Introduction
For a long time, the Mergers and Acquisitions (“M&A”) landscape in India functioned under a scattered legal regime, with compliance spread across 29 distinct central labour laws. Each statute had its own definitions, registration requirements, and compliance standards. This created uncertainty during transactions, as labour-related liabilities would surface late in the deal process. As a result, labour due diligence was largely reactive and focused on verifying whether past statutory payments had been made, rather than evaluating the long-term financial impact. The consolidation of these laws into four comprehensive codes, the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 (hereinafter collectively known as “the Codes”) which has significantly changed this position. The enforcement of these Codes in 2025 has made labour compliance a central financial issue in transactions. While the new regime aims to simplify compliance through uniform definitions and digital processes, it also increases statutory costs and strengthens penalties. Therefore, labour is no longer just a compliance checkpoint but has become a key factor influencing valuation, EBITDA, deal structuring, and post-merger integration.
Redefinition of Wages and Its Impact on EBITDA
One of the most significant changes introduced by the Code on Wages, 2019 (“COW”) is the uniform definition of “wages.” In the past, employers structured salary packages by keeping the basic pay low and increasing allowances. Since social security contributions such as provident fund and gratuity were calculated on basic wages, this practice helped reduce statutory outflows. Although the Supreme Court in Regional Provident Fund v. Vivekananda Vidyamandir (2019) clarified that universal allowances must be included in basic wages, inconsistent enforcement allowed companies to continue aggressive structuring. In M&A transactions, such risks were typically addressed through indemnities and representations that covered past non-compliance. The COW now limits exclusions to 50 percent of total remuneration. If allowances exceed this limit, the excess amount must be added back to wages for statutory calculations. This directly increases employer contributions toward the provident fund, gratuity, and bonus. For acquirers, this means that employee costs will rise even if the target company was technically compliant earlier. Since payroll forms a major portion of operating expenses in many sectors, the expanded wage base can significantly reduce EBITDA and compress margins. From a deal perspective, buyers must now ask not only whether statutory dues were paid in the past, but how the new wage definition will affect future profitability. Increased social security contributions translate into recurring financial obligations. Therefore, valuation models must incorporate these additional costs. In competitive transactions, this may lead to price renegotiations, deferred payments, or earn-out structures to bridge valuation gaps arising from higher statutory expenses rather than historical violations.
Expansion of Workforce Coverage and Reclassification Risks
The Code on Social Security, 2020 (“COSS”) has expanded the scope of statutory protection by formally recognizing gig workers, platform workers, and fixed-term employees. Under the earlier regime, many consultants, contractual staff, and platform-based workers were kept outside the statutory benefits framework. However, under the new Code, digital aggregators are required to contribute 1–2 percent of their annual turnover to a social security fund dedicated to gig and platform workers. This creates a new financial obligation directly linked to revenue, which must be considered during transaction evaluation. In M&A transactions, this change increases the importance of worker classification diligence. Buyers must carefully review whether individuals categorized as consultants or contractors could be treated as “workers” under the new definitions. If authorities reclassify such individuals, the acquirer may inherit liabilities relating to provident fund, gratuity, bonus, and other benefits. Unlike earlier regimes where enforcement was uncertain, the new Codes provide clearer definitions, making such liabilities easier to quantify and enforce. Fixed-term employees also have greater protection under the new framework. They are entitled to benefits similar to permanent employees, including gratuity after completing one year of continuous service. For businesses relying heavily on project-based hiring, this may increase accrued benefit liabilities. Therefore, workforce mapping must go beyond payroll records and include all categories of personnel. These additional costs and risks must be factored into valuation, indemnity negotiation, and post-acquisition integration planning.
Workforce Restructuring and Post-Merger Integration
The Industrial Relations Code (“IR Code”) maintains the principle that employees transferred during a merger are not entitled to retrenchment compensation if their employment continues without interruption, their terms remain favourable, and the new employer assumes future liabilities. This continuity rule provides stability during business transfers and reduces disruption at the time of acquisition. However, the enforcement of the new regime significantly affects post-merger workforce restructuring. A major reform is the increase in the threshold for government approval for layoffs from 100 to 300 workers. This provides greater flexibility to mid-sized enterprises and reduces regulatory delays that previously slowed integration. For private equity and strategic buyers, this change improves deal feasibility by reducing execution risk. Workforce rationalization, which is often necessary to achieve operational synergies, can now be implemented more efficiently in entities below the revised threshold. At the same time, the cost of retrenchment has increased. Employers must contribute 15 days wages per retrenched employee to a re-skilling fund, in addition to paying statutory compensation. Further, all dues must be settled within two days of termination. These requirements create immediate cash-flow pressure during integration. Therefore, while restructuring has become procedurally easier, it has become financially more demanding. Buyers must ensure adequate liquidity and plan workforce changes carefully before closing the transaction.
Compliance, Penalties and Director Liability
The Occupational Safety, Health and Working Conditions Code (“OSHW”) consolidates various safety laws and significantly enhances penalties for non-compliance. Under the old regime, fines were often nominal, and enforcement was inconsistent. As a result, safety compliance was rarely treated as a major issue during M&A transactions. However, OSHW introduces higher financial penalties and, in serious cases, is liable for imprisonment. Although imprisonment provisions have been reduced in number, repeat or serious violations can still lead to stringent consequences. This change increases the importance of pre-signing compliance audits. Buyers can no longer treat safety issues as minor matters to be resolved after closing. Site inspections, compliance certifications, and review of statutory registrations must form part of due diligence. Higher penalties also mean that indemnity caps and escrow arrangements may need to be adjusted to cover potential exposure arising from past violations. Director and senior management liability under the new framework further increase transactional risk. Compliance failures may now have personal consequences for officers in default. This affects board-level decision-making and governance structures during acquisitions. As a result, labour compliance has moved from a secondary diligence item to a central factor in risk allocation and deal documentation.
Transitional Challenges and the Dual Regulatory Environment
Although the New Labour Codes are in force, their implementation involves both central and state-level rulemaking. This creates a transitional phase where old practices and new rules coexist. For companies operating in multiple states, compliance obligations may vary depending on local notifications and administrative readiness. This dual regulatory environment introduces uncertainty in interpreting certain procedural aspects. For M&A transactions, such uncertainty affects valuation and timing. Buyers must evaluate how state-level implementation may influence benefit calculations, registrations and inspection processes. Assumptions based on a fully harmonized system may not reflect ground realities during the transition period. Therefore, diligence must consider both statutory provisions and practical enforcement trends in relevant jurisdictions. To manage this risk, acquirers should adopt scenario-based financial modeling. Stress-testing projections under different compliance interpretations can help prevent post-closing surprises. During this stabilization period, proactive regulatory assessment is essential to ensure that valuation assumptions remain realistic and defensible.
AMLEGALS Remarks
The enforcement of India’s New Labour Codes has fundamentally changed the way labour issues are viewed in M&A transactions. Labour diligence is no longer limited to verifying past compliance; it now requires forward-looking financial analysis. Buyers must reassess EBITDA projections in light of the 50 percent wage cap, expanded social security coverage and higher retrenchment costs. Workforce classification must be examined carefully to identify hidden liabilities and quantify potential exposure. From a practical perspective, acquirers should adopt a structured approach. Re-model financial projections to account for increased statutory contributions. Furthermore, conduct detailed workforce mapping to verify the correct classification of gig workers, fixed-term employees, and consultants.
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