Navigating Workforce Segmentation Under India’s Labour Codes

The past decade has seen Indian businesses, take to newer business models to meet the ever-changing demands of the consumer efficiently. Therefore, to suit these business models, organizations introduced newer forms of engagement that did not always fit within the four corners of traditional employment.

As these models gained popularity, significant legal questions surrounding the nature of their relationship with the platform that engages them and the rights and obligations vis-à-vis each other emerged. The Supreme Court of the United Kingdom recently assessed the applicability of the national minimum wage to drivers on the Uber platform in Uber BV v Aslam¹. Similarly, in India, questions around whether drivers engaged on the platform ‘OLA’ are to be considered as its employees for the purposes of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2015 are pending final judicial confirmation².

In this backdrop, there was a need to re-assess the regulatory aspects of the treatment of such new categories of workforce. The four labour codes (“Labour Codes”), effective from November 21, 2025³, which consolidated 29 central labour statutes, lay the foundation for the recognition of certain newer forms of employment engagement such as fixed-term employees and gig and platform workers, while simultaneously introducing reforms in how traditional employment and contract labour are treated under law.

With these changes at hand, it is now incumbent upon organizations to move beyond mere compliance with labour law and to also re-look at their employment strategy to ensure that the right type of employment category is selected for different roles in an organization.

Permanent employees and workers

Where an individual is engaged on a permanent basis, the Labour Codes categorize them either as “Employee” / “Worker” on the basis of the nature of work and wages. The definition of “Employee” encompasses all employees, with “Worker” being a sub-set of “Employee”. This distinction is key to understanding and navigating the categorization of employees.

Conceptually all the four labour codes have adopted similar definitions of “employee”, with some minor code-specific modifications. The Industrial Relations Code, 2020 (the “IR Code”) defines an “Employee”⁴ as any person, other than apprentices, “employed by an industrial establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied”. The definition of “Worker” in the IR Code⁵ covers those engaged in manual, unskilled, skilled, technical, operational, clerical, or supervisory work, while excluding those employed mainly in managerial or administrative capacities earning more than INR 18,000 per month.

Under the erstwhile labour law regime in India, Employees that did not qualify as “Workers” were largely left out for statutory purposes, with their rights and obligations being mostly governed by their employment contracts. While the treatment of Workers has not seen a major change under the Labour Codes, those that are simply “Employees” are now entitled to certain statutory rights for the first time.

The Occupational Safety, Health and Working Conditions Code, 2020 (the “OSH Code”) now requires all employers to mandatorily issue an appointment letter to all Employees (with particulars being specified by the appropriate government), and to provide various health and welfare facilities⁶. The Code on Wages, 2019 (the “Wages Code”) now applies payment of wages provisions to all Employees regardless of the wages earned. All Employees will therefore be entitled to timely payment of wages, deductions from wages to only those permitted by the Wages Code, and time-bound full-and-final settlements.

Where an organization engages Employees, the obligations under the OSH Code and Wages Code are inescapable and employers must expeditiously take measures to gear internal systems for compliance.

Newer forms of engagement such as fixed term employment and platform and gig workers will act as meaningful alternatives to engagement of “Workers” in certain cases but are not specifically relevant where the engagement is of “Employees”.

Fixed Term Employment

Section 2(o) of the IR Code defines fixed-term employment (“FTE”) as “the engagement of a worker on the basis of a written contract of employment for a fixed period”. FTE, by itself, does not create a new category of employment, instead, it introduces a new class of Workers for whom the period of employment is fixed, as opposed to non-FTE workers who must be engaged on a permanent basis.

The IR Code provides that Workers engaged on an FTE basis should have parity with non-FTE workers for all purposes including hours of work, wages and allowances. FTE workers are also eligible for statutory benefits that are available to permanent Workers proportionate to their period of service. Most notably, as regards social security, FTE workers are eligible for gratuity if they serve a minimum of one year, reduced from the standard five-year requirement.

From an employer’s perspective the key feature of FTE is that the natural termination of the period of engagement of a fixed-term employee will not amount to retrenchment and therefore will not trigger the set of conditions of retrenchment under Section 2(zh) of the IR Code. The IR Code (like its predecessor legislation) has built in several guardrails to ensure that lay-offs and retrenchment are done only with the payment of adequate compensation and with government approval (in some cases). This has led wary employers to view engagement of Workers as one that comes with onerous obligations and an impediment to downsizing and flexibility.

Based on how the IR Code treats FTE, it appears that this recognition has been introduced to provide employers with the option of engaging permanent Workers while allowing them to retain some degree of flexibility in deciding the period of engagement.

In terms of nature of tasks, employers may consider FTEs as an alternative to contract labour where dedicated full-time work requiring organization-specific or industry-specific skills are required, since in the case of contract labour the contractor may switch staff based on the contractor’s convenience. 

Additionally, the engagement of FTEs is also immediately useful in the context of the restriction on engaging contract labour in ‘core-activities’ (further detailed in the next section on contract labour). Organizations that are looking to quickly engage full-time Workers in core activities may engage FTEs in the interim before gradually building permanent staff strength.

While on the one hand FTEs will provide a clean and documented exit to Workers, on the other hand the constant churn of FTEs and the costs of hiring new staff must also be considered while opting for this form of engagement. With the concept of FTEs being new, employers may also test the option of creating a pathway for FTEs to eventually join the permanent workforce at the end of the fixed tenure based on performance metrics.

Contract Labour

The OSH Code, which has subsumed the erstwhile Contract Labour (Regulation and Abolition) Act, 1970 (the “CLRA”), has made significant changes to the provisions pertaining to contract labour including applicability threshold, duties of the principal employer towards contract workers, the restriction on engaging contract workers in core activities, and also certain procedural aspects like the licensing mechanism.

Under the CLRA, the primary responsibility for the provision of health and welfare facilities for contract workers was placed on the contractor, and where the principal employer provided any such facilities, the costs could be recovered from the contractor. The OSH Code now places the primary responsibility on the principal employer itself and does not explicitly deal with the recovery of such costs from the contractor[vii]. These health and welfare facilities are now essentially those that the principal employer has to mandatorily provide to full-time workers, some of which are provided in the OSH Code and such other facilities that the appropriate government may specify.

Another major change concerns the statutory restriction on engaging contract labour in core activities of an establishment. ‘Core activity’ has been defined in Section 2(p) broadly to mean “any activity for which the establishment is set up and includes any activity which is essential or necessary to such activity”, with some obvious tasks like sanitation and security services being express exceptions. Some exceptions to this restriction (laid down in Section 57 of the OSH Code) are instances where the activities are such that full-time workers are not required for a major portion of the working hours, where there is a sudden increase in volume of work to be accomplished in a time-bound manner and therefore warrants urgent marshalling of resources. Employers may continue to engage contract labour in core activities if the task is ordinarily carried on through contract labour in the establishment.

Contract labour will continue to remain an integral part of most organizations but mainly for ancillary tasks in an establishment. Owing to the non-delegable requirement of providing health and welfare facilities, the principal employer’s duties towards contract labour are in parity with full-time workers in this regard. Paired with the restriction on engaging contract labour in core activities, employers may now consider switching from engaging contract labour to either FTEs or full-time workers for more tasks within the organization.

Gig and Platform workers:

Gig and platform workers stand outside the traditional employment structure, and their relationship with the employer (aggregator) varies depending on the business model in question. The Social Security Code, 2020 (“SS Code”) introduces “gig worker” (Section 2(35)) as a person performing work outside a traditional employer-employee relationship and “platform worker” as one undertaking platform work via an online platform. Aggregators face contribution obligations (typically 1-2% of annual turnover, capped) toward a dedicated social security fund covering life/disability, accident, health, and maternity benefits. These categories are deliberately positioned outside “Worker” or “Employee” status under the IR Code. They offer maximum flexibility and variable cost but minimal control.

This form of engagement is highly suitable for businesses whose model involves variable demand, and location-dispersed tasks where independence exists. The entity engaging platform or gig workers can continue to maintain a certain degree of control on quality while also allowing independence of operations to gig or platform workers. This however is not relevant to traditional business models.

Conclusion

Employers should now undertake a structured review of all individuals engaged by them and classify them into “Employee”, “worker”, fixed-term employee, contract labour and gig/platform worker. A systematic review and redrafting of existing appointment letters and fixed term employee contracts must be done to ensure compliance with the Labour Codes. A core-activity audit should be conducted that identifies which functions fall within the statutory prohibition, and in case any contract labour are engaged in core activities, employers should either be certain of the applicability of any of the exceptions or otherwise undertake the process of hiring workers to carry out such tasks.

Keeping in mind the conditionalities of each form of engagement, employers should relook at what types of engagement are used for different roles, and realignment must be considered for efficiency. Employers should, however, also be advised against misclassification. Courts in India continue to look beyond mere form of contract and analyse the substance and terms of the contract to determine the true nature of engagement. With misclassification, employers risk exposure to liabilities in relation to wages, social security, gratuity and other statutory benefits.

Footnotes

^{1. [2021] UKSC 5}

^{2. ANI Technologies Private Limited v. MS. X (WA 1493/2024 dated October 04, 2024 issued by Karnataka High Court)}

^{3. Notifications S.O. 5319(E), S.O. 5320(E), S.O. 5321(E) and S.O. 5322(E), issued by the Ministry of Labour and Employment, Government of India}

^{4. Section 2(l) of the Industrial Relations Code, 2020}

^{5. Section 2 (zr) of the Industrial Relations Code, 2020}

^{6. Section 6(1)(f) of the Occupational Safety, Health and Working Conditions Code, 2020}

^{7. Section 53 of the Occupational Safety, Health and Working Conditions Code, 2020.}