India: Employment & Labour Law

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This country-specific Q&A provides an overview to employment and labour law in India.

It will cover termination of employment, procedures, protection for workers, compensation as well as insight and opinion on the most common difficulties employers face and any upcoming legal changes planned..

This Q&A is part of the global guide to Employment & Labour. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/employment-labour-law/

  1. Does an employer need a reason in order to lawfully terminate an employment relationship? If so, what reasons are lawful in the jurisdiction?

    Indian employment laws do not recognise at-will employment. Termination of employment typically requires to be supported with cogent reasons.

    Termination could be on account of misconduct, non-performance, loss of confidence, redundancy etc. Misconduct normally includes insubordination, theft, fraud, or dishonesty in connection with the employer’s business or property; wilful damage to or loss of employer’s goods or property; taking or giving bribes or any illegal gratification; habitual absence without leave; habitual late attendance; habitual breach of any law applicable to the establishment; riotous or disorderly behaviour during working hours at the establishments or any act subversive of discipline; habitual negligence or neglect of work; sexual harassment etc. Redundancy is typically on account of business restructuring or reorganisation, excessive workforce, economic slowdown of business etc.

  2. What, if any, additional considerations apply if large numbers of dismissals (redundancies) are planned?

    The process of dismissal for redundancy depends on the category of the employee. Broadly speaking, employees can be categorised either as a workman or a non-workman. A ‘workman’ is any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, but does not include any such person who is employed mainly in a managerial or administrative capacity; or who, being employed in a supervisory capacity, draws wages exceeding INR 10,000 (USD 144 approx.) or performs functions mainly of a managerial nature.

    The Industrial Disputes Act, 1947 (ID Act) regulates redundancies of workmen category employees. Redundancy of non-workmen category is regulated by the State-specific Shops and Establishments legislations.

    As per the ID Act, in case of commercial establishments and manufacturing units (engaging less than 100 workmen) the process of dismissal entails providing at least 1 month notice of termination or pay in lieu thereof; payment of a severance compensation and a post facto intimation to the labour authorities. The principle of ‘last in first out’ needs to be followed unless there are justifiable reasons in writing to deviate from such principle. In case of manufacturing units engaging 100 or more workmen, a prior approval from the labour authorities is required apart from providing a 3 months’ notice or pay in lieu and payment of a severance compensation.

    The State-specific Shops and Establishments legislations which primarily prescribe the notice period for termination (which is typically 1 month or pay in lieu thereof) govern the dismissal of non-workmen category employees.

    Apart from these regulations, the employment contracts and company policies on redundancies would need to be followed.

    In case of mass redundancies, employers often opt for a more amicable route such as voluntary retirement schemes. This helps in bringing down numbers subject to the severance package being generous.

    Other aspects to bear in mind include the settlement agreements with worker unions which if any would require consultation prior to implementation of dismissals.

  3. What, if any, additional considerations apply if a worker’s employment is terminated in the context of a business sale?

    Where the termination is pursuant to a business sale, the workmen category employees are entitled to notice and compensation under the ID Act as if they have been retrenched. This involves a notice of 1 month or pay in lieu thereof along with a retrenchment compensation of 15 days’ average pay for every year of service or any part in lieu thereof. However, where the worker is transferred on no less favourable terms of employment with continuity of service as part of the sale of the business undertaking, there is no requirement to provide any notice and compensation.

  4. What, if any, is the minimum notice period to terminate employment?

    The notice period for termination is usually 1 month. However a longer period can also be prescribed by contract. Many employers prescribe a notice period of 2-3 months for junior level employees and up to 6 months for senior level employees.

  5. Is it possible to pay monies out to a worker to end the employment relationship instead of giving notice?

    Yes, it is possible to pay wages in lieu of the notice period in order to end the employment.

  6. Can an employer require a worker to be on garden leave, that is, continue to employ and pay a worker during his notice period but require him to stay at home and not participate in any work?

    Yes, employees can be placed on garden leave during their notice period and be required to stay at home. Such provisions are generally incorporated in the contracts of employment and policies of the employer. The employees are entitled to their full salary during the period of garden leave.

  7. Does an employer have to follow a prescribed procedure to achieve an effective termination of the employment relationship? If yes, what are the requirements of that procedure or procedures?

    Termination of a workman for any reason other than on grounds of discipline is referred to as ‘retrenchment’ under the ID Act.

    The process for retrenchment of a workman under the ID Act depends on the nature of establishment and the number of workers employed.

    In case of a commercial establishment the process of retrenchment requires following conditions to be fulfilled by the employer with respect to any workman who has rendered continuous service of not less than 1 year: (i) provide 1 months’ notice in writing indicating the reasons for retrenchment or pay wages in lieu of such notice to the workmen; (ii) pay retrenchment compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of 6 months; (iii) notify the concerned labour authority by filing the prescribed form within the prescribed time; (iv) comply with the ‘last in first out’ principle unless there exists an agreement with the workman in this behalf or the employer has justifiable reasons which have been recorded in writing to deviate from such principle; and (iv) the employer is required to give preference to the retrenched workmen in the matters of re-employment over other persons, in the event a vacancy in the same position arises with the employer. However, such re-employment does not give the workman the right to secure employment on the previous terms and conditions of service.

    In case of manufacturing facilities employing 100 or more workmen, prior permission is required to be obtained by making a 3 months’ advance application in the prescribed format. Subject to such permission the workmen can be terminated by 3 months’ notice or pay in lieu thereof along with payment of retrenchment compensation as prescribed under the ID Act. While considering the application for retrenchment, the authority makes such enquiry as it thinks fit, and gives the opportunity of being heard to the employer, the concerned workmen and other persons interested in the retrenchment, before granting or refusing the permission. The order granting or refusing the permission is typically issued within 60 days from the date on which the application is made. In case no such communication is made, the permission is deemed to have been granted on the expiry of 60 days. Any retrenchment without obtaining such permission is deemed illegal from the date on which retrenchment notice was issued.

    It may be noted that the retrenchment following the approval route also requires compliance with the ‘last in first out’ principle along with the opportunity of re-employment to the retrenched workman.

    In case of non-workmen employees, retrenchment would need to be undertaken as per the terms of their contract of employment, company policies and the relevant Shops and Establishments legislation, which typically requires a notice or pay in lieu thereof to be given to the employee for termination.

  8. If the employer does not follow any prescribed procedure as described in response to question 7, what are the consequences for the employer?

    The consequences of non-compliance involves fines and imprisonment. Additionally, the employer could also be required to reinstate the employee with or without back wages.

  9. How, if at all, are collective agreements relevant to the termination of employment?

    Collective agreements may contain clauses on the manner of termination and require consultation with the trade unions prior to effecting any termination.

  10. Does the employer have to obtain the permission of or inform a third party (e.g local labour authorities or court) before being able to validly terminate the employment relationship? If yes, what are the sanctions for breach of this requirement?

    Where the workmen category employees are engaged in an industrial establishment which is a factory, mine or plantation having 100 or more workmen in the preceding 12 months, the employer would be required to obtain prior permission of the government before proceeding with the termination. In any other case, the employer would need to give a post-facto intimation of termination of workmen to the government authority in the prescribed manner. The sanctions for the breach of these obligations would be same as those mentioned in our response to question 8 above.

  11. What protection from discrimination or harassment are workers entitled to in respect of the termination of employment?

    In case of redundancies the ‘last in first out’ principle is usually to be followed unless there are justifiable reasons for deviating from it. This ensures protection from discrimination between workmen to be dismissed on grounds of redundancy.

    The ID Act lists certain practices to be unfair on the part of employers so as to protect workers from termination of employment. These include dismissal by way of victimisation, not in good faith, false implications or reasons, disregarding the principles of natural justice, as a disproportionate punishment not commensurate with the misconduct amongst others.

    Typically employment policies provide for protection from victimisation where employees are whistle-blowers or filed complaints on harassment.

  12. What are the possible consequences for the employer if a worker has suffered discrimination or harassment in the context of termination of employment?

    Where a workman category employee alleges discrimination or harassment by the employer in context of termination of employment, he/she would be able to file a complaint of unfair labour practice against the employer. Where the allegations of unfair labour practice are proved against the employer, the employer may be required to reinstate the employee, and may be awarded punishment involving imprisonment and/or fine.

  13. Are any categories of worker (for example, fixed-term workers or workers on family leave) entitled to specific protection, other than protection from discrimination or harassment, on the termination of employment?

    The Maternity Benefit Act, 1961 makes it unlawful for an employer to discharge or dismiss a woman who absents herself from work in accordance with the provisions thereof except on grounds of misconduct. The restriction applies on termination which is during or on account of the woman’s absence, or to issuance of notice of discharge or dismissal given on such a day that it expires during the woman’s absence.

    Workmen category employees are also protected from dismissal during pendency of proceedings of an industrial dispute. Any dismissal can be effected only with the permission of the adjudicating authority.

  14. Are workers who have made disclosures in the public interest (whistleblowers) entitled to any special protection from termination of employment?

    While the labour laws do not specifically provide for any special protection to whistle blowers from termination of employment, however, dismissing a workmen by way of victimisation or not in good faith has been prohibited under the ID Act and amounts to unfair labour practice. In addition to this, the Companies Act, 2013 makes it mandatory for certain companies as prescribed thereunder to establish a vigil mechanism for directors and employees to report genuine concerns in the prescribed manner. Such mechanism is required to provide for adequate safeguards against victimisation of employees and directors who avail of the mechanism. These mechanisms typically provide for anonymity to the whistle blower to ensure protection against victimisation.

  15. What financial compensation is required under law or custom to terminate the employment relationship? How do employers usually decide how much compensation is to be paid?

    Financial compensation in connection with termination of employment includes payment of all contractual dues and statutory dues.

    The contractual dues would include the amounts payable in accordance with the contract of employment and policies of the company such as superannuation, incentive payments, any reimbursement etc.

    The statutory dues typically include (depending on the applicability as per each labour legislation) leave encashment of unutilised and accrued privileged leave; provident fund; gratuity; bonus and salary up to the last date of employment.

    All of the aforesaid statutory payments are required to be paid in the manner prescribed under the relevant legislations.

    In addition to the contractual and statutory dues, a gratis amount is paid to the employee as a goodwill gesture. Such additional payments assists in amenable exits.

  16. Can an employer reach agreement with a worker on the termination of employment in which the employee validly waives his rights in return for a payment? If yes, describe any limitations that apply.

    It is possible to enter into agreement with the employee to mutually terminate the employment in consideration for a lump sum payment towards his dues arising out of the employment. In such a case, the cessation of employment can be recorded as a mutual separation between the employer and the employee. The lump sum amount paid to the employee in a mutual separation is typically over and above the statutory and contractual dues payable to the employee. However, it is not possible to contract out of payment of statutory dues. Given that this method requires one-on-one negotiations with the employees, it is difficult to implement where the number of employees proposed to be terminated is large.

  17. Is it possible to restrict a worker from working for competitors after the termination of employment? If yes, describe any relevant requirements or limitations.

    Under Indian law, restrictions on employment beyond the contractual term are not enforceable as it is a restraint of trade under the Indian Contract Act, 1872. An employer cannot restrict its employee from joining a competitor. However, courts in India have held that negative covenants of restraint during the term of employment, where the employee is bound to serve his employer exclusively, are not considered as a restraint under the Contract Act.

  18. Can an employer require a worker to keep information relating to the employer confidential after the termination of employment?

    Yes, non-disclosure and confidentiality clauses are enforceable even after termination of employment under Indian law.

  19. Are employers obliged to provide references to new employers if these are requested?

    The labour legislations in India do not prescribe any obligation to provide reference to a new employer. It is at the discretion of the employer.

  20. What, in your opinion, are the most common difficulties faced by employers in your jurisdiction when terminating employment and how do you consider employers can mitigate these?

    Employers often tend to implement terminations in haste without complying with the requirements under law and contract. This results in litigation which could otherwise be avoided. For example where it is intended to terminate an employee for a misconduct, it is imperative that any such decision of termination is commensurate with the nature of the misconduct and preceded by a domestic enquiry in compliance with the principles of natural justice. The employer should maintain proper documentation before implementing the decision of termination of any employee to demonstrate its bonafide in case of challenge. In cases of redundancies, the process prescribed under the ID Act should be complied with and compensation under law and contract should be paid. It is good practise to obtain a full and final release of dues from the employees. Consultation requirements with trade unions in case of unionised employees should also be borne in mind.

  21. Are any legal changes planned that are likely to impact on the way employers in your jurisdiction approach termination of employment? If so, please describe what impact you foresee from such changes and how employers can prepare for them?

    While there are many big ticket reforms that have been proposed by the Government of India to the existing labour laws, one that is likely to impact the way employers approach termination of employment is the proposal to simplify the process of termination of workmen in manufacturing units having up to 300 workmen. At present, a manufacturing unit employing 100 or more workmen on an average in the preceding 12 months is required to obtain prior approval of the government before terminating any workmen. Such limit is proposed to be increased to 300. Further, the retrenchment compensation under the ID Act which currently is payable at the rate of 15 days’ wages for every completed year of service is proposed to be increased to 45 days. Therefore, while the employers having smaller establishments will find it easier to terminate the workmen without any approval requirements, the overall cost of termination would be much more than what is currently incurred by the employers. As of now, there is no light on when these proposals are likely to be implemented by the government. However, the employers would need to be prepared to bear the additional cost as and when these proposals are enforced.