Labour Codes: India Inc working on strategies to comply with new employee benefits norms

Although several major IT companies were responsible for the impact of labor laws on Q3 results, many others are still working on salary restructuring plans and adjusting to the evaluation cycle.

Almost all companies will face a one-time hit, which may be evident in the coming quarters, but many are waiting for the rules to be notified to make changes.

Top IT companies, including TCS, HCLTech and Infosys, made one-time provisions for employee benefits due to new labor laws in their third-quarter results. Global brokerage Jefferies said in a note that the rules could increase margin pressure on IT companies, adding that these would not be one-time changes. It also warned that the changes could affect the profits of these companies by up to 10-20% in the third quarter of the fiscal year. Recurring employee expenses can increase by up to 5%.

At the heart of the changes to the wage bill are revised bonus provisions, which kick in for employees on fixed-term contracts after they receive one month’s salary, as well as a new definition of wages, which will represent 50% of an employee’s total cost to the company. It also includes enhanced vacation benefits.

Understandably, most other employers are waiting for the rules to be clarified. While the Ministry of Labor and Employment has issued FAQs on various provisions of labor laws, the rules for several provisions are still being finalized. They will likely be notified from 1 April 2026, linking to the new financial year when most companies will implement salary reviews.

Sandeep Jhunjhunwala, partner at Nangia Global, noted that the third-quarter results announced so far that explicitly take into account the financial impacts of the new labor laws have been largely limited to IT services companies in India, making them the first corporate sector to measure this impact. “Overall, the evidence suggests that the impact of employment law is primarily a matter of accounting timing and earnings optics rather than structural pressure on operating margins, with other sectors likely to see similar spillover effects as implementation progresses,” he said.

Although the adjustment was only disclosed in absolute terms and was consistently described as an exceptional provision, the implied analysis suggests a relatively modest impact of about 0.3% to 3% on quarterly revenues, along with a materially higher impact of about 7% to 20% on quarterly profits, varying depending on the size of the company. He also said the impact was largely front-loaded through bonus allocations, leave encashments, and recalibration of employee benefits, which temporarily distorted reported quarterly margins, while mitigating the risk of an ongoing impact on profitability.

From an income tax perspective, the advance recognition of these provisions increased the current tax liability in the year of recognition while simultaneously giving rise to a deferred tax asset, reflecting the timing difference between accounting recognition and income tax deduction.

Arjun Paleri, partner at BTG Advaya, said there are three ways companies are considering compliance with labor laws; Especially during the third quarter of the fiscal year. The first approach is to wait and watch, as the state and central rules are yet to come into force. The second approach involves partial implementation of the rules through restructuring wages and salary components, with the aim of implementing these changes in the first quarter of fiscal year 2027 when the next assessment cycle comes into force and implementation. “On a financial level, these companies are making provisions for potential higher expenses or outflow of legal benefits, but they have not yet implemented the changes,” he said.

The third approach is where companies immediately comply with labor laws, except for the Employee Provident Fund requirements which have not yet come into force. He also explained that there are many IT companies that use the third approach, and on the financial level, these companies make provisions for increased expenses or the flow of legal benefits abroad.