Does the 300-worker retrenchment threshold count contract workers and fixed-term workers, or only permanent employees?

The Industrial Relations Code defines the threshold in terms of "workers." The term "worker" under the Code is broad and covers persons employed in a factory or industrial establishment directly or through a contractor. While the exact counting methodology will be settled by rules and judicial interpretation, the safer position is to count all workers on the premises whose work is for or in connection with the manufacturing process, including contractual workers engaged through contractors for regular production activities. Factories that treat only permanent employees in the threshold calculation risk a challenge. Legal advice on a factory-by-factory basis is strongly recommended where the headcount is near 300.

What is the difference between standing orders certification under the new Code and the old regime?

Under the Industrial Employment (Standing Orders) Act, 1946, every establishment with 100 or more workers required certified standing orders. The Industrial Relations Code raises this threshold to 300 workers. Factories with fewer than 300 workers no longer need to get standing orders certified; the model standing orders issued by the appropriate government apply automatically. Factories with 300 or more workers still need to submit draft standing orders for certification within six months of the Code becoming applicable. The model standing orders also now recognise fixed-term employment as a distinct worker category, which older certified standing orders will need to be amended to incorporate.

Can a factory still employ women on night shifts after the OSH Code, and what safeguards are mandatory?

Yes. The OSH Code removes the blanket prohibition on women working night shifts in factories. Women can now work night shifts in all establishments including those with hazardous processes, provided the employer: (1) obtains the written consent of the woman worker (night shifts cannot be imposed); (2) ensures adequate safety measures including CCTV in all common areas; (3) provides transportation from the factory gate to the worker's place of residence after the shift; (4) deploys adequate security personnel during night hours; and (5) displays a helpline number accessible to workers. States may notify additional safeguards. Factories that wish to extend night shift working to women should document each safeguard and retain consent forms for each worker.

How does the 50% wage rule under the Code on Wages affect overtime costs in a three-shift factory?

Overtime must be paid at twice the "ordinary rate of wages." Under the Code on Wages, the ordinary rate of wages is computed on the expanded wage definition, which includes basic pay plus all allowances other than those specifically excluded (HRA, overtime allowance, bonus, gratuity, and certain reimbursements). In a factory where basic pay is currently 30% of CTC, the ordinary wage for overtime may effectively double once it is recalculated on the code-compliant wage base. For a factory running two shifts with 100 workers each earning 8 hours of overtime per week, the aggregate overtime cost increase can be substantial. The impact should be modelled before standing orders and employment contracts are updated to the new regime.

What are a factory's obligations when employing inter-state migrant workers from another state?

Under the OSH Code (which subsumes the Inter-State Migrant Workmen Act, 1979), a factory employing workers recruited from another state through a contractor must: (1) pay a displacement allowance equal to 50% of monthly wages at the time the worker is displaced from home; (2) arrange and pay for the outward journey to the factory and return journey home at the end of engagement; (3) pay equal wages for the same work as local workers, with no discount permitted for migrant labour; (4) maintain a register of all inter-state migrant workers with name, home address, home state, nature of work, and wages; and (5) facilitate portability of ration cards and Aadhaar-linked benefits across states. Both the contractor and the principal employer (factory) share these obligations; if the contractor fails to comply, the factory is liable.

The factory has a recognised trade union. How does the negotiating union framework change collective bargaining?

The Industrial Relations Code introduces structured rules for which union gets to negotiate with the employer. If a single trade union has 51% or more of the factory's workers as members (verified by the Industrial Tribunal or a designated authority), that union is recognised as the sole negotiating union, and the employer must negotiate only with it on collective matters. Where no single union crosses 51%, all unions with at least 20% membership form a proportionally representative negotiating council. An employer that negotiates with a union that does not hold the requisite verified membership, or refuses to negotiate with the verified negotiating union, commits an unfair labour practice. Factories should initiate the membership verification process proactively rather than waiting for a disputed claim to arise.

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Manufacturing & Factories

Labour Code Compliance for Industrial Establishments

Industry Guide18 min readLast updated: February 2026

17.4%

Manufacturing's share of India's GDP (2023–24)

6.25 crore+

Workers employed in registered factories across India

300

Worker threshold for retrenchment govt. permission (up from 100)

48 hrs

Maximum statutory working week; OT paid at 2x ordinary rate

Overview

Manufacturing is the sector most directly transformed by India's 4 Labour Codes. The industry historically operated under a dense web of separate statutes (the Factories Act, Industrial Disputes Act, Standing Orders Act, Contract Labour Act, and Inter-State Migrant Workmen Act), each with overlapping jurisdictions and inconsistent thresholds. The new Codes consolidate and reform these into a unified framework that simultaneously relaxes certain compliance burdens (particularly for mid-sized factories below 300 workers) and tightens others (safety obligations, overtime wage calculation, and full and final settlement timelines).

The most consequential change for the sector is the increase in the retrenchment, layoff, and closure permission threshold from 100 to 300 workers under the Industrial Relations Code, 2020. Factories employing fewer than 300 workers, which represents the large majority of India's registered factories, can now execute workforce adjustments without prior government approval, provided notice, compensation, and documentation requirements are met. This significantly improves operational flexibility for small and medium manufacturers, though it also places a heavier burden on employers to self-administer these processes lawfully.

Factory safety obligations under the OSH Code, 2020 are comprehensive: Safety Committees are now mandatory at 250 workers (previously 500 under the Factories Act), occupational health centres become mandatory at 500 workers, and hazardous process employers face enhanced disclosure and monitoring duties. The Code on Wages, 2019 recasts overtime calculation on the expanded wage base, materially increasing overtime costs in factories that have traditionally kept basic pay low. The Social Security Code, 2020 extends ESIC and EPFO coverage thresholds and introduces new obligations for contract labour welfare. All four Codes together demand that manufacturing HR and compliance functions be fundamentally upgraded. Piecemeal approaches to a single statute are no longer adequate.

Code on Wages, 2019

Expanded wage definition: allowances cannot in aggregate exceed 50% of total CTC, forcing manufacturers to restructure salary components across the shop floor.
Overtime must be paid at twice the "ordinary rate of wages," now calculated on the higher, code-compliant wage base, not just basic pay. For factories running 2–3 shifts, this is a material cost increase.
Floor wage concept: Central Government notifies a national floor wage below which no state minimum wage may be set, providing a universal wage baseline across manufacturing states.
Payment timelines tightened: wages must be credited by the 7th of the following month (daily/weekly/fortnightly/monthly as applicable); factories that paid by the 10th under the Payment of Wages Act must update payroll calendars.
Full and final settlement dues (under OSH Code, s.32) must be settled within 2 working days of separation; payroll systems must be capable of computing F&F instantly.
Deductions from wages strictly limited; factory canteen subsidies, housing deductions, and advance recoveries must each be individually authorised in the prescribed form.

The wage code compresses manufacturing payroll structures: the 50% rule pushes basic pay upward, making PF, gratuity, and especially overtime considerably more expensive. Factories with large blue-collar workforces and existing shift-based overtime should model the cost impact before the Code is notified in their state.

Overtime costs in factories can rise 20–40% once calculated on the code-compliant wage base rather than a reduced basic pay. Run a shift-by-shift wage modelling exercise before the Code is operationalised.

Industrial Relations Code, 2020

Retrenchment, layoff, and closure threshold raised from 100 to 300 workers: factories below this size no longer need prior government permission, but must comply precisely with notice, compensation, and documentation requirements.
Standing orders certification threshold raised from 100 to 300 workers: factories below 300 are now governed by model standing orders issued by the appropriate government, eliminating the need for a separate certification process.
Fixed-term employment (FTE) receives statutory recognition: FTE workers must receive equal wages, allowances, and benefits as permanent workers, with pro-rata gratuity entitlement after just one year.
Strike notice period extended from 14 to 60 days for all industrial establishments (not just public utilities): factories gain substantially more advance notice of planned industrial action.
Negotiating union framework: where a single union has 51%+ membership it becomes the sole negotiating union; below 51%, a negotiating council is formed from unions with 20%+ membership each.
Grievance Redressal Committee mandatory for factories employing 20 or more workers, with a 30-day resolution timeline for individual grievances.
Unfair labour practices by employers (including retaliating against union members, mass transfers near union elections, employing contract workers in permanently-manned positions to break a strike) carry enhanced penalties.

The IR Code gives factories with fewer than 300 workers genuine operational flexibility in workforce adjustment. However, it demands that this flexibility be exercised with process discipline: paperwork, timelines, and compensation payments must be impeccable or the factory faces unfair dismissal and industrial dispute liability.

The retrenchment threshold increase is not a licence for arbitrary dismissals: it removes the government permission step only. Notice, retrenchment compensation, and LIFO compliance remain legally mandatory. KSK recommends a documented retrenchment SOP for every factory above 50 workers.

Code on Social Security, 2020

ESIC coverage extends to establishments employing 10 or more workers in all states and sectors (previously excluded certain industries); factories that were exempt must now register and contribute.
EPFO applicability threshold remains at 20 workers, but the definition of "wages" for PF contribution aligns with the Code on Wages, and the 50% rule directly increases PF-applicable wage bases.
Gratuity ceiling raised: the Code on Social Security enhances and standardises gratuity, and FTE workers accrue gratuity proportionately from the first year of service, creating a new annual liability for factories using fixed-term labour.
Contract workers' social security: where a contractor fails to make PF/ESIC contributions, the principal employer (the factory) remains primarily liable and must deduct and remit on the contractor's behalf.
BOCW cess continues: factories undertaking construction activity on their premises must pay the building and construction workers' welfare cess (1–2% of construction cost) and ensure contractor workers engaged in construction are registered with the relevant state welfare board.
National Social Security Board extended coverage: unorganised workers, including informal piece-rate workers who supply labour directly, fall within the social security framework for the first time.
Maternity benefit: applies to factories engaging women workers; 26 weeks' paid maternity leave for the first two children; crèche compulsory at 50+ workers.

Social security costs increase for manufacturers on two axes: higher PF-applicable wages (50% rule) and the extension of gratuity liability to FTE workers from year one. Factories using extensive contract labour must audit contractor social security compliance to avoid principal employer liability.

Include social security compliance audits as part of every contract labour vendor empanelment process. Inspect PF/ESIC challan copies quarterly. Your factory bears the residual liability if the contractor defaults.

OSH Code, 2020

Safety Committee mandatory at 250 workers (down from 500 under the Factories Act) with representation from both management and workers; must meet at least once a quarter and maintain minutes.
Occupational health centre with qualified medical officer mandatory at 500 workers; pre-employment and annual health examinations mandatory for all workers in hazardous processes.
Women's night shift now permitted in all factories, including those running hazardous processes, subject to employer-provided safeguards: adequate lighting, CCTV, transportation to residence, and written consent of the woman worker.
Inter-state migrant workers employed in factories are entitled to: displacement allowance (50% of monthly wages), journey allowance (outward and return), equal wages as local workers for same work, and portability of ration card and Aadhaar-linked benefits.
Unified registration replaces separate registrations under the Factories Act, Contract Labour Act, and Inter-State Migrant Workmen Act; all through the Shram Suvidha Portal.
Maximum working day: 8 hours; spread-over (start to finish including intervals): 12 hours; weekly limit: 48 hours; no worker may be permitted to work beyond these limits without specific statutory authorisation.
Full and final settlement must be completed within 2 working days of the last working day; employers without automated payroll systems for F&F computation will be systemically non-compliant.
Hazardous process factories must notify the Chief Inspector, display maximum permissible exposure limits for chemicals, and provide workers with written information on hazards and emergency procedures.
Contractors supplying 50+ workers to a factory must obtain a licence under the OSH Code; factory (principal employer) must register if it engages 50+ contract workers.

The OSH Code is the operational heartbeat of factory compliance. Every factory must undertake a gap assessment against the new thresholds: Safety Committees, occupational health centres, migrant worker entitlements, and women's night shift infrastructure are four areas where the majority of Indian factories will find immediate non-compliance.

Safety violations under the OSH Code carry fines up to INR 2,00,000 per offence; accidents resulting in death can attract imprisonment up to 2 years and fines up to INR 5,00,000. Safety Committee non-constitution is among the most commonly cited deficiencies in factory inspections.

Compliance Checklist

Conduct a headcount audit to determine whether the factory falls above or below the 300-worker retrenchment/standing orders threshold; document current workforce composition (permanent, FTE, contract, apprentice, migrant).

highIndustrial Relations Code

Model the impact of the Code on Wages 50% rule on the existing salary structure across all worker categories; quantify the increase in PF, gratuity, and overtime cost before the state notifies the Codes.

highCode on Wages

Constitute a Safety Committee if the factory employs 250 or more workers; ensure equal management-worker representation, quarterly meeting schedule, and a documented terms of reference.

highOSH Code

Register on the Shram Suvidha Portal under the unified OSH Code registration (replacing separate Factories Act, Contract Labour Act, and ISM Act registrations); update all display boards with new registration details.

highOSH Code

Audit all contract labour vendors for PF and ESIC compliance; collect and verify challan copies quarterly; ensure principal employer registration if 50+ contract workers are employed on the premises.

highSocial Security Code

Update standing orders (or verify applicability of model standing orders for factories below 300 workers) to include fixed-term employment category, grievance procedure, and night shift provisions for women workers.

mediumIndustrial Relations Code

Implement the inter-state migrant worker entitlement package: maintain a register of all migrant workers, compute and pay displacement allowance at engagement, arrange return journey allowance, and facilitate Aadhaar and ration card portability.

mediumOSH Code

Establish a written night shift policy for women workers specifying: consent mechanism, transportation arrangement (point-to-point), CCTV coverage of all common areas, security deployment, and an accessible helpline number displayed at the factory gate and canteen.

mediumOSH Code

Upgrade payroll systems to compute full and final settlement (salary arrears, earned leave encashment, pro-rata bonus, gratuity, notice pay) automatically and output within 2 working days of the last working day.

highCode on Wages

Constitute a Grievance Redressal Committee for the factory if 20 or more workers are employed; draft standing operating procedure with a 30-day resolution timeline and escalation path to the conciliation officer.

mediumIndustrial Relations Code

Common Pitfalls

Misreading the 300-Worker Threshold as a Clean Exemption

Risk

Factories that cross the 300-worker mark even temporarily (such as during peak production season with contractual hiring) may inadvertently trigger the prior government approval requirement for retrenchment. Counting methodology matters: the Code counts all workers including daily wage, fixed-term, and contract workers in some interpretations, not just permanent employees. An accidental overshoot followed by unilateral retrenchment without government permission can expose the factory to reinstatement orders, back-wages, and criminal proceedings.

Fix

Establish a headcount monitoring system that tracks total worker strength (permanent + FTE + contract) against the 300-worker threshold in real time. Do not rely on permanent-employee headcount alone. Where the factory operates near the threshold, seek legal advice before executing any retrenchment or implement a prior-permission process as a precaution regardless of threshold applicability.

Overtime Calculated on Old Wage Base After Code Notification

Risk

Many factories have historically maintained a low basic pay with high allowances to minimise PF contributions and overtime costs. Once the state notifies the Code on Wages, overtime must be paid at twice the "ordinary rate of wages," which, under the new definition, includes all remuneration excluding specific exclusions. If payroll systems are not updated, the factory will be systematically underpaying overtime, accumulating retroactive liability for every shift worked across the workforce, and facing inspection penalties.

Fix

Run a wage restructuring exercise before state notification. Calculate the minimum compliant basic pay under the 50% rule for each worker category, update the payroll system to compute overtime on the new wage base, and communicate changes to workers with a minimum 30 days' notice. Retain actuarial records of the restructuring date to defend against pre-notification claims.

Safety Committee Constituted but Non-Functional

Risk

Factories above the 250-worker threshold may constitute a Safety Committee on paper to satisfy inspectors but fail to hold quarterly meetings, maintain minutes, or act on safety recommendations. A factory accident that occurs after a Safety Committee was formed but where the Committee had not met in over six months, or had not reviewed a hazard that caused the accident, exposes management to significantly enhanced criminal liability, as the Committee's dormancy becomes evidence of wilful negligence.

Fix

Treat the Safety Committee as a governance body, not a compliance box-tick. Schedule four quarterly meetings at the start of each year; maintain signed minutes; track safety action items to closure; conduct annual internal safety audits with the Committee; and brief senior management on Committee findings. Ensure the Committee includes workers from hazardous process areas.

Contract Labour Used to Circumvent Retrenchment and Standing Orders Obligations

Risk

Using contract workers for permanently manned positions (to avoid them being counted toward the retrenchment threshold or the standing orders threshold) is explicitly listed as an unfair labour practice under the Second Schedule to the Industrial Relations Code. If a factory employs contract workers on a perennial basis for work that was being done by regular workers, the appropriate government can prohibit contract labour in that process and the workers can seek regularisation. Multiple Supreme Court precedents reinforce this principle.

Fix

Audit all contract labour deployment for whether the work is: (a) perennial in nature, (b) previously done by regular workers, or (c) not incidental or ancillary to the core manufacturing activity. Any "yes" to these questions indicates regularisation risk. Engage a labour law counsel to classify each deployment correctly and transition genuinely ancillary roles to properly structured contractor arrangements with clear work orders.

Migrant Worker Entitlements Overlooked in Multi-State Factories

Risk

Factories drawing migrant labour from states like Uttar Pradesh, Bihar, Jharkhand, Odisha, or West Bengal, as is common in Tamil Nadu, Gujarat, and Maharashtra manufacturing clusters, are exposed to retroactive migrant worker claims if displacement allowances have not been paid and journey allowances have not been provided. Under the OSH Code, equal wages for same work is mandatory, and discriminatory wage structures for migrant workers are an unfair labour practice.

Fix

Maintain a dedicated register of inter-state migrant workers identifying their home state. Compute and pay the displacement allowance (50% of monthly wages) at the point of engagement. Arrange and document return journey allowances. Verify that wages paid to migrant workers for the same job role are equal to those paid to local workers. Partner with state labour departments for ration card and Aadhaar portability facilitation.

Frequently Asked Questions

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