Most employers we have spoken to appear puzzled as to why the Government is positioning the recent notification of four Labour Codes as “reform”. After all, as most employers see it, the cost of employing workers goes up (rather than coming down) on the back of the new codes. Vineet Kaul – formerly CHRO for Hindalco and now an HR advisor – demystifies what is really going on with these reforms.
The first thing we need to understand says Mr Kaul is that the primary focus of these reforms is to shift the legal regime from protecting employment to formalising work:
“For decades, India ran a dual labour market. A small formal segment enjoyed statutory protections, while nearly 85-90% of the workforce remained outside the legal frame, surviving in an informal economy where rights were theoretical. This dualism shaped behaviour everywhere: companies stayed artificially small, unions became defensive, and enforcement relied on discretion rather than transparency.
The Second National Labour Commission had warned of these distortions as far back as 2002. Yet reform stalled for two decades, and in that vacuum, both employers and workers created informal workarounds: keeping permanent headcount below 100, over-relying on contract labour, and navigating closure or retrenchment through negotiated, extra-legal pathways. When policy lags reality, practice takes over.
The Labour Codes attempt to realign law with reality.”
However, the battle is still not over because these Labour Codes will have to be implemented by the states. How the states administer these Codes will be critical. If we revert back to an Inspector Raj type construct then formalisation won’t happen; employers will continue replacing workers with machines in that scenario.
The second big thing about these reforms is that they formally recognise gig workers and give them the same protections as conventional workers. This is a big deal says Mr Kaul (with the caveat again of how the states implement the Codes will be critical):
“For decades, India’s labour imagination remained tied to factories and offices even as millions joined platform-based work. Recognition matters: it enables welfare structures, portability of benefits, and a new vocabulary for worker protection.
Yet recognition is not protection. The emerging model is a cess-funded welfare system rather than a rights-based one—an important distinction that will shape how robust gig protections ultimately become. Some states, such as Rajasthan, have enacted gig welfare legislation, but implementation has been slow and uneven. Welfare boards, funding mechanisms and benefit delivery remain patchy.
Large global firms outsourcing work to India are unsure what compliance means when their workers are technically gig contractors but operate in ambiguous employment formats. Domestic platforms worry about cost structures and P&L implications; a sharper definition of wages, benefits and liabilities may compress already thin margins.”
The third big change – and one that has been highlighted in the media – is that the threshold for retrenchment has been raised from 100 to 300 workers. Note however that 300 is a MINIMUM; if states want they can raise the threshold higher. This raises the possibility that in the more progressive states we might see large employers shift from contract labour to on-rolls employment (albeit with fixed term contracts).
Mr Kaul suggests that the impact of this change is likely to be more layoffs: “Flexibility is not an outcome; it is a responsibility. And technology will accelerate these transitions: automation will displace some roles even as augmentation creates demand for new, higher-skilled work—making reskilling not an HR programme but a survival imperative.”
Finally, the big structural change says Mr Kaul is that the new Labour Codes create space for competition between states on the basis of labour rules. The scope for the states to compete with each other is massive. Mr Kaul writes:
“The Codes propose digital registers, randomised inspections and graded penalties—a potentially transformative shift away from negotiated compliance. But technology cannot override culture. India has lived through decades of inspector raj, where enforcement was discretionary, unpredictable and often rent-seeking. The risk now is behavioural backsliding: if inspectors recreate old methods under a digital skin, the promise of the Codes weakens.
States also face another, more immediate pressure. Much of India’s economy rests on micro and small enterprises who operate with thin margins and limited administrative capacity. For them, the Codes could feel onerous—not because they oppose formalisation, but because they lack the systems, people and time to manage digital compliance. Many will look to state governments for relief, phased transitions or capacity-building support. How states respond to this constituency will shape ground-level enforcement as much as the letter of the law.
Some states—such as Gujarat, Karnataka and Tamil Nadu—are moving early with clearer rules, extended working-hour provisions with safeguards, and digital inspection systems. Others, such as Kerala, have openly opposed the Codes…
Much will depend on competitive federalism. Just as GST created pressure for harmonisation, the Labour Codes may push progressive states to differentiate themselves through clarity, capability and modernised governance. Large domestic firms and MNCs increasingly factor labour governance into location decisions. States that align quickly may gain investment. Those that delay or default to old patterns may find themselves bypassed—even as pressure from small enterprises pushes them to soften or sequence enforcement.
The Codes set the architecture. States will determine whether the system they build inspires trust or fear.”
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