FAQs: What Foreign Investors and Multinational SMEs Need to Know About India’s Industrial Relations Code, 2020

Posted by Written by Melissa Cyrill Reading Time: 6 minutes

India’s Industrial Relations Code, 2020 modernizes labor governance by simplifying compliance, expanding worker definitions, raising restructuring thresholds to 300+ employees, formalizing fixed-term employment, and introducing digital compliance. For foreign investors and MNCs, the Code improves hiring flexibility, reduces paperwork, enhances dispute resolution timelines, and provides greater operational predictability across industrial and services sectors.

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Why it matters: The Industrial Relations Code, 2020, makes India more competitive for manufacturing, supply chain investment, and multi-location expansion while setting clearer rules on classification, wages, and restructuring.

1. What is the Industrial Relations Code, 2020 and what does it replace?

The Industrial Relations Code, 2020 (IRC 2020) consolidates three legacy Indian labor laws:

  • Industrial Disputes Act, 1947
  • Trade Unions Act, 1926
  • Industrial Employment (Standing Orders) Act, 1946

Its goal is to modernize India’s labor governance, simplify compliance, improve industrial relations, and create a more predictable environment for business and employment – especially relevant for foreign companies evaluating India’s manufacturing and services landscape.

2. Why does the Industrial Relations Code matter for foreign investors and multinational SMEs?

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Labor regulation influences investment cost, ease of hiring, operational flexibility, and workforce-related risk.

IRC 2020 introduces updated rules on workforce definitions, dispute resolution, restructuring permissions, and digital compliance. These changes affect:

  • operational risk assessment
  • HR planning and cost models
  • cross-border staffing structures
  • due diligence during India market entry

3. What are the important definition changes that impact employers?

Key definitional expansions include:

  • “Worker” now includes sales promotion staff, working journalists, and supervisory employees earning up to INR 18,000/month.
  • “Industry” is broadened to cover any systematic employer–worker activity – even without profit motive or capital investment.
  • A uniform definition of “wages” across all four Labor Codes is introduced: Exclusions from wages are capped at 50 percent, ensuring that statutory benefits – such as gratuity, retrenchment compensation, and social security contributions – are calculated on a meaningful share of actual earnings. It increases the wage base for social security benefits, resulting in higher lay-off and retrenchment compensation and preventing wage manipulation through inflated allowances designed to reduce statutory payouts. Legally, the provision aligns with the principle of beneficial construction in labor jurisprudence, giving courts a clear statutory basis to safeguard worker entitlements and eliminating much of the ambiguity that previously led to litigation. 

Implication: More job roles will now fall under statutory protections, requiring employers to reassess employee classification and compensation structuring.

4. How does the Industrial Relations Code reduce the compliance burden?

Per the Government of India’s official Press Information Bureau (PIB) release:

  • Rules reduced: 105 → 51
  • Forms reduced: 37 → 18
  • Registers reduced: 3 → 0

For multinationals with multiple plants or state-level operations, this means substantial simplification, reduced paperwork, and potential efficiency gains in HR and compliance workflows.

Revised Threshold for Standing Orders

To ease compliance for smaller establishments, the requirement to adopt certified Standing Orders now applies only to industrial establishments employing 300 or more workers, increased from the previous threshold of 100 workers. This change significantly reduces the administrative burden on SMEs while allowing larger units to maintain formalized, standardized service conditions.

Greater adaptability: Employers and workers in small and medium units can mutually set service conditions – such as work timings, leave arrangements, or job roles – through direct communication rather than formal codification.

Enhanced workforce agility: Flexible practices enable easier role adjustments, quicker decision-making, and a more personalized employer – employee relationship, supporting productivity and operational responsiveness.

5. How does the Code change hiring flexibility, especially regarding fixed-term employment?

The Industrial Relations Code, 2020 formally recognizes Fixed-Term Employment (FTE):

  • Employers may hire workers for a defined, written contractual period.
  • FTE workers receive parity with permanent staff (wages, hours, allowances, statutory benefits).

Benefit for investors: Enables agile workforce planning for project-based expansions, pilot operations, seasonal production cycles, or rapid scaling.

Fixed Term Employment (FTE)

The Industrial Relations Code, 2020 introduces Fixed Term Employment (FTE), enabling employers to engage workers through a direct written contract for a specified duration. FTE employees receive the same working conditions, wages, allowances, and statutory benefits as permanent employees, ensuring parity and preventing discriminatory treatment. The model is designed as a balanced approach – reducing excessive contractualization while giving employers cost efficiency and workforce flexibility.

Pro-labor benefits

  • FTE workers are entitled to safe and healthy working conditions equivalent to permanent staff.

  • All statutory benefits available to permanent employees are extended to FTE workers.

  • FTE employees become eligible for gratuity upon completing one year of service.

  • The structure helps fresh entrants gain work experience and develop specialized skills in a shorter time frame.

Pro-employment benefits

  • Encourages flexible hiring across industries, especially for seasonal, cyclical, or project-based roles.

  • Creates more job opportunities by enabling smoother entry and exit of talent.

  • Helps reduce excessive reliance on third-party contract labor while improving cost efficiency for employers.

Pro-growth benefits

  • Universally applicable across all establishments.

  • No restrictions on tenure, duration, or nature of work for FTE roles.

  • Provides employers flexible, direct hiring options to meet diverse business needs without intermediaries.

Source: PIB Fact Sheet

6. What are the new rules on layoffs, retrenchment, and closure?

A key reform under the Industrial Relations Code, 2020 is the higher threshold for obtaining prior government approval before laying off, retrenching, or closing an industrial establishment:

  • Earlier requirement: Applicable to establishments with 100 or more workers.

  • Revised requirement: Now applicable to establishments with 300 or more workers. (States may increase this threshold further.)

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This shift provides mid-sized manufacturing and industrial units with greater operational flexibility, enabling quicker restructuring decisions, enhanced competitiveness, and improved investor confidence.

In addition, the ‘Worker Re-Skilling Fund’ introduces a new employer obligation. For every retrenched worker, the employer must contribute an amount equivalent to 15 days of the worker’s last drawn wages, to be deposited within 45 days of retrenchment. Managed by the government and separate from statutory retrenchment compensation, this fund supports upskilling initiatives to help retrenched workers improve their employability and transition to new opportunities.

7. How does the Code improve industrial dispute resolution?

Key updates include:

  • Time-bound adjudication via a two-member tribunal (judicial + administrative).
  • Direct tribunal access once conciliation fails (within 90 days).
  • Advance notice requirements: Strikes and lock-outs require 14 days’ notice. Further, strikes are restricted during conciliation or tribunal proceedings
  • “Strike” now includes mass casual leave (50 percent + workers absent).

Investor relevance: Reduced risk of sudden disruptions and faster resolution timelines improve operational predictability.

8. What digital compliance measures are introduced?

IRC 2020 moves compliance toward electronic filings, digital registers, and online communication.

This benefits foreign-invested firms by enabling:

  • Standardized HR processes across sites
  • Integrated compliance dashboards
  • Lower administrative overhead
  • Faster regulatory interactions

9. How does the Code support gender equity and flexible work arrangements?

Key provisions include:

  • Mandatory women’s representation in workplace Grievance Redressal Committees, proportionate to their workforce share.
  • The Model Standing Orders for the service sector now formally recognize work-from-home arrangements, subject to mutual agreement between the employer and employee. This provides greater flexibility in workforce planning and is particularly beneficial for women professionals, employees with caregiving responsibilities, and sectors adopting hybrid work models.

This supports global Diversity, Equity, and Inclusion (DEI) and remote-work policies typically adopted by multinational companies.

10. What are the key takeaways for foreign investors and multinational SMEs considering India?

  • India is aligning its labor framework with global standards to support ease of doing business.
  • Higher restructuring thresholds and lower compliance burden strengthen operational confidence.
  • FTE and digital compliance improve flexibility for fast-scaling or multi-location operations.
  • Expanded definitions require employers to audit employee classifications, wage structures, and statutory benefits.
  • Multinationals can use the Code to standardize compliance practices across Indian entities.

Overall, the Industrial Relations Code, 2020 signals a more investor-friendly, transparent, and modern industrial relations regime.

11. What steps should I take now if I plan to invest or scale in India?

Recommended next actions:

  • Conduct a workforce audit: Review existing contracts, worker classifications, allowances, benefits, and ensure alignment with the new definitions under the Code.
  • Optimize hiring strategy: If you rely on contract labor, seasonal staffing, project staffing – check whether FTE or other models under the Code offer better compliance and cost efficiency.
  • Evaluate establishment size, thresholds and plan for scale: Evaluate whether operations are likely to exceed the 300-worker threshold. If your unit grows to 300+ workers, plan for permissions and compliance; accordingly, if below this threshold, you may have more flexibility.
  • Build digital compliance readiness: Adopt electronic record-keeping and filings to leverage the simplified framework. Make sure operations are aligned with the Code’s electronic record-keeping requirements.
  • Engage qualified local legal/regulatory advisors: Labor law is a state subject in India, so ensure you consider state-level labor rules, as states may modify or supplement certain provisions.
  • Factor labor stability and dispute risk in your due diligence: Assess the industrial relations history of your target state/sector to better manage dispute risk. Overall, the improved dispute resolution mechanisms under the Code may reduce risk.

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India Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Delhi, Mumbai, and Bengaluru in India. Dezan Shira & Associates also maintains offices or has alliance partners assisting foreign investors in China, Hong Kong SAR, Vietnam, Indonesia, Singapore, Malaysia, Mongolia, Dubai (UAE), Japan, South Korea, Nepal, The Philippines, Sri Lanka, Thailand, Italy, Germany, Bangladesh, Australia, United States, and United Kingdom and Ireland.

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