With the implementation of India’s four new Labour Codes from November 21, 2025, the Institute of Chartered Accountants of India (ICAI) has issued an extensive guidance note outlining the audit implications of the revamped labour law framework, underscoring the far-reaching financial, compliance, and disclosure consequences for businesses across sectors.
The publication, titled “Guidance on New Labour Codes”, has been brought out by the Auditing and Assurance Standards Board (AASB) of ICAI to assist auditors in navigating the significant changes arising from the consolidation of 29 central labour laws into four comprehensive Codes—a move described as one of the most transformative labour reforms in independent India.
The four Labour Codes now operational are Code on Wages, 2019; Industrial Relations Code, 2020; Code on Social Security, 2020; and Occupational Safety, Health and Working Conditions Code, 2020.
These Codes aim to simplify compliance, enhance worker welfare, and promote ease of doing business by replacing a fragmented and often overlapping legal regime with a unified framework.
Although the Codes are effective from November 21, 2025, the supporting rules are yet to be fully notified, with only Gujarat and Arunachal Pradesh having issued final rules under all four Codes so far. Until fresh rules are notified, existing rules under the repealed laws will continue to apply to the extent they are not inconsistent with the Codes.
Expanded Definition of “Wages” and Wider Coverage
A key highlight of the reforms—and a major audit challenge—lies in the expanded definition of “wages”, which now limits exclusions such as allowances, bonuses, and house rent allowance to 50% of total remuneration, with excess amounts deemed wages for statutory purposes. Additionally, remuneration in kind up to 15% is also included in wages.
This redefinition has a cascading impact on provident fund and ESI contributions; gratuity and retrenchment compensation; leave encashment and notice pay; and actuarial valuations and employee benefit liabilities.
Further, the Codes broaden the scope of coverage by extending statutory protections to managerial, supervisory, fixed-term, gig, and platform workers, significantly expanding the employee base subject to labour law compliance.
ICAI’s guidance emphasises that labour laws fall squarely within the category of statutes having a direct effect on financial statements, bringing them within the scope of Standard on Auditing (SA) 250. Auditors are therefore required to obtain sufficient and appropriate audit evidence regarding compliance with the new Labour Codes.
The guidance highlights critical audit focus areas including:
- Payroll expenses and wage restructuring
- Statutory dues and social security contributions
- Employee benefit obligations such as gratuity and maternity benefits
- Recognition, measurement, and disclosure of liabilities
- Adequacy of management judgments and estimates
Auditors are also advised to scrutinise whether management has correctly identified affected employee categories, updated payroll systems, revised HR policies, and assessed transition-related financial impacts.
Gratuity, Fixed-Term Employment, and Gig Workers
Under the Code on Social Security, gratuity continues largely on existing principles but is now required to be calculated on the revised definition of wages. Significantly, fixed-term employees become eligible for gratuity after one year of service, compared to five years earlier for permanent employees.
The Code also formally recognises gig and platform workers, empowering the Central Government to establish a Gig and Platform Workers’ Social Security Fund, with aggregators required to contribute between 1% and 2% of turnover, subject to caps.
Enhanced Penalties, Limited Imprisonment
While the thrust of the Labour Codes is on compliance facilitation, the guidance notes that penalties have been significantly enhanced, though imprisonment is reserved for serious violations. The Codes also permit compounding of certain offences, reflecting a shift toward corrective rather than punitive enforcement.
Audit Reporting and Governance Communication
ICAI cautions that non-compliance with the Labour Codes can result in modified audit opinions, including qualified, adverse, or disclaimer opinions, depending on materiality and pervasiveness. Auditors are required to communicate significant issues to those charged with governance and ensure robust documentation of professional judgments.
A Critical Transition Phase
ICAI President CA Charanjot Singh Nanda, in the foreword to the publication, described the guidance as a timely resource to help auditors address the “substantial changes” brought about by the new Labour Codes. The Institute expressed confidence that the document would assist members in managing compliance risks during this crucial transition phase.
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