Currently, India has become one of the most strategic markets for global expansion, particularly for US companies building distributed teams.
With the perks of a skilled workforce, cost efficiency, and rapid digital transformation, the country continues to attract foreign investment across technology, finance, and operations.
However, hiring in India is no longer just about accessing talent, as now it requires a clear understanding of the country’s changing system.
In particular, India’s labour law reforms are driving significant structural changes in how global companies hire, manage payroll, and maintain compliance. These reforms aim to simplify outdated regulations while increasing transparency and accountability, making compliance more structured but also more critical than ever.
As a result, for companies planning a legal entity setup in India, it is essential to understand these reforms and how to use them effectively.
This blog provides a detailed overview of the updated labour laws and explains how to align your entity setup strategy with India’s evolving regulatory system.
What Are India’s New Labour Laws?
India has consolidated 29 central labour laws into four comprehensive codes to streamline compliance and improve ease of doing business:
1. Code on Wages (2019)
- It standardizes wage definitions across industries
- It applies to all employees, regardless of sector
- impacts salary structuring and statutory contributions
2. Industrial Relations Code (2020)
- This regulates employment terms, layoffs, and dispute resolution
- This introduces clearer frameworks for workforce management
3. Social Security Code (2020)
- It expands benefits such as provident fund (PF), insurance, and gratuity
- It includes gig and platform workers
4. Occupational Safety, Health and Working Conditions Code (2020)
Covers workplace safety, working hours, and employee welfare
Objective:
- It simplifies compliance
- It improves transparency
- It supports digital governance
Therefore, for global businesses, this creates a more structured but compliance-driven environment.
Why India Updated Its Labour Laws and What It Means for Global Businesses?
India’s previous labour framework was fragmented and difficult to manage, especially for foreign companies unfamiliar with state-level variations.
Key Drivers Behind Reform
- Improve ease of doing business rankings
- Encourage foreign investment
- Formalize the workforce
- Enable digital compliance systems
According to the World Bank’s historical ease-of-doing-business data, regulatory simplification has been a key factor in improving India’s attractiveness to foreign investors.
What This Means for US Companies
- More predictable compliance structure
- Increased reliance on digital filings and documentation
- Higher accountability and enforcement
While the system is simplified, non-compliance risks are now more visible and enforceable.
Key Changes in India’s Labour Laws That Impact Foreign Employers
One of the most important changes under India’s new labour laws is the introduction of a uniform definition of wages. This directly impacts how companies structure compensation and calculate statutory obligations.
Key areas affected include:
- Basic salary calculations
- Provident Fund (PF) contributions
- Gratuity obligations
As a result, global companies must reassess their payroll structures to ensure alignment with the revised wage framework.
Expanded Social Security Coverage
The new framework significantly broadens the scope of social security, bringing more categories of workers under its coverage.
This includes:
- Wider inclusion of employees and worker categories
- Mandatory contributions for eligible employees
- Increased overall cost considerations for employers
For international businesses, this means planning for higher statutory contributions as part of workforce budgeting.
Stricter Compliance and Penalties
While the laws simplify structure, they also introduce stricter enforcement mechanisms.
Companies should be aware of:
- Higher penalties for non-compliance
- Increased inspections supported by digital systems
This makes proactive compliance management essential for avoiding financial and operational risks.
Digital Registers and Filings
A major shift in India’s labour law reforms is the move toward digital compliance.
Key requirements include:
- Mandatory electronic recordkeeping
- Integration with government compliance systems
This transition improves transparency but also requires companies to adopt reliable payroll and compliance technologies.
Working Conditions and Hours
The reforms also bring greater clarity and standardization to workplace policies.
Notable changes include:
- Defined guidelines for working hours and leave policies
- Enhanced employee protection measures
These updates require companies to ensure that employment contracts and HR policies are fully compliant with the new standards.
What This Means for Global Companies
Collectively, these changes require businesses to take a more structured and proactive approach. Before entering India, companies must carefully evaluate their hiring models, payroll setup, and compliance strategies to ensure full alignment with the updated labour law system.
How India’s New Labour Laws Affect Hiring, Payroll, and Workforce Strategy?
The new labour law system has a direct impact on how companies approach hiring, payroll, and overall workforce planning in India.
Impact on Hiring
- Clearer employee classification requirements
- Increased scrutiny on contract vs full-time roles
Impact on Payroll
- Changes in wage structure
- Higher statutory contribution requirements
- Need for compliant payroll systems
Impact on Workforce Strategy
Companies are shifting toward:
- Structured employment models
- Long-term workforce planning
- Localized HR and compliance teams
For businesses planning company registration in India, aligning payroll and HR policies with labour laws is essential from day one.
Step-by-Step Process for Hiring Employees in India
To ensure compliance and operational efficiency, companies should follow a structured hiring approach.
1. Choose the Right Hiring Model
- Employer of Record (EOR)
- Legal entity setup
2. Register for Statutory Compliance
- Provident Fund (PF)
- Employee State Insurance (ESIC)
- Tax registrations
3. Draft Compliant Employment Contracts
- Include a wage structure aligned with new laws
- Define roles, benefits, and termination clauses
4. Set Up Payroll Systems
- Ensure compliance with wage code definitions
- Automate statutory deductions
5. Maintain Compliance and Reporting
- Digital recordkeeping
- Timely filings
A structured approach reduces operational risks and ensures regulatory alignment.
The Compliance Checklist for Foreign Companies Hiring in India
Before hiring employees, companies should ensure all key compliance requirements are in place.
- Proper employee classification
- Payroll aligned with wage definitions
- PF, ESIC, and tax registrations completed
- Digital records maintained
- Compliance calendar established
Therefore, failure in any of these areas can lead to penalties and operational delays.
Some Common Compliance Mistakes Foreign Companies Make in India
Despite regulatory clarity, several common mistakes continue to create challenges for foreign businesses.
1. Incorrect Salary Structuring
Ignoring the new wage definition can increase compliance costs unexpectedly.
2. Misclassification of Employees
Treating full-time employees as contractors creates legal risk.
3. Delayed Registrations
Late PF or tax registrations can result in penalties.
4. Ignoring State-Level Requirements
Labour laws may vary across states, even under central codes.
5. Poor Documentation
Lack of proper records affects audits and compliance checks.
However, these issues are common among companies entering India without local expertise.
India Labour Laws vs Other Countries: What Global Businesses Should Know
Compared to the US and Europe:
- India has more structured statutory compliance requirements
- Employee protection laws are stronger in certain areas
- Digital compliance systems are rapidly evolving
According to NASSCOM reports, India continues to strengthen its regulatory infrastructure to support global businesses.
Key takeaway:
India is becoming more standardized, but still requires active compliance management.
Do You Need a Legal Entity in India or an Employer of Record (EOR)?
When you choose the right hiring model is critical for ensuring compliance and operational flexibility.
Using an EOR
- Faster market entry
- Third-party handles compliance
- Suitable for small or short-term teams
Setting Up a Legal Entity in India
- Full control over hiring and payroll
- Direct compliance responsibility
- Better suited for scaling operations
Labour Law Consideration
- EOR reduces compliance burden but limits control
- Legal entity provides flexibility, but requires full compliance management
For companies planning long-term growth, legal entity setup in India becomes a strategic requirement.
Is India Still a Good Market for Global Expansion in 2026?
Despite increased compliance requirements, India remains one of the most attractive markets for global companies.
Key Advantages
- Large and skilled workforce
- Cost efficiency
- Growth of Global Capability Centers (GCCs)
- Government-backed digital reforms
India is home to over 1,600 GCCs, with continued growth expected through 2030, reflecting strong confidence from global enterprises.
Labour law reforms further support this growth by creating a more transparent and structured environment.
How Cerity Global Supports Global Expansion into India?
Setting up operations in India involves more than just hiring—it requires alignment across legal, HR, payroll, and compliance functions.
Cerity Global supports businesses with:
- End-to-end company formation in India
- Assistance with company registration in India and regulatory approvals
- Labour law compliance and payroll setup
- Advisory on EOR vs legal entity models
- Ongoing compliance and workforce management
With the right expertise, companies can reduce setup timelines, avoid compliance risks, and scale operations efficiently.
Bottom Line
India’s labour law reforms represent a significant shift in how companies hire and operate in the country.
While the new framework simplifies regulations, it also increases compliance expectations. For US and international businesses, this means:
- Planning hiring strategies carefully
- Structuring payroll correctly
- Choosing the right operational model
For long-term success, aligning with India’s labour laws is not optional as it is a core part of your expansion strategy.
India continues to offer strong growth opportunities, and with the right approach, it can serve as a key hub for global operations.