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Employment in India

Indian employment law is heavily bureaucratic, with numerous statutory requirements with regards to contracts, termination procedures as well as employee pensions and holidays. The main distinction with regards to employee rights lies with whether the employee is considered a “workman” or otherwise under Indian employment law. As the following only aim to act as a guide in the broadest sense, it is still recommended that professional legal advice be sought when employing in India. For further reading, please refer to the Indian Ministry of Labour’s website here.

Key points on employment in India

Indian legislation views workers as two distinct categories: workmen and non-workmen. In India, most of the legislation in place primarily applies to workmen.

Under the Industrial Disputes Act (ID) Act, one of the main labour legislations in the country, a workman is defined as any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment are express or implied. An employee working in a managerial or administrative capacity, or those employed in a supervisory capacity earning more than INR10,000 per month, are excluded from the scope of this definition.

The model standing orders under the Industrial Employment (Standing Orders) Act 1946 also classify workmen as permanent workmen, probationers, badli workmen and temporary workmen based on the nature of their employment.

The definition of “workman” under the ID Act includes temporary workers. Temporary or part time workers are thus entitled to the same benefits as full­-time workers and subject to the provisions of the ID Act in relation to termination provisions. However, where a temporary worker is employed for a genuine specific task for a limited time period, the usual provisions concerning termination for full-­time workers will not apply to that temporary worker.

Indian law also recognises agency workers – workers employed through third party contractors. Their employment is governed by the Contract Labour (Regulation and Abolition) Act 1970.

A worker’s entitlement to statutory employment rights depends on the category of employee and multiple other factors, including nature of the work undertaken, remuneration, location of employee and type of industry. As the ID Act seeks to protect workmen, an employee who does not qualify as a workman will not receive any protection or benefit under the ID Act.

  1. Contracts

    In India, it is not mandatory for employment contracts to be written. However, some state specific statutes which regulate local businesses require prescribed particulars to be disclosed in writing to the employee, stating basic details such as the address and name of the employer, employee details, wage rates and designation. Having said that, most employers issue appointment letters to, or execute employment agreements with, their employees, which set out the terms and conditions of employment. Written contracts usually specify the following:

    • Title of job or nature of work (or job description);
    • Place of work;
    • Probation period, if any, and its terms;
    • Date of commencement of employment;
    • Salary/remuneration details along with any benefits that the employee is entitled to;
    • Type of contract (permanent or fixed-term);
    • Period of notice required for termination of employment;
    • Leave entitlement;
    • Conditions under which the employer can terminate the contract; and
    • Restrictive covenants – non-compete, confidentiality, non-solicitation provisions, etc.

    Collective agreements are common in labour intensive sectors, particularly the manufacturing sectors, including the automobile, banking and pharmaceutical industries. In cases where the employees are represented through a union, the terms of employment are negotiated and agreed with the employer through collective bargaining. While most labour unions are formed at the company level, there are also regional and industry specific unions. The employer is required under industrial labour regulations to consult with the employees or their representatives to finalise the terms of employment contained in the organisation’s standing orders.

    The terms of employment may be amended when both the parties agree to such amendment in writing. However, special rules apply to employees falling within the definition of “workman” under the ID Act. Where an employer wishes to change the conditions of employment (for example, wages, working hours and so on) of a “workman” employee, the employer must give either 21 or 42 days’ notice of the change in the prescribed form (the length of notice depends on which jurisdiction in India the employee is located in). The employee can then either agree to the change, or object to it and raise an industrial dispute. Where an objection is raised, the dispute must be resolved by the relevant tribunal. The employer is barred from implementing the change until the dispute has been resolved.

    For employees not covered by the ID Act, the employment contract will determine whether or not unilateral changes can be made by the employer.

  2. Probation Periods

    While there are no general laws addressing probationary periods, they are permissible under Indian employment law.

    However, under the Industrial Employment (Standing Orders) Act, 1946 (IESO Act) (in establishments to which it is applicable) a workman can be employed on a probationary basis to provisionally fill a permanent vacancy for a maximum of three months. The worker is not entitled to any dismissal notice or payment in lieu of notice during the period of probation.

    For employers where the IESO Act is not applicable, employers are free to decide on the reasonable duration of probation. However, notice periods may be dependent on any applicable state-specific S&E Act.

  3. Termination Procedures

    Under Indian law, there are two types of dismissal:

    • Ordinary dismissal
    • Dismissal for cause.

    Notice period

    Generally, the notice period for ordinary dismissal under the ID Act is one month, unless the employment contract prescribes a longer notice period. Some local shops and establishments statutes may also require the employer to notify the authorities in case of a dismissal. In certain specified establishments with more than 100 employees, however, an employer is required to serve a notice of at least three months with the reasons for retrenchment. Again, it is important to note that the provisions in the ID Act only regulate retrenchment of ‘workmen’. Non-workmen may be terminated pursuant to company policy or the employment contract.

    For dismissal with cause, an employer has to establish that misconduct has been proved at an enquiry following the principles of natural justice. An employee may be dismissed for reasons such as poor performance, breach of employment terms, misconduct, etc. Employment terminated on grounds of misconduct can be done with immediate effect, without providing any notice or wages in lieu of notice.

    Subject to certain exceptions, any kind of termination of service is known as retrenchment. However, an employer’s inability to give employment on account of the reasons as prescribed in the ID Act, which include a shortage of coal, power or raw materials, an accumulation of stock, the breakdown of machinery and a natural disaster, is known as a ‘lay-off’ under the act. In India, there are no separate rules or definitions for ‘collective dismissal’ or ‘reduction in workforce’.

    The ID Act also prescribes the last-in-first-out process to be followed when retrenching employees, i.e., where any workman belonging to a particular category of workmen in the establishment is to be terminated, except: (i) in case of any agreement between the employer and the workman in that behalf; or (ii) for reasons to be recorded by the employer in writing, the the workman who was the last person to be employed in that category should be retrenched first.

    Furthermore, where a future vacancy arises, the employer is required to give a preference for the retrenched workmen for re-employment.

    Severance payments

    Employees who are dismissed are entitled to certain termination benefits including:

    • Severance payment:  Equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months. Only a ‘workman’ who has been in continuous employment with the employer for more than one year is entitled to retrenchment compensation.
    • Leave encashment: The employee is entitled to payment of wages for accrued and unavailed leave days up to the date of termination of employment.
    • Gratuity payment: This is to be paid in accordance with the Gratuity Act, which entitles an employee who has rendered continuous service of at least five years to gratuity, upon termination of employment. Gratuity is calculated at the rate of fifteen days’ wages for every completed year of service or part thereof in excess of six months, subject to a limit of INR 1,000,000.
    • Any other amounts due under the employment contract.

    Termination benefits are calculated on the basis of the employee’s salary and length of service.

    The employer ordinarily has the option of paying wages in lieu of the termination notice.

    Collective dismissal

    Collective dismissal or a reduction in the workforce generally refers to retrenchment of a significant number of employees. Generally, an employer is not required to notify or seek approval of the relevant government authority. However, for employers with over 100 workmen who have been employed on an average per working day for the preceding 12 months, the employer cannot lay off any employee without the prior permission of the appropriate government authority, unless such lay-off is due to shortage of power or a natural disaster, and in the case of a mine, such lay off is due also to a fire, flooding, an excess of inflammable gas or an explosion. In such cases, the employer is required to seek approval for the continued lay-off of such employees within 30 days of such lay-off. There is no statutory requirement to notify the works council or trade union. Practically however, the employer should notify any employee representatives of any such intended layoff.

    Termination disputes

    In the event of a dispute, employees are permitted bring claims of unfair dismissal or wrongful termination of employment for remedy to the courts. In certain situations, an employee can also allege unfair labour practice on the part of the employer. The remedies for a successful claim typically include reinstatement of the employee with back wages. Alternatively, the courts may award damages for illegal or wrongful termination.

  4. Statutory Leave

    Working Hours

    Daily and weekly working hour limits depend on the establishment’s activities, and the relevant statute governing it. For example, all factories would fall under the purview of the Factories Act 1948 (Factories Act) while establishments carrying out commercial activity would be subject to the local shops and establishments statute applicable in the region in which the establishment is located.

    Daily hour limits usually range from between eight to nine hours, while the usual weekly limit is 48 hours. Under the Factories Act, the daily limit for factory workers cannot be exceeded without the prior permission of the authorities. Under the local shops and establishments statute, normal working hour limits can only be exceeded up to certain prescribed limits. In such a case, employees must also received overtime payments.

    Annual leave

    An employee’s leave entitlement is usually stipulated in the terms of the employment contract unless mandated by an applicable statute. For example employees of employers involved in a commercial activity would have their holiday entitlement determined under the local shops and establishments statutes. The thresholds usually range from 12 to 21 days’ holiday per year.

    The Factories Act also provides that every adult worker who has worked in a factory for at least 240 days in a calendar year is entitled to one day’s leave with wages for every 20 days of work.

    Medical leave

    The local shops and establishments statutes apply to all categories of employees except where the government has issued specific exemptions in relation to certain classes of employees. Some of these local statutes contain provisions mandating that employees are entitled to leave on account of illness or injury (ranging from 12 – 24 days). Factories which employ the requisite number of workmen must also provide sick leave to their employees (in accordance with the Factories Act). These periods of medical leave are paid.

    Employees who are covered by the ESI Act can claim sickness or disablement benefit (which is paid by the government). However, the employer cannot recover any sick pay from the government.

    Where the employee is entitled to benefits which are similar to benefits under the ESI Act, the employer can discontinue or reduce those benefits to the following extent:

    • Sick leave on half pay
    • Such proportion of any combined general purposes and sick leave on half pay as may be assigned as sick leave (but not exceeding 50% of the combined leave).

    If the employee avails himself of any sick leave from the employer under his conditions of service, the employer will be entitled to deduct the amount of benefit he is entitled to under the ESI Act.

    Maternity leave

    The Maternity Benefit Act (MB) stipulates that female employees who have been employed in the establishment for at least 80 days preceding the expected date of delivery are entitled to paid maternity leave of 12 weeks, of which not more than six weeks shall precede the date of her expected delivery. In the event of miscarriage or medical termination of pregnancy, a female employee is entitled to leave with wages for a period of six weeks immediately following the day of her miscarriage. The MB Act also provides for paid leave if the employee undergoes a tubectomy or in case of any illness arising out of pregnancy, delivery, or premature child birth.

    During maternity leave, the female employee is still entitled to receive her salary and benefits . She is also entitled to a medical bonus of INR 3,500. The employer is prohibiting from requiring the employee to do any work during maternity leave. The pregnant female employee also has the right to request that she not be required to do any work of an arduous nature or which involves long hours of standing, is in any way likely to interfere with her pregnancy or the normal development of the foetus, or is likely to cause her miscarriage or otherwise to adversely affect her health.

    In the event the employee is covered under the ESI Act, the benefit is paid by the government.


  5. Pensions and Benefits

    Social security in India is governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act). The EPF Act provides for the following three schemes:

    • Provident Fund Scheme (PF Scheme).
    • Pension Scheme.
    • Employee Deposit Linked Insurance Scheme (EDLI Scheme).

    The EPF Act applies to the establishments with 20 or more employees, or those voluntarily opting to be covered under the Act.


    In 2008, the Ministry of Labour and Employment extended the applicability of the Provident Fund and Pension Scheme rules to a new class of employees called “International Workers.” Under the EPF Act, the definition of “International Workers” includes the following:

    • An Indian employee (an Indian passport holder) who has worked or is going to work in a foreign country with which India has entered into a social security agreement and who is or will be eligible to avail of the benefits under a social security program of that country, in accordance with such agreement
    • A foreign national who works for an establishment in India to which the EPF Act applies

    As such, foreign nationals and their respective employers are now required to contribute to PF and PS schemes.

    However, the following international worker employees are excluded:-

    • International workers who are contributing to a social security program of his or her country of origin, either as citizen or resident.
    • The employee’s home country has entered into a social security agreement with India on a reciprocity basis and the employee is considered to be a detached worker under the social security agreement by obtaining a detachment certificate from their respective social security authorities

    India currently has a number of bilateral social security agreements in place, including Belgium, Denmark, Finland, France, Germany, Hungary, Korea (South), Luxembourg, the Netherlands, Sweden and Switzerland.

    It can also be noted that local employees earning monthly salaries exceeding of INR15,000 are excluded from the legislation, but this exclusion does not apply to International Workers. As such, contributions are required for International Workers even if the their monthly salary exceeds INR15,000.

    Rate of contribution

    Provident Fund and Pension Fund

    Both employers and employees are required to contribute 12% of the employee’s monthly salary towards the PF scheme (24% in total). The employer must pay both its own and its employees’ contribution, but has the option of recovering the employees’ contribution by deducting the equivalent amount from the employees’ salary. Employer contributions are exempt from tax up to 12% of monthly pay.

    Employees (including International Workers) who become members on or after 1 September 2014 earn a monthly salary exceeding INR15,000 have their entire contribution allocated to the Provident Fund. For employees who are existing members as of 1 September 2014, 8.33% of the employer’s 12% share of the contribution is allocated to the Employees’ Pension Fund, with the balance allocated to the PF scheme.


    Under the EDLI Scheme, the employer must contribute 0.5% of basic wages, capped at INR15,000 per month for all employees.

    Employee State Insurance Act (ESI Act)

    The ESI Act provides for health care and cash benefit payments for employees in the event of sickness, maternity, temporary or permanent physical disablement, or death due to employment injury

    Similar to the PS and PF schemes, the ESI Act applies to establishments employing 20 or more employees (though in some states this threshold is reduced to ten employees) and employees earning monthly salaries of INR 15,000 and under. Both employee and employer must make contributions to the Employees’ State Insurance Corporation at the rate of 1.75% and 4.75% respectively. The employer must pay both its own and its employees’ contributions, but also has the option to recover the employees’ contributions.

Outsourcing Employment Through a GEO Employer of Record Service

Compliance with local employment requirements is just one of the issues foreign companies face when employing staff in India. For companies which intend to employ their staff directly through their incorporated Indian entity, professional legal advice is recommended. Shield GEO provides an alternative path for companies to outsource the employment of their staff in India.

As a Global Employer Organization (GEO), Shield GEO acts as the Employer of Record and ensures the employment is compliant with host country regulations regarding employment. In addition Shield GEO will handle payroll processing, tax and immigration. Using Shield GEO is the fastest and most cost effective way to deploy local and foreign workers into India.

The Shield GEO solution is an attractive alternative where

– the company is looking to employ staff quickly

– the company doesn’t have an appropriately incorporated entity in India

– the company wants to work within a defined budget

– the company wants to limit its initial commitment in India

– the company needs help with tax, employment, immigration and payroll compliance in India

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