New labour codes a boost or blow to workers? Expert KE Raghunathan weighs in

India’s new labour codes promise major changes from simplifying compliance to redefining social security and workforce rules. But for MSMEs, which make up the bulk of India’s industrial ecosystem, the transition may not be straightforward.

The Federal spoke to KE Raghunathan, a leading voice of India’s MSME sector, to understand what these reforms actually mean for small and medium enterprises, and where the biggest concerns lie.

The government claims the new labour codes will give MSMEs more flexibility in hiring and workforce management. Will these reforms really make operations easier, or do they risk reducing job security for workers?

We have 29 labour-related laws that have been in place for nearly 50 years. Under those, an industrialist had to comply with 1,436 rules, file 31 returns, fill 181 forms, and maintain 84 registers. This was the earlier system.

A tripartite committee was created with representatives from state governments, employer associations, and trade unions. From 2015 to 2019, many discussions were held to reach a consensus. I was part of this committee, representing employers, during the creation of the new labour codes.

Any change brings mixed reactions. Some people welcome it, some are impacted. Some impacts are short term, some long term. For those who follow the law, changes may look genuine, but loopholes can be exploited by others, creating serious consequences.

Also Read: Kerala rejects Centre’s labour codes, reiterates it will not implement them

We are moving from vintage policies to modern working methods. The world has changed — work-from-home, remote work, gig work, and moonlighting did not exist earlier. Manufacturing has also evolved, with automation, process changes, and inventory control systems.

On one side, the government wants to bring in investments. On another, it must protect workers’ interests. And third, it has to ensure that whatever changes are introduced do not harm stakeholders. All three concerns were studied while framing these codes.

Parliament has enacted the codes, effective November 21. But they do not become operational until each state passes its own legislation. Corporates have welcomed the changes. Trade unions are calling them anti-worker. MSMEs are caught in the middle — they appreciate some changes, but must remain cautious about others.

The government says standardised rules will reduce cost and litigation. Will these labour codes actually reduce operational expenses for MSMEs, or will revised social security norms increase the financial burden?

India has about 6.25 crore MSMEs. Micro enterprises make up 92 per cent of this — businesses with turnover up to Rs 10 crore. Most of them employ only 10–15 people.

Many micro units are not covered under EPF or ESI. Hiring and firing happens based on seasons and orders. Workers come and go depending on business cycles. Concepts like minimum wage guarantees, appointment letters, or fixed commitments are often absent.

For these units, compliance becomes a challenge because they may not be highly educated, do not maintain HR policies, and cannot afford fixed monthly commitments. Their business model is not predictable.

Also Read: Will new labour codes bring transformative changes? Answer is not clear yet

Unlike corporates, micro and small enterprises start their operations only when they receive an order. Corporates plan quarterly, invest up front, and project their growth. MSMEs do not work that way. Their entire business cycle is based on credit, orders, and cash flow.

There will be short-term and long-term impacts. In the short term, people will find loopholes to escape compliance. In the long term, enterprises may hesitate to grow. Instead of moving from micro to small or small to medium, many may create multiple micro units to avoid compliance burdens.

Hiring practices will be affected. For example, a worker who completes one year becomes eligible for gratuity and benefits. So someone may be hired only for 11 months to avoid this obligation. Such loopholes defeat the government’s intention, which is to include everyone in the growth process — but it may end up excluding many.

The new codes push for greater documentation and digital records. Will this formalisation encourage MSMEs to expand, or will tighter inspections make them fear growth?

Take the Code on Wages. It mandates minimum wages fixed by the state. Many micro and small units may not be able to afford this because they operate on seasonal or variable-cost models.

The Industrial Relations Code does not apply to micro and small enterprises, so they need not worry about that.

Also Read: Simpler for business, tougher for workers: Tamil Nadu debates impact of new Labour Codes

But the Code on Social Security increases the basic pay, which increases EPF contributions and other costs. Our estimate shows the overall cost will rise. So it is not entirely favourable to employees either. For example, the retrenchment threshold has increased from 100 to 300 workers.

Again, loopholes will appear. If contractual periods get reduced to 11 months to avoid gratuity, how does that help employees?

India is a large and diverse country. One size cannot fit all. Business models vary by season, geography, and sector. That is why labour is a concurrent subject with states.

We must wait to see what states like Tamil Nadu finally implement. Trade unions have valid concerns. MSMEs also have valid concerns — they need handholding, training, onboarding time, and cost support.

Mindsets also need to change. If an enterprise employs fewer than 10 people, these codes do not apply. They can operate as they always have. The fear is that India may end up with too many very small enterprises staying outside the radar, regulations, and workforce protections — because remaining micro may feel safer than becoming compliant.

Also Read: New labour codes: From gratuity after 1 year to equal pay, all you need to know

This will increase informal workers and reduce worker benefits and safety. In the long run, this affects economic growth, government revenues, and formal job creation.

If implementation is too strict, rebellions may rise. Enterprises may prefer staying below the radar rather than coming into the system. An enterprise can split into five or six smaller units, each with fewer than 10 employees, and avoid compliance.

Eventually, everyone may end up becoming gig workers, and gig workers are not covered under these codes. That is the real challenge.

This process has already taken six years. Yet, consensus has not been reached because many grey areas remain.

What are the major grey areas in the new labour codes?

Compliance cost is a major grey area. Rigid timelines, lack of phased implementation, and absence of separate policies for different sectors are concerns.

We could have had separate codes for units with up to 50 workers or up to 100 workers, making it simpler for each target group. Instead, we now have one set of rules for the entire country.

Also Read: Labour reforms: Critics warn of risks; govt says move to modernise workforce

Compounding is allowed only once. If I use compounding once, I cannot use it again for five years. For something new, this is impractical. If you give me a new car, I cannot master it on day one. I will make mistakes. I need time to learn.

Even IT portals like the income tax website face glitches and get deadline extensions. More dependence on experts increases costs. Big companies can hire HR and compliance managers. Small industries cannot.

One size does not fit all.

(The content above has been transcribed using a fine-tuned AI model. To ensure accuracy, quality, and editorial integrity, we employ a Human-In-The-Loop (HITL) process. While AI assists in creating the initial draft, our experienced editorial team carefully reviews, edits, and refines the content before publication. At The Federal, we combine the efficiency of AI with the expertise of human editors to deliver reliable and insightful journalism.)