In short: Startup first employee India compliance changed significantly on 21 November 2025, when all four Labour Codes came into force. Every founder hiring their first employee must now issue a written appointment letter, structure salary correctly under the 50% wage rule, and understand when PF and ESIC registration become mandatory.
Key points
- All four Labour Codes — covering wages, industrial relations, social security, and occupational safety — came into force on 21 November 2025, replacing 29 older labour laws.
- A written appointment letter is now mandatory for every worker — permanent, fixed-term, contractual, or gig — under the new Labour Codes.
- Under the Code on Wages, 2019, Basic pay plus Dearness Allowance cannot be less than 50% of total CTC; if it is, PF and gratuity liability is recalculated upward.
- EPF registration is compulsory once your establishment reaches 20 employees; voluntary coverage is available below that threshold.
- Central and several state-level rules under the new Codes are still being finalised — founders must track notifications for their specific state, as compliance timelines vary.
- Delhi, Karnataka, Maharashtra, and Kerala are among states that have issued at least partial rules; some states are yet to notify rules under all four Codes.
What did India’s new Labour Codes change for startups?
On 21 November 2025, the Government of India brought all four Labour Codes into force simultaneously. This is the most significant overhaul of Indian employment law in decades.
The four Codes are: 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. Together, they replace 29 existing central labour laws.
For a startup hiring its first employee, this means the legal framework governing that hire is largely new. The old patchwork of standalone Acts — many of which you may have read about in older guides — has given way to these consolidated Codes.
That said, one critical caveat applies: while the Codes themselves are in force, the detailed Central rules and many state-specific rules required to implement them are still being finalised. The Ministry of Labour and Employment published draft Central Rules by gazette notification in December 2025, but those rules are not yet fully operative. Until the rules are notified, organisations cannot fully restructure payroll or compliance systems.
Practical implication: Follow the Codes as enacted, monitor your state government’s gazette for rule notifications, and take legal advice before restructuring any existing employment arrangements.
Is a written employment contract mandatory?
Yes. Since 21 November 2025, issuing a written appointment letter to every worker is a mandatory legal requirement — not just good practice.
This applies regardless of the type of engagement: permanent employees, fixed-term employees, contractual workers, and gig workers are all covered. The purpose, according to KPMG’s analysis of the Codes, is to ensure transparency and job security for all categories of workers.
For a startup, this means your first hire cannot be on an informal or purely verbal arrangement. A written letter must be issued before or at the time of joining.
What should the appointment letter include?
While the exact format prescribed by Central rules is still being finalised, your appointment letter should at minimum cover the role and designation, the place of work, the remuneration structure (broken down by component), working hours, leave entitlements, notice period, and the terms of termination.
Importantly, the salary structure in the letter must comply with the 50% wage rule described below. Getting the letter wrong could expose you to greater PF and gratuity liability down the line.
How does the 50% wage rule affect your salary structure?
This is one of the most consequential changes for startups that like to offer low-basic, high-allowance salary packages.
Under the Code on Wages, 2019, “wages” are defined to include basic pay, dearness allowance, and retaining allowance. All other components — such as HRA, conveyance allowance, overtime pay, bonuses, and employer PF contributions — are excluded from this definition of wages.
The rule: excluded components cannot exceed 50% of an employee’s total remuneration (CTC). If they do, the excess is reclassified as “wages” for the purpose of calculating statutory deductions.
In plain terms: your employee’s Basic plus DA must be at least 50% of their total CTC. If you set Basic at 30% and load the rest into allowances, the government will recalculate PF and gratuity as if the Basic were higher — meaning your liability increases retroactively.
| Salary Component | Structure A (Compliant) | Structure B (Non-Compliant) |
|---|---|---|
| Total CTC | ₹10,00,000 | ₹10,00,000 |
| Basic + DA | ₹5,00,000 (50%) | ₹2,50,000 (25%) |
| Allowances (HRA, conveyance, etc.) | ₹5,00,000 (50%) | ₹7,50,000 (75%) |
| Result | PF and gratuity calculated on ₹5,00,000 Basic | Excess ₹2,50,000 reclassified as wages — higher PF and gratuity liability |
Before you draft your first offer letter, speak to a payroll professional or employment lawyer to structure CTC correctly. You can also explore our Law for You guides for plain-language explanations of employment and startup legal basics in India.
When does EPF (Provident Fund) apply to your startup?
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 — now being subsumed into the Code on Social Security, 2020 — sets out the EPF framework.
EPF registration is mandatory for establishments with 20 or more employees. The count includes part-time, contractual, and casual workers — not just full-time payroll staff. Once you cross 20 employees, you must register with the EPFO within one month.
If your startup has fewer than 20 employees — as most first-time hirers do — EPF is not compulsory. However, you can opt for voluntary EPF coverage even below the threshold. This can be a useful employee benefit to offer early-stage talent who expect PF.
The EPF contribution rate (employer and employee shares) is set out in the Act and applicable rules. Since those figures are derived from the Act itself and not reproduced in our verified sources for this article, we direct you to the EPFO’s official website at epfindia.gov.in for the current contribution rates.
What about ESIC (Employees’ State Insurance)?
ESIC is governed by the Employees’ State Insurance Act, 1948, also being subsumed into the Code on Social Security, 2020. Our verified fact sheet does not contain confirmed figures for the ESIC wage ceiling or the specific employee threshold that triggers mandatory ESIC registration.
We have deliberately not stated those figures here to avoid giving you outdated or inaccurate information — this is YMYL legal content, and precision matters. Please verify the current ESIC applicability thresholds directly with the ESIC portal at esic.gov.in or consult a labour law practitioner.
A practical startup first employee India compliance checklist
Use this as a starting framework. Verify each item against your state’s notified rules and take legal advice on items marked as transitional.
| Step | Action | Status under New Labour Codes |
|---|---|---|
| 1 | Issue a written appointment letter | Mandatory from 21 November 2025 |
| 2 | Structure CTC so Basic + DA ≥ 50% of total CTC | Required under Code on Wages, 2019 |
| 3 | Check EPF applicability (mandatory at 20+ employees) | Governed by Code on Social Security, 2020 |
| 4 | Check ESIC applicability for your establishment | Verify current threshold at esic.gov.in |
| 5 | Check your state’s notified rules under all four Codes | Transitional — varies by state |
| 6 | Maintain employment records as prescribed | Detailed records requirements under OSH Code rules — pending in some states |
| 7 | Consider voluntary EPF if below 20-employee threshold | Permissible under existing EPF framework |
What about state-level rules — does it matter where your startup is registered?
Yes, it matters significantly. The four Labour Codes require both Central rules and state-specific rules to be notified before they can be fully implemented in a given state.
As of the date of research (27 June 2026), Karnataka, Maharashtra, and Kerala have notified their state-specific rules. Delhi has notified rules under the Code on Wages and the Code on Social Security, but is yet to release rules under the Industrial Relations Code and the Occupational Safety, Health and Working Conditions Code.
Several other states have not yet notified all four sets of rules. This creates a genuinely complex picture for startups operating across multiple states or even for a single-location startup registered in a state where rules are incomplete.
The practical advice: check your state government’s official labour department gazette and, where rules are absent, seek legal advice on what the position is in the interim.
Frequently asked questions
Do I need to register for EPF when I hire my very first employee?
No. EPF registration is compulsory only once your establishment reaches 20 or more employees (including part-time, contractual, and casual workers). Before that threshold, you are not required to register, though voluntary coverage is available. Track your headcount carefully — once you cross 20, you must register with EPFO within one month.
Are the new Labour Codes fully in force right now?
The four Labour Codes were notified into force on 21 November 2025 and replace 29 older labour laws. However, the detailed Central rules and certain state-specific rules required to implement the Codes are still being finalised. Draft Central rules were published in December 2025. Until your state notifies complete rules, some implementation details remain in transition. Monitor your state’s official gazette and take legal advice before restructuring payroll or employment terms.
What happens if I structure my employee’s salary with Basic below 50% of CTC?
Under the Code on Wages, 2019, if your excluded allowances (HRA, conveyance, etc.) exceed 50% of total CTC, the excess is reclassified as “wages.” This means your EPF and gratuity liability will be recalculated as if the employee’s Basic were higher — resulting in a larger employer contribution than you planned for. Structure CTC with Basic plus DA at a minimum of 50% of total CTC from the outset.
This article is for general information only and is not legal advice. Laws change; verify against the primary sources cited and consult a qualified advocate for your situation.
