Non-compliance with new labour codes is now a boardroom risk for every foreign subsidiary operating in India. All four Labour Codes have been in force since 21 November 2025, replacing 29 central laws. The central rules were notified on 8 May 2026. The first anniversary of implementation falls in Q4 2026, along with year-end payroll closures, bonus payouts and annual filings. legalsuvidhadlapiper
For MNCs, global startups, overseas investors and NRI-promoted companies, the issue goes beyond fines. Personal liability can reach India-resident directors and officers in charge, and a payroll error repeated across hundreds of employees compounds quickly. Whether you completed Company Formation in India years ago or are planning Company Setup in India now, this guide explains the penalty exposure and how to reduce it. Startup Solicitors LLP advises foreign-owned entities on these regulatory transitions.
Understanding Non-Compliance with New Labour Codes in the Indian Context
India consolidated its labour laws into four codes:
- Code on Wages, 2019: wage definition, minimum wages, timely payment, bonus.
- Code on Social Security, 2020: provident fund (EPF), ESIC, gratuity, gig and platform workers.
- Industrial Relations Code, 2020: standing orders, layoffs, retrenchment, strikes, fixed-term employment.
- OSH Code, 2020: workplace safety, health, licensing, working hours.
One change affects almost every foreign subsidiary: the uniform wage definition. Where allowances make up a large share of pay, the wage base for PF and gratuity can rise, which increases contributions. Under-deducting PF after the codes took effect is a common hidden liability.
For global teams, the main point is that Indian labour law is no longer a patchwork. The codes apply to every employer, and enforcement relies on inspector-cum-facilitators, digital filings and employer-wide accountability. Your parent company’s group HR policy does not replace Indian statutory compliance.
Legal Framework & Regulations in India
The Ministry of Labour and Employment issues the codes and central rules. States notify their own rules, so a subsidiary with offices in several states faces a hybrid compliance map. Related regimes also apply:
- Companies Act, 2013: directors’ duties and officer liability, monitored through the Ministry of Corporate Affairs. See our corporate governance compliance support.
- FEMA and RBI rules: payments to expatriate staff and parent-company cost recharges. See RBI and FEMA approvals compliance.
- Income Tax Act: salary TDS and deductibility of statutory dues, administered via the Income Tax Department. Our taxation and compliance services cover this.
- DPDP Act, 2023: employee data handling in digital payroll systems. See DPDPA compliance.
Indicative Penalty Exposure (confirm against current gazette text and state rules)
| Code | Typical breach | Indicative consequence |
|---|---|---|
| Wages | Underpaid or delayed wages, missing registers | Fine up to ₹50,000; repeat offence can add imprisonment and fines up to ₹1 lakh |
| Social Security | Late or short PF/ESIC, contributions deducted but not deposited | Interest, damages, fines and possible imprisonment |
| Industrial Relations | Retrenchment without notice or compensation, unfair practices | Fines from ₹10,000 up to ₹2 lakh depending on breach |
| OSH | Safety lapses, licensing gaps | Fines in lakhs; imprisonment where a death results |
Companies can also face prosecution through the “officer in charge” provision, which brings directors and managers into the frame.
Step-by-Step Process to Close Compliance Gaps
- Map your workforce. List employees, contract labour, fixed-term staff and gig workers by state.
- Re-base the wage structure. Recompute CTC to the new wage definition and test PF, gratuity and bonus impact.
- Check state rules. Confirm which central or state rules apply at each location.
- Update employment documents. Revise appointment letters, standing orders, leave and overtime policies.
- Audit contractors. Principal employers carry liability when contractors default. Review contracts and indemnities. Our due diligence and compliance audits help here.
- Fix payroll and filings. Align registers and returns through professional payroll management.
- Document everything. Maintain a compliance calendar and board reporting trail.
Stakeholder considerations:
- Indian residents (promoters/directors): Personal exposure as officer in charge. Keep board minutes recording compliance reviews.
- NRIs: If you hold a majority stake, appoint an accountable resident director. See resident director appointment and nominee director services.
- Foreign companies: Branch and liaison offices are also employers. Review branch and liaison office setup structures.
- Global startups: Entering through private limited company registration or the foreign national setup route, build labour compliance into month one.
- Overseas investors: Include labour liabilities in due diligence and warranties.
Key Challenges and Practical Issues
- Copying group policy. Overseas HR templates rarely match Indian wage definitions.
- Underestimating contract labour risk. A vendor’s default can become your liability.
- Expatriate staff. Work authorisation gaps compound labour issues. Review employment visa applications and FRRO compliance.
- Inconsistent state timelines. Multi-state subsidiaries run parallel legacy and new regimes.
- Documentation gaps. Missing registers, undated policies and unsigned contractor declarations weaken your position during inspection.
- Transfer pricing friction. Cost recharges for seconded staff need alignment with transfer pricing compliance.
Practical example: A UK-owned SaaS subsidiary with 120 employees kept allowances at 60% of gross pay. After the new wage definition, its PF base was understated every month. By Q4, the arrears, interest and gratuity effect had become a material audit finding. Re-basing salaries early would have contained the cost.
Strategic Insights & Expert Recommendations
- Treat Q4 as a closing window. Complete a gap audit before annual accounts and bonus cycles, not after.
- Quantify liability, not just fines. Back-dated contributions, interest and gratuity often exceed headline penalties.
- Separate accountability. Name one responsible officer per state and review quarterly.
- Rewrite contractor contracts. Add compliance covenants, audit rights and indemnities.
- Use compounding wisely. Many offences can be settled by paying a compounding amount, but only if identified and self-reported promptly.
- Build compliance into structuring. For Company Setup in India, model labour costs alongside tax and FEMA. A corporate law and legal advisory review at entry stage is more economical than remediation.
Conclusion
Non-compliance with new labour codes carries layered costs: fines, back-dated dues, personal liability and reputational damage with Indian and global stakeholders. Foreign subsidiaries that act in Q4 2026 can correct wage structures, contractor terms and state-level gaps on their own timeline, rather than during an inspection. To review your position, contact Startup Solicitors LLP. Also see our Government of India DPIIT references for startup recognition.
Follow us: Website | LinkedIn | Substack | Instagram
This article is for general information and is not legal advice. Penalty amounts are indicative; verify with the current gazette text and applicable state rules.
FAQs
1. What are the new labour codes in India?
India’s four labour codes cover wages, social security, industrial relations and occupational safety. They replace 29 earlier central laws and apply to all employers, including foreign-owned subsidiaries, branch offices and companies formed through Company Formation in India.
2. What is the penalty for non-compliance with new labour codes?
Penalties vary by code and breach. They include fines (for example, up to ₹50,000 for wage violations), higher fines and imprisonment for repeat offences, back-dated PF and ESIC dues with interest, and officer-in-charge liability for directors and managers.
3. Are foreign subsidiaries in India covered by the labour codes?
Yes. Any establishment employing workers in India must comply, irrespective of foreign ownership. Branch offices, liaison offices and wholly owned subsidiaries all carry employer obligations, including payroll, social security contributions and workplace safety requirements.
4. Can directors be personally liable?
Yes. The codes extend liability to the officer in charge of the establishment’s affairs, which can include directors and senior managers. Documented compliance reviews, clear delegation and board-level reporting help demonstrate due diligence.
5. What should NRIs and overseas investors check first?
Review the wage structure against the new wage definition, PF and gratuity calculations, contractor agreements and state-level registrations. Include labour liabilities in due diligence before any investment or Company Setup in India.