When I first started researching labour law in India, compliance was relatively straightforward. You had your Factories Act, your Shops and Establishments Act and a dozen other statutes to keep track of. It was completely acceptable to use manual registers for things like leave management system. If you had the privilege of using Excel sheets, that was the height of sophistication.
That environment has more or less ceased to exist today.
The Government of India has consolidated 29 separate labour laws into four comprehensive codes. One major shift this brings is in how companies could handle employee leave or time off. The new framework demands better tracking, accurate record-keeping, and transparent communication. In the absence of a reliable leave management system, none of these ambitious compliance goals will ever be possible.
Why Waiting for the New Labour Codes Could Be a Mistake?
Many organisations are taking a wait-and-see approach, assuming the new labour codes will be delayed again. But with most states already finalising their rules, the rollout could be an imminent possibility anytime. Those without compliant systems, like a proper leave management software, risk being caught unprepared.
Leave Management System Compliance in 2026: Why It’s More Critical Now
Of all the changes embedded in the four labour codes, the provisions affecting leave management represent the most immediate technical and financial risk for organisations. Rather than a policy update or HR handbook revisions, this calls for mandatory system capabilities that most organisations don’t have.
The risk concentrates at the intersection of two codes: the Code on Wages (2019) and the Occupational Safety, Health and Working Conditions Code (2020). Together, they create a compliance environment where manual leave management is both inefficient and legally untenable.
How the 50% Wage Rule Impacts Leave Management for Indian Employers
The Code on Wages introduces what appears to be a simple rule: the sum of allowances cannot exceed 50% of an employee’s total compensation. Consequently, basic salary components must constitute at least 50% of the gross.
Rather than an accounting adjustment, this has become a structural mandate that increases your statutory liability across every wage-linked benefit, such as provident fund, gratuity, and, critically, leave encashment.
If an employee earns ₹100,000 monthly, under many current compensation structures, the basic salary might be ₹30,000 (30% of gross). Under the new codes, this becomes non-compliant. The basic must rise to ₹50,000 minimum.
What does this mean for leave encashment? The standard formula is to divide the monthly basic salary by 30 to get the daily rate and then multiply that by the number of encashable leave days.
At the old 30% basic structure: ₹30,000 ÷ 30 = ₹1,000 per day
At the mandated 50% basic: ₹50,000 ÷ 30 = ₹1,667 per day. That’s a 66.7% increase in the monetary value of every single earned leave day on your books.
Three Changes That Demand A Leave Management System Upgrade
1: Reduced eligibility threshold
Employees now qualify for earned leave after 180 days of service instead of 240 days. To adjust to this new scenario, your leave management software must now track service continuity with greater precision, especially for newer hires whose leave liability kicks in earlier.
2: The 30-day carry-forward limit
Employees can only carry forward a maximum of 30 days of paid leave into the next calendar year. For HR teams, this means the leave management system must automatically track, cap, and adjust balances at year-end
3: Mandatory annual encashment
f an employee’s accrued leave exceeds 30 days, the employer must mandatorily pay cash compensation for the excess as a statutory obligation.
The Compliance Gap in Outdated Leave Management Systems
Most organisations that are using outdated time off management methods don’t have automated and proactive capabilities to handle any of these statutory changes. All they can do is track leave balance and process encashment by manually calculating them one by one. They cannot proactively identify, calculate, and queue mandatory payouts based on statutory thresholds.
Under the Code on Wages, when an employee exits, whether through resignation, termination, superannuation, or death, all final dues, including leave encashment, must be settled within two working days.
Ironically, what is currently the procure in many organisations is: an employee resigns, HR processes the resignation, and then proceeds to process the leave balances. This alone could sometimes take a few days if the records are not centralised.
Although there is no law that says organisations to upgrade to sophistication in time off management, like an upgrade to an online leave management system, sticking to the manual processes of leave management can still lead to compliance violations under the new labour codes, where accurate, auditable records are a statutory expectation.
Is Your Leave Management System Strong Enough to Withstand an Audit?
I need you to understand something about the new codes: the penalties for non-compliance.
The Code on Wages specifies fines up to ₹50,000 for obstructing inspections and introduces imprisonment for repeat wage violations. Procedural failures like failing to issue wage slips or improper register maintenance can carry ₹10,000 fines for first offences. Upon repetition of these offences, the fines will double.
This changes the economic equation entirely. The cost of maintaining manual or semi-automated systems now includes substantial downside risk. A single audit revealing systematic non-compliance in leave encashment calculations could result in penalties exceeding the cost of a proper automated online leave management system.
Why Multi-State Compliance Demands a Smarter Leave Management System?
For organisations operating across multiple states, there’s an additional layer of complexity that cannot be ignored.
While the four labour codes establish a central framework, implementation depends on state-specific rules. And despite the goal of uniformity, variations persist. State-level Shops and Establishments Acts continue to govern certain localised regulations. States like Maharashtra, Gujarat, and Karnataka have notified draft rules with subtle but significant variations in carry-forward provisions, sick leave definitions, and procedural requirements.
Some states still mandate physical, paper-based register submissions despite the push toward digital compliance.
What Does This Mean for Your Leave Management Solution?
You need centralised data management for operational efficiency, but a highly parameterised configuration to accommodate local deviations. Your leave management system must be capable of applying different accrual rates, different carry-forward limits, and different encashment triggers based on the employee’s location of work.
It is practically impossible to think of managing this level of complexity manually. It requires sophisticated leave management software architecture designed explicitly for multi-jurisdictional compliance.
How to Prepare Your Leave Management System for the 2026 Labour Codes?
You cannot achieve HR compliance through policy documents alone. As we head towards 2026, it can only be achieved through sophisticated system capabilities. Here’s what technical readiness for the 2026 codes actually requires:
- Apply updated leave eligibility retroactively for all active employees.
- Automate year-end leave audits and encashment calculations without manual input.
- Update leave accrual eligibility from 240 to 180 service days.
- Queue excess leave encashment automatically for payroll on December 31.
- Trigger instant leave encashment upon employee exit for 48-hour processing.
- Enable seamless integration between leave, payroll, and exit management modules.
- Maintain all statutory registers digitally in prescribed, auditable formats.
- Flag and prevent non-compliant salary structures automatically in payroll.
- Ensure attendance, wages, and leave data are compliant for inspection.
What You Should Do Now
If you’re responsible for HR, payroll, or compliance in any organisation operating in India, here’s my advice:
Stop waiting for the official notification date
The legislative infrastructure is ready. State rules are substantially finalised. The implementation will happen, and when it does, you won’t have time to prepare.
Audit your current compensation structures
How many of your employees have basic salaries below 50% of gross? Calculate what the restructuring will cost you in increased leave liability, PF contributions, and gratuity provisions. This needs to be budgeted now.
Assess your leave management system capabilities
it handles the 180-day eligibility logic? Can it trigger mandatory encashment automatically at year-end? Can it process final settlements within 48 hours? If the answer to any of these is no, you need to start the replacement or upgrade process immediately.
Start Mapping Your Compliance Now
If you operate in multiple states, document the specific variations in each state’s draft rules. Your system needs to be configured to handle these variations before they go live.
Ensure digital audit readiness
All your systems must be capable of generating standardised, digitally auditable records in the prescribed formats that inspectors will demand.
A Final Thought
The consolidation of India’s labour laws is, in principle, a positive reform. Simpler legal frameworks should reduce compliance costs and improve ease of doing business.
But this simplification of the legal code may not essentially mean a simplification of the compliance work.
The old system, for all its complexity, was manageable through manual processes because enforcement was inconsistent and penalties were low. The new system, with its higher penalties and clearer obligations, demands the kind of precision that only automation in cloud-hosted leave management systems can deliver.
If you are an Indian business bracing for the 2026 rollout, a compliant-ready platform like Book a free demo of Mewurk’s leave management system is the answer.
