance, could be substantially higher than in a rural area of a different state.
For global employers, this dual system means compliance is not a single-country exercise; it’s a state-by-state mandate. Operating in multiple Indian states necessitates adherence to the specific local rules in addition to the national framework.
Worker Classification and Employee Protections
Proper worker classification is paramount in India, as the benefits and protections offered by law are overwhelmingly extended to ’employees’ and often exclude true ‘independent contractors.’ Misclassification is a significant compliance risk.
Employee vs. Independent Contractor
The determination hinges on the degree of control exercised by the employer over the worker, a principle common in many jurisdictions.
| Factor | Employee | Independent Contractor |
| Control | Company controls what is done and how it’s done. | Contractor controls the means and manner of achieving the agreed-upon result. |
| Integration | Work is key to the business; relationship is permanent/ongoing. | Services are ancillary; relationship is project-based or fixed-term. |
| Benefits | Entitled to statutory benefits (PF, ESI, Gratuity, etc.). | Not entitled to statutory employee benefits. |
| Taxation | Subject to Tax Deducted at Source (TDS) on salary; employer pays matching social security contributions. | Subject to TDS on professional fees; responsible for own tax and social security. |
Read more: Avoiding Employee vs Contractor Misclassification: How Employer of Record Services Can Help
Key Employee Protections
Employees enjoy robust protections across several categories:
- Social Security: Mandatory contributions to the Employees’ Provident Fund (PF) and Employees’ State Insurance (ESI) are typically required. PF applies to establishments with 20 employees, and ESI applies to those with 10 employees (with wages up to a prescribed ceiling, currently ₹21,000 per month for ESI).
- Maternity Benefits: The Maternity Benefit Act, 1961 (and its 2017 amendment) mandates 26 weeks of paid maternity leave for women, a figure that is among the highest globally, provided the woman has worked for the employer for at least 80 days in the 12 months preceding the date of her expected delivery.
- Sexual Harassment: The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (PoSH Act) is mandatory for all workplaces with 10 or more employees. It requires the constitution of an Internal Complaints Committee (ICC) to address complaints.
- Termination: Unlike “at-will” employment, termination procedures are often governed by law, especially for ‘workmen’ under the existing framework. Dismissals must generally be for a valid reason and adhere to principles of natural justice, and severance may be required.
The New Era: Overview of India’s Four Labour Codes
To simplify the fragmented system of over 40 Central labour laws, the Indian government enacted four new Labour Codes. While passed by Parliament, the full implementation of these codes has been pending, as the Central and State Governments need to notify the rules simultaneously. The expected implementation date is subject to change, but they represent the future of India’s labour governance.
1. The Code on Wages, 2019
This Code consolidates laws on wages, bonus payments, and equal remuneration.
- Key Reform: Introduces the concept of a Floor Wage (a national minimum wage) set by the Central Government, which states cannot go below. It also simplifies the definition of ‘wage’ across all subsumed laws, aiming for clarity.
- Equal Pay: Reinforces the principle of equal pay for equal work, regardless of gender.
2. The Code on Social Security, 2020
This Code aims to expand social security coverage to all workers, including unorganised sector workers, gig workers, and platform workers.
- Key Reform: Consolidates nine social security laws and introduces provisions for social security schemes for gig and platform workers for the first time, to be funded through a possible levy on aggregators. It maintains the existing structure of PF, ESI, and Gratuity but aims to expand their scope.
3. The Occupational Safety, Health and Working Conditions Code (OSH Code), 2020
This Code consolidates laws relating to safety, health, and working conditions for workers.
- Key Reform: Sets standards for working hours, including a maximum work limit of 48 hours per week (as per the subsumed Factories Act, 1948). It also mandates specific rules for different categories of workers, including women (e.g., allowing women to work at night with consent, safety, and transportation provisions). The code applies to establishments with specific employee thresholds, such as 10 for factories and 50 for contract work.
4. The Industrial Relations Code, 2020
This Code seeks to amend laws relating to trade unions, conditions of employment, and industrial dispute resolution.
- Key Reform: It includes contentious provisions like raising the threshold for establishments needing government approval for layoffs, retrenchments, or closure from 100 to 300 employees (for certain industrial establishments), giving employers more flexibility, although this is a point of debate and resistance. It also introduces provisions for fixed-term employment.
Common Compliance Pitfalls for Global Employers
Even with the upcoming reforms, global businesses often stumble over subtle, yet costly, compliance issues in India.
- Mismanaging State-Level Payroll and Leave: Failure to track and implement the varying minimum wages, public holidays, and annual leave as specified under individual State Shops and Establishments Acts is a frequent error. A company operating across Bangalore (Karnataka) and Gurgaon (Haryana) must adhere to two different sets of non-wage labour rules.
- Incomplete Social Security Registration: Assuming central compliance covers all bases. Timely and accurate registration with both the Employees’ Provident Fund Organisation (EPFO) and the Employees’ State Insurance Corporation (ESIC), along with correct monthly contribution calculations based on varying wage ceilings, requires deep local knowledge.
- Neglecting the PoSH Act: The mandatory establishment of an Internal Complaints Committee (ICC) and regular training under the PoSH Act is often overlooked by foreign entities, leading to legal vulnerability and significant reputational risk.
- Improper Independent Contractor Engagements: The allure of classifying workers as independent contractors to avoid statutory benefits is strong, but a review of the actual working relationship by Indian authorities can easily lead to re-classification, back-payment of social security contributions, and penalties.
Conclusion: Partnering for Seamless Expansion
The Indian government’s push for new Labour Codes is a clear move towards modernising and consolidating its complex labour law framework, signalling a commitment to both ease of doing business and broader worker protection. However, the staggered rollout and the persistent dual nature of central and state laws mean the compliance burden remains substantial, requiring specialised, up-to-the-minute local expertise.
For businesses looking to expand or hire quickly in India without establishing an immediate local entity or navigating the multi-state regulatory environment, partnering with an experienced Employer of Record (EOR) is the most compliant and efficient solution.
EOR providers, like Eos Global Expansion, take on the legal responsibility as the official employer, handling all aspects of payroll, social security contributions, tax withholdings, and ensuring full adherence to both Central and State-specific India employment laws. This partnership allows your business to focus on its strategic goals while confidently mitigating the regulatory and compliance risks inherent in India’s evolving legal landscape.
Read more: EOR India: Everything You Need to Know Before Hiring in 2025
Ensure compliant hiring by partnering with an EOR familiar with India’s legal framework. Contact Eos Global Expansion today to seamlessly hire talent across all 28 Indian states. Check our full-range of EOR services here or book a free consultation now.
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