Implementation of New Labour Codes by MSMEs 

• The four new labour codes, effective 21 November 2025, require MSMEs to build stronger payroll, documentation, and compliance systems.
  
• While higher thresholds reduce the regulatory burden for smaller units, core responsibilities, such as wage payments, worker records, and safety standards, continue to apply. Moreover, compliance is now system-driven, with digital filings, structured employment records, and defined wage components becoming essential.
  
• Early preparation during FY26, especially before the first full compliance cycle, can help MSMEs avoid disruptions and manage the transition more smoothly. This blog article guides small businesses on how and where they can comply 

The Government of India has consolidated 29 central labour laws into four new Labour Codes—Code on Wages, 2019; Industrial Relations Code, 2020; Code on Social Security, 2020; and Occupational Safety, Health and Working Conditions (OSHWC) Code, 2020, which came into effect from 21 November 2025. These codes aim to modernise, simplify, and digitise compliance while bringing greater structure to how businesses manage their workforce.

For MSMEs across manufacturing, trading, and services, this marks a shift towards formal systems, documented processes, and greater accountability. Businesses that have relied on informal practices will need to gradually align operations with the new framework.

Key Highlights of the New Labour Codes for MSMEs

The four labour codes affect payroll, hiring, social security, and workplace safety. For MSMEs, the biggest changes relate to wage structuring, worker records, contractor management, and digital compliance.

Code on Wages, 2019: Standardises wage-related provisions and makes payroll discipline more important. For MSMEs, the clearer definition of wages can affect salary structuring, social security calculations, timely wage payment, equal remuneration, and overtime.

Industrial Relations Code, 2020: The threshold for certified standing orders has increased from 100 to 300 workers, and prior government approval for lay-off, retrenchment, or closure now applies only to establishments with 300 or more workers. Fixed-term employment is also formally recognised.

Code on Social Security, 2020: This code brings employee benefit-related provisions under one structure. For MSMEs, it means formal wage structures may increase obligations related to EPF, ESIC, and gratuity, where applicable, while also making proper employee records more important.

Occupational Safety, Health and Working Conditions Code, 2020: Covers workplace safety, health, welfare, and certain contract labour provisions. Factory licensing thresholds have increased to 20 workers with power and 40 without power, while the contract labour threshold has increased to 50 workers. At the same time, MSMEs need to pay closer attention to workplace conditions and employee safety requirements.

Overall, the shift is towards single registration, unified returns, and digital filings. While this reduces duplication, it also requires MSMEs to maintain cleaner records and stronger internal systems.

Key Compliance Steps for MSMEs

Compliance under the new labour codes requires consistent internal processes rather than one-time actions. MSMEs need to approach this as part of the daily operations.

1. Issue Appointment Letters

All employees must have formal appointment letters clearly defining roles, wages, and employment terms. This forms the base of compliant workforce management.

2. Review and Align Wage Structure

Businesses must ensure that at least 50% of total remuneration aligns with the definition used for social security calculations. This directly impacts EPF, ESIC, and other contributions.

3. Complete Digital Registration and Filings

MSMEs should move to the unified electronic system for registration, returns, and licence management to avoid duplication and delays.

4. Verify Contractor Compliance

Where contract workers are employed, businesses must ensure that contractors hold valid licences and maintain proper records, especially when thresholds are exceeded.

5. Strengthen Health and Safety Systems

Workplace safety standards, sanitation, protective measures, and annual health check-ups for employees above 40 must be implemented consistently.

6. Build Basic Compliance Systems

Attendance tracking, wage slips, employee records, and notices should be maintained in a structured and accessible format, preferably digital.

Common Pain Points MSMEs Are Likely to Face

Despite simplification, the transition to the new labour codes may not be straightforward for many MSMEs, particularly those operating with informal systems.

Higher payroll outgo: As wage definitions become standardised and linked to social security contributions, businesses may need to restructure salaries, resulting in higher monthly obligations.

Documentation gaps: Many small businesses do not maintain formal appointment letters, attendance records, or structured employee data. Under the new framework, such gaps can lead to compliance issues during inspections or audits.

Demanding contract labour management: Even when contractors are responsible for their workforce, the principal employer may still be held accountable in certain situations. This increases the need for verification and proper documentation.

Slow implementation in smaller towns: The absence of dedicated HR or compliance teams slows down implementation in industrial clusters and tier-2 and tier-3 cities. Businesses may struggle with digital filings if systems are still manual.

Safety compliance: Often overlooked earlier, this now requires consistent attention. Requirements related to workplace conditions, health check-ups, and reporting need to be regular and consistent.

Besides the above, there is also confusion around thresholds. While certain provisions apply only above specific employee limits, core obligations continue regardless of size; thus, misinterpretation can lead to unintentional non-compliance.

Where MSMEs Can Find Help to Comply

MSMEs do not have to navigate the transition alone. Several government and institutional support systems are available to guide businesses through compliance requirements.

1. Ministry of Labour & Employment Portal

The official Ministry of Labour & Employment website is a primary source for official notifications, rules, and the Compliance Handbook for Employers under the four labour codes. It provides simplified explanations of provisions, formats, and updates that MSMEs can refer to while aligning their processes. The Acts & Policies under the ‘Documents’ tab and the FAQs on Labour Codes, updated on 16 March 2026, provide detailed information. 

2. Udyam Registration Portal

The Udyam portal serves as the entry point for MSME formalisation. Registered businesses can access various government-linked services, updates, and support systems relevant to compliance and operations.

3. MSME-Development & Facilitation Offices (MSME-DFOs)

MSME-DFOs are government offices spread across regions that provide on-ground support to small businesses. They offer consultancy, training programmes, and guidance on regulatory compliance, process improvement, and scheme access. For MSMEs without dedicated compliance teams, these offices act as practical support centres to understand and implement requirements.

4. Tool Rooms & Technical Institutions (Technology Centres)

MSMEs that need practical support beyond paperwork can also look at the government’s Technology Centres network and the Ministry’s page on Tool Rooms and Technology Development Centres. These centres are not only technical training institutions, but they can also help MSMEs strengthen compliance readiness where labour codes overlap with factory systems, machine safety, workplace conditions, and process discipline.

These centres provide consultancy on process development, production upgrades, and technical improvements, which can help MSMEs bring machinery, shop-floor layouts, and work environments closer to required safety norms. Many centres also support quality, environmental, and occupational safety standards, including the Occupational Health and Safety Assessment Series (OHSAS) and ISO-related systems, which can be relevant for businesses trying to improve alignment with the OSHWC Code.

They also conduct training programmes in tool and die making, machine operations, and technical handling practices. For MSMEs, this matters because labour compliance is not only about registrations and returns. It also depends on whether workers are operating safely, whether machines are handled properly, and whether the workplace is equipped for basic health and safety compliance.

As manufacturing moves towards automation and Industry 4.0 practices, these centres can also help MSMEs understand newer systems such as digitally monitored operations, better process control, and technology-led safety improvements. For small businesses that supply to larger manufacturers, this kind of technical support can improve both compliance readiness and overall competitiveness.

5. Third-Party Audits under the OSH Code

The OSH Code allows certain businesses to undergo third-party safety audits instead of relying only on direct inspections. These audits are conducted by approved external professionals who assess workplace safety, hygiene, and compliance systems. For MSMEs, third-party audits provide a structured way to identify gaps early, improve workplace conditions, and maintain documented proof of compliance.

MSMEs can follow a state-based process, since implementation is handled by individual state labour departments. MSMEs can find this list on the respective state labour portal under sections such as “Third Party Audit”, “Inspection Scheme”, or “Acts & Rules”. For instance, Telangana MSMEs can find a list of government-approved auditors here.

After the audit, a formal report is issued highlighting compliance status, gaps, and corrective actions required. In many states, these reports must be uploaded or submitted through designated labour department portals as part of compliance records. MSMEs are expected to act on audit observations within prescribed timelines and maintain records for future verification.

Since rules may vary slightly across states, MSMEs should refer to their respective state notifications to understand eligibility, frequency of audits, and reporting requirements.

6. Professional Advisory and Compliance Services

Private compliance firms and payroll service providers offer support in areas such as wage structuring, statutory filings, digital attendance systems, and audit preparation. These services are particularly useful for MSMEs that do not have internal HR or compliance teams.

Why MSMEs May Need Financial Support to Comply

For many MSMEs, compliance under the new labour codes is not only an operational change but also a financial adjustment. Moving to formal payroll systems may increase monthly outgo due to structured wage definitions and social security contributions. These changes, while necessary, can strain cash flows in the short term.

Digital compliance requires investment in payroll software, attendance systems, and recordkeeping infrastructure. Businesses transitioning from manual systems may need to allocate funds for this shift. Safety and health requirements may also lead to additional spending on workplace upgrades, equipment, and medical check-ups. These are essential but often unplanned expenses for smaller units. Administrative costs may rise as businesses strengthen documentation, contractor verification, and reporting systems.

For MSMEs operating with tight margins, these costs may be manageable over time but difficult to absorb immediately. Access to timely business finance through RBI-regulated NBFCs such as Protium can help manage these expenses without affecting production cycles, workforce payments, or delivery commitments.

The new labour codes mark a shift towards more structured and transparent business practices. MSMEs that begin aligning early, build internal systems, and use available support mechanisms are likely to adapt more smoothly and strengthen their long-term operational stability.