The new labour laws effective April 1, 2026, introduce a dramatic reduction in settlement timelines for employees leaving organizations. Under the revised framework, employers must now process and complete full and final settlements within just two working days of the last working day. This represents a significant improvement from the previous timeline of 45 to 90 days that employees often faced when leaving organizations. The new rule applies uniformly across all cases including resignation, termination, or retrenchment, with failure to follow this timeline treated as a legal breach.
The new labour codes have introduced significant changes to gratuity eligibility, allowing employees to receive gratuity after just one year of continuous service, down from the previous requirement of at least five years. According to reports from Mint, this change applies only to certain categories of employees, with the government clarifying that gratuity under the new rules will apply from 21 November 2025. The Labour Ministry stated that "gratuity will be applicable with effect from 21st November 2025 i.e. date of enforcement of the Code. Establishments may make provision as per accounting norms." The revised framework also mandates that once an employee qualifies, the employer must release gratuity payments within 30 days of exit, significantly accelerating the disbursal process.
The new wage framework under the Labour Codes establishes a 50% floor requirement where wages must constitute at least 50% of total remuneration. As per the latest Ministry of Labour and Employment FAQs, only statutory components such as employer PF and pension contributions and statutory bonus are included in "total remuneration" for computing the 50% floor, while gratuity, ESI, and other retirement benefits are excluded. The framework specifically covers dearness allowance, retaining allowance, and basic pay as core components, with the first proviso stating that if payments under clauses (a) to (i) exceed 50% of all remuneration, the excess amount shall be deemed as remuneration and added back to wages. This means the Code sets a floor wage (basic pay + DA + retaining allowance) that must constitute at least 50% of total remuneration, and where they fall short, the shortfall is bridged by reclassifying a portion of allowances as wages.
The one-year gratuity rule applies specifically to fixed-term employees (FTEs) and contract workers on a pro rata basis. As reported by Mint, permanent or regular employees still generally require five years of continuous service, unless in cases of death or disablement, for which separate rules apply. Under the updated framework, gratuity will be calculated on a pro rata basis, meaning employees will receive gratuity proportional to the period they actually worked, even if it is shorter than five years. The new rules also mandate that wages used for gratuity calculations will include basic pay, dearness allowance (DA) and retaining allowance, which together must constitute at least 50% of an employee's total cost-to-company (CTC). The 'Principle of Universality' established by the Supreme Court continues to apply, requiring employers to assess whether allowances form part of basic pay based on whether they are universally, necessarily and ordinarily paid to all employees.
The shift to the 50% wage floor is expected to translate into around 66% increase in gratuity payouts, as reported by Mint. Under the new definition of "wages," if an employee's sum of allowances exceeds 50% of CTC, the excess is automatically added back to the employee's basic pay. This change represents a significant improvement in gratuity benefits for eligible employees, particularly those in contract or fixed-term positions who previously would not have qualified for gratuity benefits. However, employees may see a slight dip in monthly take-home income of 2 to 5% due to increased deductions for higher PF and gratuity contributions. The new framework also clarifies that performance-based incentives, ESOPs, and variable pay components fall outside the wages definition, while leave encashment is not considered part of allowances.
Employees planning to switch jobs under the new system must follow strict compliance procedures to avoid delays. Following proper notice period compliance is crucial, as any shortfall could still be deducted from the final payout despite the faster settlement window. It is essential to submit all investment proofs and tax-related documents in advance to avoid discrepancies in final salary calculations. Additionally, confirming whether your employer has updated payroll systems in line with the new rules can help prevent delays or confusion. Organizations, especially in sectors like IT, BPO, and retail, may see compliance costs rise by 5 to 15% due to higher contributions toward PF and gratuity, which may influence future hiring patterns and compensation strategies. The prudent employer response is to structure compensation from the statutory text outward, preserve a clear rationale for each inclusion and exclusion, and keep payroll, social-security and termination computations under periodic review until the rules and judicial position settle with greater finality.
