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The implementation of the four new Labour Codes, seen as the biggest revamp of India’s labour laws in decades, is expected to ease the compliance burden for the country’s Micro, Small, and Medium Enterprises (MSMEs), something that these smaller businesses had been calling for years. And while expanded social security net, safety mandates, and greater digitisation of human resource management dictated by the Codes could push up employee costs, industry representatives are of the view that not only would these costs pale in comparison to the reduced compliance burden, but that they would benefit the sector in the long run.
“For MSMEs, the new Labour Codes answer our long-standing demands to ease compliance issues,” said India SME Forum President Vinod Kumar. According to Kumar, with compliance becoming structurally simpler and more uniform and wage, social security, and safety obligations becoming stronger and more enforceable, well-run MSMEs that already follow most core laws will get a level playing field and less regulatory ambiguity. Further, while highly informal units will face a sharp adjustment with higher unit labour costs, they will also benefit from potentially lower legal and reputational risk over time.
The Parliament had cleared the Code on Wages in 2019 and the other three codes on industrial relations, social security, and occupational safety, health, and working conditions in 2020. The four codes will replace 29 Central labour laws and are aimed at widening the social security net for all workers, including those who work for companies such as Zomato, Swiggy, and Amazon, among others, as the codes define gig and platform work and aggregators for the first time.
In addition to Aadhaar-linked Universal Account Numbers making welfare benefits easily accessible and available across states, regardless of migration, the codes will also define a National Floor Wage and mandate timely wage payments.
The government is likely to pre-publish draft rules for the labour codes within a week, after which it will provide 45 days for public comments. Some of the provisions of the codes that relate to the industry may come into effect from April 1, 2026.
Some MSME sector insiders and representatives feel that payroll costs are set to rise on account of the broader and better-defined social security net, guaranteed minimum wages, specified working hours, double overtime pay, and paid leave. According to Association of Indian Entrepreneurs (AIE) – which acknowledged the Codes are a major reform – the likely increase in operational costs for MSMEs is a concern and more clarity, transitional support, and flexible implementation mechanisms from the government is needed.
“These costs come at a time when MSMEs are already battling high inflation, rising capital costs, and market uncertainties,” the AIE said in a statement on Saturday. “The complexities of these rules may not be manageable for micro and small units who lack dedicated HR or legal teams,” said AIE National Chairman KE Raghunathan. The AIE emphasised that MSMEs “must not be overwhelmed by sudden regulatory shock” and the Codes’ implementation must be MSME-sensitive as otherwise, “the reforms could unintentionally slow down job creation and discourage new entrepreneurs”.
However, others feel the rise in costs may not be that high. According to Suchita Dutta, Executive Director of Indian Staffing Federation, while there might be a 5-7 per cent increase in costs in the short-term, the long-term benefits from reduced compliance will be far more.
“Today, the underhand deals on the compliance front – you won’t even be able to estimate how many millions (of rupees) are flowing out of such companies just to show themselves as compliant,” Dutta said. “Compliance is a big headache. It may be an indirect cost for many; only for a handful it shows as a direct cost. But the court cases, legal notices, delays, penalties that have to be paid – these run into multiples of crores.”
“The good part is that licenses have been reduced. The amount of ease that will come because of that and the compliance burdens that will reduce, that will offset the increase in the visible cost. The costs of non-compliance are at least 5x more than what you’re going to be paying right now (under new labour codes). If you are non-compliant on ESIC or you are not giving minimum wages and have more than 20 people, or you are doing casual employment, it won’t go unchecked for a long time,” Dutta added.
According to the government, provisions relating to contract labour will now apply to contractors employing more than 50 workers, up from 20 before. As such, a contractor employing less than 50 contract staff will not require a license. This, the government said in a statement on Saturday, will free small contractors “from excessive regulation” and encourage small business growth.
The long-term benefits also include greater formalisation for a sector that employs the highest number of Indians after agriculture, with improved social security and paid leave, among other changes, having the potential to mitigate the high-attrition rate MSMEs usually grapple with. According to India SME Forum’s Kumar, mandatory appointment letters and clear rules on timely payment of wages are expected to push MSMEs to move workers onto proper rolls, maintain clean muster and payroll records, and upgrade payroll software.
“Thresholds and rules around contract labour, retrenchment, and fixed‑term renewal are now more clearly defined, which can reduce future disputes and enables MSMEs to formalise arrangements that were earlier informal or semi-compliant,” Kumar added.
Dutta of Indian Staffing Federation also noted that the implementation of the labour codes should be seen in conjunction with the Pradhan Mantri Viksit Bharat Rozgar Yojana (PMVBRY), launched by Prime Minister Narendra Modi in his Independence Day speech.
“PMVBRY is saying EPFO will offer support if social security is a burden. If that support comes every six months, companies now have the motivation to do formal employment. That, in conjunction with the labour codes, is a positive move and it cannot be done in a highly staggered way; both of them coming together makes sense. This is where we need to educate people that the CTC (cost to company of employees) rising will not have an impact,” Dutta argued.
The consolidation of 29 central laws into the four Labour Codes, common definitions such as for ‘wages’, and digital filings, as per India SME Forum, will reduce fragmentation, duplication, and interpretational disputes for small businesses operating in several states. Further, the provision for single or fewer registrations and returns, standardised formats, and an ‘inspector-cum-facilitator’ approach should lower transaction costs while making it easier for MSMEs to understand requirements.
Chandrakant Salunkhe, who heads SME Chamber of India, termed the Labour Codes as “industry and MSME friendly” and a much-needed measure from the government. The codes’ implementation, he said, is expected to create a level-playing field, make MSMEs more formal and structured, and improve worker welfare. According to him, the government should now focus on supporting MSMEs through more assistance and rewards in a bid to enhance general productivity and high-value production.
“This sector in India converts unskilled labour into a skilled workforce. While the Labour Codes are a good and welcome initiative, the government should also consider providing more relief to small businesses through special tax rebates, tax holidays, wage support for workers, particularly those in rural and semi-urban areas, etc. Such measures would help SMEs grow and strengthen all over the country,” Salunkhe said.
The AIE, meanwhile, said “real compliance” with the Labour Codes will depend on state-level guidelines, which are still evolving. This could lead to “ambiguity in interpretation, inconsistent enforcement, and high risk of unintentional non-compliance”. In its statement, the AIE urged states to adopt a “facilitative, non-punitive approach” during the transition.
