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Preparation of Business Under New Labour Code for Payroll
The New Labour Codes have been in effect since November 2025, but many Mumbai businesses are still operating with incomplete understanding and partial implementation. If you haven’t fully prepared your payroll systems for 2026, you’re sitting on a ticking time bomb of compliance risks.
The truth is this: Payroll isn’t just about paying employees anymore. Under the New Labour Codes, every salary component, every deduction, every filing carries legal implications. Get it wrong, and you’re looking at penalties ranging from ₹5,000 to ₹3 lakhs, plus interest charges, recovery proceedings, and potential imprisonment for serious violations.
But here’s the good news: Preparing your payroll properly for 2026 isn’t complicated if you break it down into manageable steps. This comprehensive guide walks you through exactly what you need to do between now and December 2025 to ensure your business is bulletproof against compliance issues.
Step 1: Assess Your Current Payroll Against New Code Requirements
Before making any changes, you need to understand where you stand today.
Conduct a Complete Payroll Audit
Pull up your current payroll structure for all employees. Look at:
- How many salary components does each employee have?
- What percentage is basic pay vs. allowances?
- Are you maintaining all prescribed registers (wage register, muster roll, leave register)?
- How are you currently calculating PF, ESI, and gratuity?
- What's your current process for statutory filings?
Identify the Gaps
Compare your current practices against the New Labour Code requirements:
Salary Structure Compliance: Under the Code on Wages and Code on Social Security, basic pay plus dearness allowance must equal at least 50% of total remuneration. If your current structures have basic at 30-35%, you're non-compliant. Document exactly how much restructuring each employee needs.
Statutory Registration: Check if you're registered under PF (mandatory if 20+ employees), ESI (mandatory if 10+ employees), Professional Tax (mandatory for all employers with employees), and TDS (mandatory if salary > ₹50,000/annum for any employee).
Digital Compliance: Are you using digital registers or still maintaining physical ones? Are you filing returns electronically? The codes mandate digital compliance through unified portals.
Record Maintenance: Do you maintain wage registers showing daily/monthly wages with breakup, muster rolls showing attendance, leave registers, maternity benefit registers if applicable? Missing registers are direct violations.
Documentation Quality: Can you produce payslips for every employee for every month? Can you show proof of statutory deposit payments for the past 12 months? Can you demonstrate that you've maintained employee records with Aadhaar linkage?
This audit typically reveals 3-5 major gaps that need fixing before 2026.
Step 2: Plan and Execute Salary Restructuring
This is the single most important preparation task, and it needs careful planning.
Understand the Impact
The 50% basic rule sounds simple, but implementing it requires understanding the ripple effects:
When you increase basic pay, several things change:
- PF contribution base increases (though capped at ₹15,000)
- Gratuity calculation increases (15 days' wages per year after 5 years)
- Overtime rates increase (calculated on basic pay)
- Leave encashment values increase
Example: An employee earning ₹60,000 CTC with current structure (Basic ₹20,000, HRA ₹24,000, Special ₹16,000) needs restructuring to (Basic ₹32,000, HRA ₹18,000, Special ₹10,000). While gross remains same, gratuity liability increases significantly over time.
Get Legal Approval
Board resolution or management approval must be obtained for salary restructuring. This becomes important if disputes arise later.
Communicate Transparently
Many employees worry salary restructuring means reduced take-home. Be clear:
- Gross salary remains the same
- Take-home may change slightly due to tax implications (explain this)
- Benefits (PF, gratuity) actually increase
- This is mandatory legal compliance, not company decision
Update Employment Documents
For all restructured salaries, issue:
- Revised offer letters or salary amendments
- Updated employment contracts
- New payslips showing restructured components
New Labour Code
Step 3: Set Up Digital Payroll Infrastructure
The codes mandate digital-first compliance. Paper-based systems are no longer acceptable.
Choose the Right Payroll Software
Invest in payroll management software that:
- Automatically calculates PF, ESI, Professional Tax based on new structures
- Generates compliant payslips with all required details
- Maintains digital registers (wage register, muster roll, leave register)
- Integrates with EPFO, ESIC, and state PT portals for filing
- Tracks compliance deadlines with reminders
- Provides real-time reporting and analytics
Register on All Government Portals
Even before switching to new software, ensure you have:
- EPFO Unified Portal account with establishment code
- ESIC Portal registration (if applicable)
- State Professional Tax portal registration (MAITRI for Maharashtra)
- Income Tax TAN registration
- Digital signature certificate for authorized signatories
Set Up Bank Integration
Enable online transfer capabilities for:
- Salary payment (bulk transfer to employee accounts)
- Statutory deposit payments (PF, ESI, PT, TDS to government)
- Loan repayments and other deductions
Step 4: Build Compliance Infrastructure
Compliance under the New Labour Codes requires systematic processes, not ad-hoc responses.
Designate Compliance Owner
Appoint one responsible person (or small team if you have 100+ employees) whose role includes:
- Tracking all compliance deadlines
- Filing all statutory returns on time
- Maintaining registers and records
- Responding to government notices
- Conducting internal audits
- Reporting compliance status to management
This person needs training and authority to act.
Create Compliance Calendar
Build a detailed calendar showing:
- Monthly deadlines: 7th (TDS), 15th (PF), month-end (PT)
- Quarterly deadlines: Form 24Q, ESI returns
- Annual deadlines: Forms 3A/5/6A (April 30), Form 16 (June 15)
- Internal deadlines: 5th (attendance submission), 10th (payroll processing)
Use digital tools (Google Calendar, Excel, or built-in software reminders) so nothing slips.
Set Up File Management System
Organize all compliance documents:
- Separate folders for each year
- Subfolders for each month showing payroll, statutory filings, payment proofs
- Employee files with contracts, declarations, identification documents
- Statutory registration certificates and licenses
- Inspection reports and correspondence
Digital filing with regular backups is essential—physical papers get lost.
Step 5: Train Your HR Team
Your team is your compliance engine. Invest in their knowledge.
Conduct New Labour Code Training
Organize sessions covering:
- Overview of four new codes and key changes
- Salary structure compliance (50% basic rule)
- Payroll calculation under new codes
- Statutory filing requirements and deadlines
- Registers to maintain and record-keeping requirements
- Common violations and penalties
- How to use the new payroll software
Budget 6-8 hours of training time.
Cross-Train Backup Person
Never have only one person who knows how to file ECR or process payroll. Train at least one backup person so you're not dependent on any single individual.
Create Knowledge Documents
Document everything:
- FAQ sheet addressing common questions
- Quick reference guides for calculations
- Screenshots of portal login and filing processes
- Contact list for government offices and consultants
Ongoing Updates
The codes are still evolving with circulars and amendments. Subscribe to government notifications and brief your team quarterly on changes.
Step 6: Prepare Documentation for Audits
The codes grant labour inspectors broader powers to inspect and audit. Be ready.
Organize Documents Chronologically
For each month of the past year:
- Payroll register showing all employees and calculations
- Payslips for every employee
- Statutory return copies (PF, ESI, PT, TDS)
- Payment proof (bank statements, challan receipts)
- Attendance records/muster roll
- Leave records
Create Summary Reports
Prepare summary documents showing:
- Total employees at month start/end
- Total wages paid
- Total statutory contributions
- Employee-wise details for major categories
Maintain Compliance Certificates
Keep copies of:
- PF registration and annual confirmations
- ESI registration (if applicable)
- PT registration
- Any licenses or certifications required for your industry
Document Compliance Efforts
If you find minor gaps, fix them immediately and document the correction:
- What was the gap?
- When was it identified?
- What corrective action was taken?
- When was it corrected?
This demonstrates good faith compliance efforts.
Step 7: Conduct Internal Compliance Audit
Before 2026 officially begins, audit yourself as a government inspector would.
Monthly Payroll Audit:
- Are all employees recorded in payroll?
- Are salary structures compliant with 50% basic rule?
- Are statutory deductions correct?
- Are payslips issued to all employees?
- Are registers being maintained?
Statutory Filing Audit:
- Were all returns filed by deadlines?
- Were all payments deposited on time?
- Do filed details match with payroll records?
- Are payment receipts properly organized?
Registration Audit:
- Is PF registration current and valid?
- Is ESI registration (if applicable) current?
- Are employee UAN numbers valid and linked with Aadhaar?
- Are all new employees registered within prescribed timelines?
Record Maintenance Audit:
- Are all prescribed registers being maintained?
- Are employee files complete with required documents?
- Are records easily accessible if needed for inspection?
- Are digital backups being taken regularly?
Fix any identified gaps immediately.
Step 8: Implement Contractor Management (If Applicable)
If you use contractors for any services, the new Code on Social Security makes you jointly liable for their statutory compliance.
Verify Contractor Credentials
Before engaging or continuing with any contractor:
- Check their Contract Labour Act license (must be valid)
- Verify EPFO registration
- Verify ESI registration
- Get bank details for verification
- Get references from existing clients
Get Proper Agreements
Ensure every contractor agreement includes:
- Compliance warranty (they're registered under all laws)
- Requirement to submit monthly proof of statutory deposits
- Indemnity clause (they indemnify you against compliance failures)
- Right to audit their records
- Bank guarantee for security
Monitor Monthly
Don't just assume the contractor is compliant. Every month:
- Request proof of PF deposit (challan receipt)
- Request proof of ESI deposit (if applicable)
- Maintain a compliance register of all proofs received
- Flag immediately if any deadline is missed
Step 9: Plan for 2026 Payroll Calendar
Map out your entire 2026 payroll calendar now:
January 2026: Full year payroll setup with restructured salaries, TDS planning based on previous year, training of team on any changes
February-March: Focus on on-time filing of all pending returns from FY 2024-25, Form 16 generation and issuance, employee grievance resolution
April 2026: Annual return filing (Forms 3A, 5, 6A by April 30), gratuity calculations, salary advance if needed, new FY salary reviews
May onwards: Monthly compliance in full rhythm, regular internal audits, correction filings if needed, preparation for potential inspections
Preparation of Business under New Labour Code - Professional Support
Preparing your payroll systems isn't something you should do alone, especially if you have 20+ employees. The financial and legal risks are too high.
Why Professional Help Matters:
A specialized payroll consultant can:
- Audit your current payroll and identify gaps
- Plan and execute salary restructuring with minimal disruption
- Set up compliant systems and processes
- Train your team
- Manage statutory filings so you never miss deadlines
- Represent you in case of notices or audits
- Keep you updated on law changes
Compare this to the cost of non-compliance
- Single penalty: ₹5,000-₹1,00,000+
- Accumulated interest on delayed payments: 12% per annum
- Employee disputes and back-wage claims
- Reputational damage
One missed deadline often costs more than hiring professional support for a year.
Don't wait until you receive a notice to get your payroll in order. Let us prepare your business for 2026 compliance excellence.