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How to Continue Employing Staff in India After Closing an Indian Entity

Companies that are planning on closing an overseas entity for any reason will want to consider how to continue employing valued staff.  Just because the entity is closing does not mean that there is no further need for skilled and experienced employees, so a strategy will be necessary to keep them onboard.

If you are closing an entity in India, it is important to pay attention to local regulations and labor policies that may affect how you handle employee transitions.  This is especially crucial if you are planning on retaining only a portion of your Indian staff and terminating others.  There are several options to accomplish this with varying levels of compliance and employee appeal.

How to Employ and Pay Staff in India Without an Entity

Once the decision has been made on retaining staff, the next step to find a new employment solution.  If you have been doing business in India for some time you may have a local partner (vendor or supplier) who would be willing to place your employees on their payroll.  This appears to be a simple option as long as you have a trust relationship with the partner.

But at best, this is an interim solution and can’t be relied on for long term employment.  The employee may have doubts about job security or benefits when there is a new ‘employer’ unrelated to their actual managed duties, and the partner would have a fair amount of control over their statutory rights.

Some companies will elect to shift the employees into an independent contractor relationship, which also saves the cost of employment benefits and entitlements.  This option would have to be acceptable to the employee as they would be giving up those very same benefits.  If they were unhappy with the decision at some point, they could easily bring a claim of misclassification if you continue to manage their work and time just as if they were an employee.

Neither one of these choices would be appealing to long term, high value employees so a more complete solution will be needed.

Use an employer of record to employ your staff

Another option for transferring staff is to use an employer of record (EOR) located in India. The EOR is a legal entity already in place to hire and payroll your employees according to Indian regulations.  They become the administrative employer, while you continue to manage the daily work schedule and methods of your employees.

The EOR would help draft the new employment contract, re-hire the employees and place them on the payroll, to complete a seamless transition from your former entity.

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What to Consider When Closing an Entity in India and Transferring Employees

Even with the EOR solution, there are a few things to consider when transferring your employees from an entity.  Most of these relate to ensuring that your employees are being given equitable treatment when the transfer is complete.

Costs and fees

There will be costs associated with transferring employees, including the set up and monthly management fees of the EOR.  You may also incur legal or administrative fees when closing your entity in India, as it was a registered corporation.

Compliance with local regulations

Closing an entity is fairly straightforward if you follow the rules, but there is a risk if you don’t handle the employee transition correctly.  Before you close your entity, the employees will have to be terminated with statutory notice periods and protocols, to avoid any claims of unfair termination.  Only then can they be re-hired and onboarded by the EOR.

For example, an employee on maternity leave cannot be terminated in India for any reason, so their consent would be required prior to the transfer.  This type of issue is why you will want to use an EOR in India that is experienced with transitioning and onboarding employees between entities.

Maintaining employee seniority

Employee seniority can affect entitlements such as annual leave, severance and pensions, so HR managers should work with the EOR to make sure seniority is maintained post-transfer.

Annual leave

Typically, when an employee is terminated, their unused annual leave will be paid out.  This becomes complicated when a transfer occurs to a new entity, as the employee may prefer to keep the vacation days intact.  You will want to know if the Indian EOR can allow for the transfer of the days, possibly in the new employment contract and with the employee’s consent.

Employee benefits

Naturally, employees will want to know if their non-statutory benefits will be the same when employed by the EOR, such as health insurance coverage.  It will matter to them if the policy is the same or better, and if a change of providers is made that there is no gap in coverage.  The following case illustrates how this situation can be handled to keep employees satisfied.

Client Case: Maintaining Health Insurance When Employing Staff Through an EOR

Context:

We had a client in India with over 20 employees, that was closing their entity, and wanted to retain all of the employees.  During the transition planning they noted that they wanted to make sure the health insurance coverage was the same or better than the policy they had through their entity.  The pandemic made this benefit even more important than usual.

Solution:

We obtained the current policy and coverage details from the client, and then worked with our local partner in India to find health insurance that had the same or better coverage.  That way, the employees were ensured of already having similar coverage in place with the transfer to the EOR.

Summary

It is not uncommon for multinationals to close entities for business reasons, but still want to retain their employees’ experience and talent.  In an era of remote work, this is a completely practical option as long as the employees feel their situation has not changed substantively.

Shield GEO can facilitate the transfer of employees from your entity to our local EOR in India, without any interruption of payroll, benefits or other employee entitlements.  Your employees will continue with their daily work tasks and schedule while we handle every part of their administrative transfer.  We make international employment simple.

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The information in this article is subject to changes in local legislation.

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