An analysis of the Ministry of Labour & Employment FAQs dated 16 March 2026 clarifying India’s four labour codes on wages, gratuity, overtime, leave, and social security.
Introduction
The Ministry of Labour and Employment (MoLE) released a fresh set of frequently asked questions (FAQs)1 on 16 March 2026, addressing employer and practitioner queries arising from the implementation of India’s four Labour Codes — the Wages Code, 2019; the Social Security Code, 2020; the Industrial Relations Code, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020 (OSH&WC Code). These Codes were notified as enforceable from 21 November 2025.
The FAQs provide authoritative, albeit non-binding, administrative guidance on several contested definitional and computational questions that have occupied human resources (HR) professionals, payroll practitioners, and labour law counsel since the enforcement commenced. This article offers a thematic analysis of the clarifications, contextualising them within the relevant statutory provisions.
Wages Code — key clarifications
The 50 per cent wage floor rule and the composition of “total remuneration”
Section 2(y), Wages Code defines “wages” and contains the critical proviso that if the allowances enumerated in clauses (a) to (i) of Section 2(y) exceed 50 per cent of total remuneration, the excess amount is added back to wages. This mechanism — commonly referred to as the 50 per cent wage floor rule — is central to computing provident fund contributions, gratuity, and other statutory obligations.
The FAQs now provide long-awaited clarity on which components constitute “total remuneration” for the purpose of this threshold:
1. Overtime allowance: The Ministry has confirmed that overtime allowance payments form part of the components in Sections 2(a) to 2(i). Where such allowance, in aggregate with other listed components, exceeds 50 per cent of remuneration, the excess is added back to wages.
2. Employer provident fund (PF) and pension contributions: Only statutory components such as the employer’s share of PF/pension contribution and statutory bonus are included within the 50 per cent computation. The FAQ reiterates that this follows from Section 2(y)(c).
3. Gratuity, employees’ state insurance (ESI) and other retirement benefits: These are expressly excluded from the computation of total remuneration for the purposes of the 50 per cent rule.
The practical import of these clarifications is significant. Employers who had structured cost to company (CTC) components to remain within the 50 per cent allowance threshold must now verify whether their overtime pay triggers a recomputation. Conversely, the exclusion of ESI and gratuity from the denominator provides a measure of predictability.
Annual performance-based incentives
The Ministry has confirmed that annual performance-based incentives do not form part of “wages” for computation under the Labour Codes. This aligns with the broadly held position under the erstwhile Payment of Wages Act, 1936, and provides clarity to employers who structure variable pay as annual performance awards distinct from periodic remuneration.
Eligibility for overtime — workers and employees
A recurring point of confusion has been whether managerial and supervisory staff are entitled to overtime wages. The FAQ clarifies that any employee — including workers — whose minimum rate of wages is fixed under the Wages Code, is eligible for overtime. This brings supervisory and managerial employees within the ambit of overtime entitlements, provided their minimum wage is prescribed under the Code.
Definition of “wages” — effective date
The Ministry confirms that the revised definition of “wages” under the Wages Code came into effect on 21 November 2025, i.e., the date of implementation of the Codes. This date anchors a range of consequential calculations, including gratuity, PF and bonus.
Distinction between “minimum wages” and “wages”
The FAQ draws a clear conceptual distinction between the two terms. Minimum wages are fixed by the appropriate government and represent a statutory floor below which no employer may pay. Wages, on the other hand, are defined under Section 2(y) of the Code and are determined by the terms of employment between the employer and the employee. An employer is legally prohibited from paying below the prescribed minimum wage.
Wage protection for white-collar employees
The Wages Code, contains provisions for the timely payment of wages applicable to all employees, including white-collar workers. The Ministry confirms that no separate or differentiated protection mechanism exists for white-collar employees; the general wage protection provisions of the Code apply uniformly.
Social Security Code — key clarifications
Gratuity: Effective date and applicability
Multiple FAQs address the temporal applicability of the revised gratuity framework:
1. Prospective application: Gratuity calculation under the revised definition of wages is applicable prospectively from 21 November 2025. The employee will be paid gratuity based on wages last drawn at the time of superannuation, retirement, resignation, or death, as computed under the Social Security Code.
2. Pre-implementation service: Gratuity for service rendered prior to 21 November 2025 falls under the Payment of Gratuity Act, 1972. The Code governs service on or after that date. The last-drawn wage at the time of exit — calculated under the new definition — will determine the gratuity quantum for the entire period.
3. Wage components for gratuity: Only components within the included and excluded parts of Section 2(88), Social Security Code, are relevant. Any payment not captured within that section is excluded from the gratuity calculation.
Fixed-term employment (FTE) and gratuity
Fixed-term employment under the Codes covers only employees directly engaged by the employer, and not contract labour engaged through contractors. On the question of gratuity eligibility for FTEs, the Ministry has clarified:
1. An FTE is eligible for gratuity upon rendering service for a period of one year from the commencement of the contract.
2. Consequently, an FTE engaged for 11 months who exits on contract expiry would not be eligible for gratuity. However, an FTE who exits before completing one year of a contract originally of longer duration would similarly not qualify.
This clarification resolves ambiguity arising from the omission of the usual five-year continuous service requirement for FTEs, a deliberate policy choice to align the duration of gratuity eligibility with the contract period.
Gratuity for contract labour
Under Section 53, Social Security Code, the responsibility for paying gratuity to contract labour lies with the contractor (employer), and not with the principal employer. Gratuity is payable upon rendering five years of continuous service at 15 days’ wages for each completed year of service, based on last drawn wages.
ESI coverage
Pending finalisation of rules, the pre-existing wage threshold of Rs 21,000 per month for ESI coverage continues to apply. With effect from 21 November 2025, the definition of “wages” under the Social Security Code, governs the computation of ESI contributions, replacing the erstwhile definition under the Employees’ State Insurance Act, 1948.
Gig and platform workers — social security contributions
The Ministry clarifies that under Section 114(4), Social Security Code, the rate and manner of contribution by aggregators towards social security for gig and platform workers will be notified by the Central Government. These contributions will be credited to a dedicated social security fund. States may not independently levy a cess on aggregators for this purpose; the scheme is governed at the Central level.
Remuneration in kind
The FAQ clarifies that benefits under the terms of employment, such as food coupons, ration items, and mobile recharge, constitute “remuneration in kind” for the purposes of the wage definition. Employers must account for these in-kind benefits when computing total remuneration for the 50 per cent rule. Also, as per the Explanation in Section 2(y), the value of such remuneration-in-kind up to only 15 per cent of the total wages is counted as part of wages.
OSH&WC Code— key clarifications
Scope of leave provisions
Leave-related provisions under the OSH&WC Code apply to workers, including sales promotion employees and working journalists. Supervisory employees are also covered, but only where their wages do not exceed Rs 18,000 per month. Managerial staff drawing wages above that threshold, and employees at corporate offices not classified as workers, are excluded from the leave provisions of the Code.
The FAQ specifically addresses the position of Relationship Managers and salespersons: Those drawing wages above Rs 18,000 per month are not entitled to leave encashment under the Code. Sales promotion employees, however, fall within the definition of “worker” under Section 2(1)(zzl), OSH&WC Code and are accordingly entitled.
Leave carry forward and accumulation
A worker may carry forward up to 30 days of leave to the succeeding calendar year. However, where a worker has applied for leave with wages, and the same has been refused by the employer, such refused leave may be carried forward without any limit. Where a State law (such as the Andhra Pradesh law permitting 60 days of carry forward) is more favourable to the worker, the worker is entitled to the benefit of the State law to that extent. However, where there is inconsistency, the Code prevails.
Leave encashment — no maximum cap
There is no prescribed maximum limit on the number of days that can be encashed under the OSH&WC Code. Leave exceeding 30 days — if applied for but not granted — may be encashed at the end of the calendar year. Upon separation from service, a worker is entitled to encash all accumulated leave to their credit.
Overtime threshold
Overtime under the OSH&WC Code becomes payable when a worker works for more than eight hours in any day, or more than 48 hours in any week. Overtime wages are payable at twice the normal rate of wages and must be paid at the end of each wage period. The FAQ clarifies that even where the appropriate government prescribes a maximum working day of 12 hours, overtime is computed from the eighth hour — not from the twelfth.
Crèche facility
The Ministry clarifies that the obligation to provide a crèche facility is not contingent upon any specific gender composition of the workforce. The benefit is available to all employees irrespective of gender.
Annual health check-ups — applicable rules
Where the age threshold for annual health check-ups differs between Central and State rules, the applicable rules are determined by the identity of the appropriate government for the establishment in question. For establishments where the Central Government is the appropriate government, Central rules apply. Where the State Government is the appropriate government, State rules govern.
Quick reference — summary of key clarifications
|
Subject |
Ministry’s position |
|
Overtime in 50 per cent wage floor rule |
Included — excess over 50 per cent is added back to wages |
|
Employer PF/pension in 50 per cent rule |
Included as per Section 2(y)(c) |
|
Gratuity, ESI in 50 per cent rule |
Excluded from total remuneration computation |
|
Annual performance incentives |
Not part of “wages” under the Labour Codes |
|
Overtime eligibility |
All employees whose minimum wage is fixed under the Wages Code |
|
Effective date of “wages” definition |
21 November 2025 |
|
Gratuity — effective date |
Prospective from 21 November 2025; payment of gratuity (PGA) 1972 for prior service |
|
FTE — gratuity eligibility |
On completion of one year of contract service |
|
Gratuity liability for contract labour |
Contractor (employer), not principal employer |
|
ESI wage threshold |
Rs 21,000/month (pending revision of rules) |
|
Gig worker contributions |
To be notified by the Central Government, States cannot levy cess |
|
Leave carry forward (workers) |
Up to 30 days; unlimited for refused leave |
|
Leave encashment cap |
No prescribed maximum |
|
Overtime threshold (OSH&WC Code) |
Beyond eight hours/day or 48 hours/week, at double normal rate |
|
Crèche facility |
Available irrespective of gender composition |
|
Sales promotion employees |
Classified as “workers”; entitled to leave encashment |
Concluding observations
The FAQs dated 16 March 2026 represent a significant administrative effort to resolve interpretive ambiguities that have emerged in the initial months of the Labour Codes’ enforcement. Several observations merit note:
1. Further clarification on the composition of wages under the Wages Code, and the composition of remuneration-in-kind provides lucidity on calculation of wages.
2. The confirmation that overtime allowance is included within the 50 per cent wage floor computation has immediate payroll implications for industries with significant overtime liability. Employers should audit their CTC structures accordingly.
3. The prospective application of the revised gratuity framework from 21 November 2025 — with the last-drawn wage under the new definition governing the overall quantum — creates a transitional hybrid computation that requires careful actuarial attention.
4. The restriction of leave and leave encashment entitlements to “workers” (with a wage cap for supervisors) introduces a two-tier employee classification that employers must operationalise in their HR policies.
5. The centralisation of gig/platform worker contributions at the federal level, to the exclusion of State levies, provides a degree of regulatory uniformity for aggregator-driven platforms operating across multiple States.
It bears emphasis that these FAQs are expressly stated to be for informational purposes only and do not constitute legally binding instruments. In any conflict between the FAQs and the text of the relevant Labour Code, the latter prevails. Practitioners are accordingly advised to verify their conclusions against the applicable Code provisions and the subordinate rules notified by the Central and State Governments.
*Managing Partner, Shivpuri Law Chambers. Author can be reached at: ashivpuri@shivpurilawchambers.com.
1. The FAQs analysed in the article are issued by the Ministry of Labour and Employment and are themselves expressly stated to be non-binding in character.
