How India’s New Labor Codes Will Reshape M&A Transactions in 2026

India’s new labor codes are reshaping the M&A landscape in India by altering valuation models, workforce liabilities, and integration costs, requiring buyers to treat labor diligence as a core financial and deal-structuring exercise.

Historically, India’s mergers and acquisitions (M&A) transactions have taken place within a fragmented labor law framework comprising 29 central statutes, with varying definitions, registration requirements, and enforcement practices. As a result, labor-related liabilities, particularly around payroll structures and contractor arrangements, often surfaced late in transactions, limiting labor diligence to a reactive, compliance-focused role.

India’s consolidation of legacy laws into a unified labor code framework in 2025 establishes standardized definitions and mandates digital compliance. The policy direction points toward centralized registrations, digital-first filings, and clearer employer obligations, which should reduce procedural friction over time. At the same time, implementation introduces execution complexity. Businesses must continue tracking state-level rules and operational practices as the framework stabilizes. 

This legal shift reshapes the mergers and acquisitions (M&A) landscape by positioning labor as a measurable financial variable rather than a purely compliance consideration. By reducing scope for interpretational arbitrage, the new framework ensures that changes in wage definitions, broader workforce coverage, and tighter penalty regimes have a direct impact on earnings before interest, taxes, depreciation, and amortization (EBITDA) and post-transaction cash flows. 

Overview of India’s four new labor codes and implementation status

India’s long anticipated four labor codes came into effect on November 21, 2025. The legal law overhaul is no longer a prospective reform but a live regulatory reality. While the central codes have repealed legacy statutes nationwide, the ‘Dual Regulatory Environment’ persists as states finalize specific subordinate rules. 

The four labor codes now in force are:

• Code on Wages, 2019, which merges multiple wage-related statutes and standardizes definitions of wages and minimum pay structures.
• Industrial Relations Code, 2020, which subsumes laws on trade unions, employment standing orders, and industrial disputes, and recalibrates procedural requirements for layoffs and dispute resolution.
• Code on Social Security, 2020, which integrates several benefits frameworks (such as provident fund and employee insurance) and expands coverage to include gig and platform workers.
• Occupational Safety, Health and Working Conditions Code, 2020, which consolidates multiple safety and working condition statutes into a unified compliance regime covering a wide range of establishments.

Navigating the central-state implementation overlap

The effectiveness of new labor codes is a two-tier process requiring both central notification and state-level rule-making. This creates a dual regulatory environment where legacy practices and nascent code rules coexist.

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For M&A deal teams, this “overlap phase” is not merely a legal technicality; it introduces significant regulatory uncertainty regarding deal timing and enforcement horizons. Consequently, buyers must account for differentiated state-level rollouts when scoping diligence and calculating statutory benefit liabilities, as assumptions remain more variable than under a fully harmonized regime. 

Valuation and EBITDA implications of the new wage definition

The now-active uniform wage definition has effectively ended ‘interpretation arbitrage.’ By capping allowance exclusions at 50 percent of total remuneration, the code forces an immediate recalibration of statutory contributions, directly impacting EBITDA and enterprise value.

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For acquirers, the financial implications are immediate. A broader wage base increases employer contribution to provident fund, gratuity, bonus, and other social security obligations, raising recurring employee costs even where historical compliance appeared technically sound. As outlined in the reference material, these higher statutory outflows translate into a structural EBITDA impact, particularly in labor-intensive sectors where payroll costs form a significant share of operating expenses.

This shift forces deal teams to revisit valuation assumptions. Higher ongoing labor costs can compress margins, prompt downward adjustments to valuation multiples, and require recalibration of purchase consideration. In competitive processes, buyers may seek price adjustments, deferred consideration, or earn-out mechanisms to bridge valuation gaps driven by post-closing cost increases rather than legacy non-compliance.

As a result, diligence must evaluate forward-looking cost behavior under the new wage definition rather than relying on historical compliance outcomes. Acquirers must model how revised compensation structures reshape cash flows, valuation multiples, and integration economics. Acquirers must model how compensation structures under the new wage definition will reshape cash flows, valuation multiples, and integration economics.

Workforce classification risks under expanded statutory coverage

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The new labor codes materially expand the scope of who qualifies for statutory protection, increasing workforce-related risk in M&A transactions. Under the SS Code, coverage now extends beyond traditional employees to include fixed-term employees, gig workers, and platform workers, significantly broadening the universe of individuals entitled to social security benefits. For digital platforms and aggregators, this shift introduces a direct financial obligation to contribute 1-2 percent of annual turnover toward a dedicated social security fund for gig and platform workers, creating a new, transaction-relevant cost line.

Fixed-term employment also carries heightened implications. The codes grant gratuity eligibility after one year of continuous service, aligning fixed-term workers more closely with permanent employees for benefit purposes. Businesses that rely heavily on project-based or contract hiring may therefore face higher accrued liabilities than reflected in historical accounts.

These changes elevate the importance of worker classification diligence. Long-standing practices of engaging consultants, contractors, or commission-based sales staff outside the statutory framework now present clear deal risks. If authorities recharacterize such arrangements as employment relationships, buyers may inherit unprovided liabilities for provident fund, gratuity, bonus, and social security contributions.

In M&A contexts, reclassification risk can translate into retrospective liabilities post-closing, affecting cash flows and integration plans. As a result, acquirers must reassess workforce structures at a granular level and factor classification exposure directly into valuation, indemnity design, and transaction pricing.

Restructuring, retrenchment, and post-merger integration under the new regime

The new labor codes preserve the core principle governing business transfers and continuity of employment. As carried forward from the earlier Industrial Disputes Act into the Industrial Relations Code, employees transferred as part of a merger or acquisition do not qualify for retrenchment compensation where continuity of service remains intact, employment terms are not less favorable, and the transferee assumes future retrenchment liability. From a deal-structuring perspective, this continuity framework remains familiar and provides legal certainty for asset and business transfers.

Where the new regime materially alters post-merger integration is in workforce restructuring flexibility and cost. The threshold for seeking prior government approval for layoffs has increased from 100 to 300 workers, significantly reducing regulatory friction for mid-sized acquisitions. This change shortens integration timelines and allows buyers greater agility in executing synergy-driven workforce rationalization, particularly in manufacturing and services businesses that previously fell within the approval regime.

That flexibility comes at a price. The cost of exits has increased through mandatory retrenchment compensation, employer contributions to the re-skilling fund equivalent to 15 days’ wages per retrenched worker, and the requirement to settle all dues within two days of termination. These provisions intensify short-term cash-flow pressure during integration.

The net effect is clear: the new regime lowers execution risk but raises integration liquidity requirements, forcing acquirers to plan workforce restructuring earlier, fund exits upfront, and reflect higher integration costs directly in deal economics.

Compliance, penalties, and director exposure in M&A transactions

The OSHWC Code consolidates multiple safety and workplace statutes into a single compliance framework, raising both the visibility and materiality of labor risk in transactions. Under the earlier regime, fragmented enforcement and low monetary penalties often relegated safety compliance to a secondary diligence item. The new framework alters that calculus.

The OSHWC Code introduces a clear shift from nominal fines to materially higher penalties, with certain violations attracting substantial financial sanctions and, in serious cases, criminal liability including imprisonment. While the number of offences carrying imprisonment has narrowed, repeat and aggravated violations now carry a higher probability of enforcement. This change elevates labor compliance from a routine regulatory issue to a potential transaction-stopping risk.

Director and senior management exposure has also increased. The codes place greater responsibility on directors and key managerial personnel for compliance failures, which has direct implications for deal negotiations, board appointments, and post-closing governance structures.

As a result, safety audits and labor compliance reviews are moving decisively into the pre-signing phase. Deal documentation increasingly reflects this shift through expanded conditions precedent, higher or ring-fenced indemnity caps, and escrow arrangements designed to cover legacy violations. Labor compliance now directly influences risk allocation, deal certainty, and closing mechanics in Indian M&A transactions.

Navigating M&A under India’s new labor codes

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India’s new labor codes require deal teams to recalibrate how they approach workforce risk across the transaction lifecycle. The starting point is early re-modelling of labor costs during valuation and financial diligence. Buyers should stress-test EBITDA assumptions against revised wage definitions, expanded social security coverage, and higher exit costs, rather than deferring these issues to post-closing integration.

Equally critical is granular workforce mapping and classification audits. Under SS Code, digital aggregators must now contribute 1 to 2 percent of annual turnover to a gig-worker fund, making ‘hidden headcount’ a primary due diligence item. This analysis helps quantify reclassification exposure and identify liabilities that may not appear in historical compliance reviews.

From a structuring perspective, buyers increasingly rely on labor-specific indemnities, escrows, and price adjustment mechanisms to allocate risk. Generic indemnity language often proves insufficient where liabilities stem from forward-looking cost increases rather than past violations. Deal documentation must reflect this distinction.

These integration mechanics require buyers to plan liquidity well before closing, particularly where workforce rationalization forms part of the post-merger strategy.

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