India: Employment & Labour Law

The In-House Lawyer Logo

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, describe what reasons are lawful?

    In terms of the dismissal of an employee, the governing legislation would be the Industrial Disputes Act 1947 (“ID Act”) as well as specific provisions of the Industrial Employment (Standing Orders) Act 1946 (“IESO Act”), Shops and Establishment Act of the relevant state (“S&E Act”). For an employee to whom the aforesaid Acts do not apply, the termination of such employee other than for misconduct, would be ‘termination simpliciter’ and will have to be guided by the terms of his employment as mentioned under the employment agreement, the principles of natural justice and judicial precedents. Indian labour legislation does not envisage a ‘hire and fire’ policy. In case of misconduct, all dismissals must follow a proper procedure requiring an enquiry to be held. Further, the employee must be given a reasonable opportunity to be heard in the process of the enquiry. The courts stresses on the right to cross examine and in cases where the enquiry has been vitiated or has followed unlawful procedure, courts have had no hesitation in reinstating the employee to his post.

    The decision of an employer is liable to be challenged before an Industrial Tribunal and further before the High Court and Supreme Court as well. Courts may grant relief such as reinstatement with back wages or compensation in lieu of reinstatement. Loss of confidence in the employee, e.g. through his conduct such as habitual dishonesty, has been cited as one of the instances when reinstatement is not possible. Misappropriation or theft are also valid grounds for a dismissal of an employee. Also, unlawful industrial action such as ‘go slow’ will be valid grounds for a dismissal.

    If a termination simpliciter is challenged in a court of law, courts are free to determine if such employee is being victimised or punished or being discharged on account of his misconduct. Accordingly, courts are permitted to identify if the employer has given such employee a fair hearing in accordance with the principles of natural justice, prior to effecting his termination. In the absence of such fair hearing, the court is free to set a termination order aside, and reinstate the employment of an employee whose services have been terminated.

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

    Depending upon the nature, location and the number of employees in an establishment, the employer shall be required to comply with the provisions related to retrenchment under the ID Act with respect to employees to whom the ID Act applies.

    As per the ID Act, no workman employed in any industry who has been in continuous service for not less than 1 year under an employer shall be retrenched unless: a) the workman has been given 1 months’ notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid salary in lieu of such notice; b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to 15 days average pay for every completed year of continuous service or any part thereof in excess of 6 months; and c) a notice is served to the appropriate Government / authority as per the ID Act.

    If the industrial establishment (as defined under the ID Act) employing not less than 100 workmen on an average day of the preceding 12 months, terminates the employment of a workman who has been in continuous service for not less than 1 year, such industrial establishment is required to serve 3 months’ notice in writing to the workman being retrenched or salary in lieu of such notice and also take prior permission of the appropriate Government / authority as per the ID Act. Some states in India have increased the aforesaid 100 employee threshold to 300.

    Employees to whom the ID Act does not apply, shall be governed by the terms and conditions mentioned in their individual employment agreement.

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

    In cases where the business of a company is being transferred, the ID Act provides conditions wherein the workers who have been in continuous service of not less than 1 year in that undertaking immediately before such transfer, shall be entitled to notice and retrenchment compensation. Judicial precedents also insist on the requirement to obtain consent of the workers being transferred.

    The workers shall not be entitled to notice and retrenchment compensation in the event the following conditions are met: a) the service of the workman has not been interrupted by such transfer; (b) the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and (c) the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

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

    Termination of employment of workman:

    As discussed in question 2 above, depending upon the nature of establishment, the location of such establishment and the number of employees in such establishment, as per the ID Act, the employer is required to serve 1 / 3 months’ notice in writing to the employee being retrenched or salary in lieu of such notice.

    The S&E Act applies to employees who work in shops, commercial establishments, residential hotel, restaurant, eating house, theatre and other places of public amusement. The compliance with the S&E Act is also required in case of termination of employees. The restrictions on termination of employment are categorised on basis of time that an employee has spent in his employment. In almost all the states in India, an employee can only be dismissed after being given (i) at least 30 (thirty) days’ notice in writing; or (ii) wages in lieu of such notice. However, no employee shall be entitled to the notice or pay in lieu thereof if he is removed on account of misconduct established on record.

    Termination of employment of non-workman:

    There are no specific legislations governing severance payments to non-workman. The non-workman shall be governed by the terms and conditions mentioned in their individual employment agreement. Therefore, the employer shall be required to comply with the notice period requirements as mentioned under the said employment agreement, subject to minimum notice requirement under the S&E Act, as aforesaid.

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

    As discussed in Question 4 above, the employer can dispense with the notice period requirement as under the S&E Act and the ID Act by paying salary in lieu of such notice.

  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 say at home and not participate in any work?

    There is no statutory provision expressly barring garden leave clauses and a lot of companies in India practice this concept. However, such garden leave can only be enforced during the notice period of termination / resignation of an employee. In the event, the garden leave is for a longer duration as compared to the notice period of termination / resignation of an employee, the employee and the employer will be required to expressly agree on the extended notice period.

    However, when the validity of ‘garden leave’ clauses came for consideration before the Bombay High Court , it was argued that “the Garden Leave Clause is .... prima facie in restraint of trade and is hit by Section 27 of the Contract Act. The effect of the clause is to prohibit the employee from taking up any employment during the period of three months upon the cessation of the employment”. The Bombay High Court, accepting the argument, held that obstructing an employee who has left service from obtaining gainful employment elsewhere is not fair or proper.

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

    In order to give effect to the termination of an employee’s services, it is imperative to identify the nature of such employee’s engagement with the establishment to ascertain whether such employee will fall under the definition of a ‘workman’ under the ID Act or not.

    For employees who are ‘workmen’ as per the ID Act:

    The provisions of the ID Act will be applicable in case of employees who fall under the definition of ‘workman’. In addition to fulfilling the notice period requirements and the retrenchment compensation payable to the employee as discussed in Question 2 above, the employer must ordinarily follow the ‘last-in first-out policy’ for terminating the services of workers, unless the employer records reasons for retrenching any other workman.

    As discussed in Question 1 above, discharge or dismissal for misconduct, without conducting a domestic enquiry or with undue haste, in violation of the principles of natural justice, will constitute an unfair labour practice and the courts may order the reinstatement of the employee to his post.

    For non-workmen

    As discussed in Question 4 above, the compliance with the S&E Act is required in relation to the notice period requirements, in case of termination of the employment of a non-workman. The termination of such non-workman, other than for misconduct, would be ‘termination simpliciter’ and will have to be guided by the terms of his employment, the principles of natural justice, and judicial precedents.

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

    For employees who are ‘workmen’ as per the ID Act:

    Under the ID Act, any difference between an employer and workmen arising out of the workman’s retrenchment, dismissal, discharge or termination shall be deemed an industrial dispute and the workman concerned has the right to directly apply to a Labour Court or Industrial Tribunal for adjudication of the dispute, subject to a 3 year limitation period from the date of termination. Such courts/tribunal may execute an award, order or settlement against the employer and may also set aside the order of discharge or dismissal and direct reinstatement of the workman, and provide relief on such terms and conditions as it thinks fit. Additionally, the employer may also face penal consequences and fine in the event the employer does not comply with the provisions of the ID Act.

    For employees who are non-workmen:

    As discussed above in Question 1, if a termination simpliciter is challenged in a court of law, courts are free to determine if such employee is being victimised or punished, and being discharged on account of his misconduct. Accordingly, courts are permitted to identify if the employer has given such employee a fair hearing in accordance with the principles of natural justice, prior to effecting his termination. In the absence of such fair hearing, the court is free to set a termination order aside, and reinstate the employment of an employee whose services have been terminated. For employees to whom the S&E Act applies, the employer may also be subject to penalties under the S&E Act.

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

    Collective bargaining means the negotiations on working conditions and terms of employment between employers, group of employers or one or more employers’ organisation on one hand and one or more representative workers organisation on the other hand, with a view to reaching an agreement. In India, negotiations under collective bargaining agreements are usually limited to issues relating to wages, bonuses, working hours, benefits, allowances, terms of employment, holidays, etc. Such collective bargaining agreements are not relevant to the termination of employment.

  10. Does the employer have to obtain the permission of or inform a third party (eg 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?

    For employees to whom the ID Act applies

    As discussed in question 2 above, depending upon the nature, location and the number of employees in an establishment, the employer shall be required to serve a notice to the appropriate Government / authority and also take prior permission of the appropriate Government / authority as per the ID Act. Failure to provide the notice to the appropriate Government / authority or take prior permission shall attract penalty which shall be punishable with imprisonment and / or fine.

    For employees to whom the ID Act does not apply

    There is no requirement to consult or notify the local labour authorities for employees to whom the ID Act does not apply. Such employees shall be governed by the terms of their employment agreement and the S&E Act.

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

    The Constitution of India 1950 (“Constitution”) guarantees equality before law and prohibits discrimination of citizens on grounds of race, religion, caste, sex or place of birth. Such protection can be enforced against the state and not private sector establishments.

    The ID Act categorises various acts/ instances (in case of termination of employment) which may constitute an unfair labour practice. Such acts may include the following:

    • threatening workmen with discharge or dismissal, if they join a trade union;
    • discharging or punishing a workman, because he is urged other workmen to join or organise a trade union;
    • discharging or dismissing a workman for taking part in any strike (not being a strike which is deemed to be an illegal strike under the ID Act);
    • discharging or dismissing workmen

      • by way of victimisation;
      • not in good faith, but in the colourable exercise of the employer’s rights;
      • for patently false reasons;
      • in utter disregard of the principles of natural justice in the conduct of domestic enquiry or with undue haste.
    • to discharge or discriminate against any workman for filing charges or testifying against an employer in any enquiry or proceeding relating to any industrial dispute.

    An employer shall not commit any unfair labour practice and if the employer does so, such employer shall be punishable with imprisonment and / or fine for committing an unfair labour practice. The ID Act also states that any dispute or difference between the workman and the employer, arising out of the termination of employment, shall be deemed to be an industrial dispute and any such workman may make an application to the Labour Court or the Industrial Tribunal for the adjudication of the dispute.

    As per the Maternity Benefit Act 1961, it is also unlawful for an employer to discharge or dismiss a woman employee on account of being on maternity leave or to issue a notice of discharge or dismissal expiring during the period of maternity leave.

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

    In addition to any award that may be granted in favour of the worker by a court or Industrial Tribunal, the employer may also be subject to penalties and imprisonment prescribed under the relevant labour legislation. In case of a successful claim of the employee, the courts may set a termination order aside, and reinstate the employment of an employee whose services have been terminated.

  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?

    No, such categories of workers are not entitled to any specific protection, other than protection from discrimination on wage or maternity status or harassment, on the termination of employment.

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

    Under the ID Act, discharge or discrimination against any workman for filing charges or testifying against an employer in any enquiry or proceeding relating to any industrial dispute constitutes an ‘unfair labour practice’ and the employer will be subject to punishment with imprisonment and / or fine for the violation of the same.

    Further, workers, whether public servants or not, who have made any public interest disclosure are generally protected against any kind of victimisation under the Whistle Blowers Protection Act 2011. An employer may be subject to penalties in case of 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?

    An employer is required to make the following payments upon termination of employment of an employee:

    Retrenchment Compensation: As discussed in Question 2 above, an employer is required to pay retrenchment compensation (calculation mentioned in Question 2) in case of retrenchment. In case the employer is dispensing with the notice period requirement, the employer shall be required to pay salary in lieu of such notice. It is to be noted that, in the event the employment agreement / appointment letter of the employee states for a notice period of a longer duration as compared to the notice requirement for retrenchment, the notice period of the longer duration shall prevail and the employer shall be required to comply with the notice period provisions as may be set out in the employment agreement / appointment letter. Further, the employer may also be required to pay gratuity to the employee as set out below:

    Gratuity: For an employer to whom the Payment of Gratuity Act 1972 (“Gratuity Act”) applies, an employee who has rendered at least 5 years of continuous service for such employer, shall be eligible for gratuity upon termination of his employment. Such gratuity shall be calculated as follows: For every completed year of service or part thereof in excess of 6 months, the employer shall pay gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee. The amount of gratuity payable shall not exceed INR 10,00,000.

    Leave encashment: The accumulated leaves must be calculated and corresponding ‘wages’ be accordingly paid to the employees.

    Benefits: Employment agreement / appointment letter specify the benefits payable to an employee. Benefits contained in employment policies of an organisation are also made applicable to an employee by virtue of the employment agreement / appointment letter. The employees shall be provided with the benefits as per the employment agreement / appointment letter and the company policy.

  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.

    Rights which are mandatorily provided by the statute cannot be waived off.

  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.

    As per Section 27 of the Indian Contract Act 1872 (“Contract Act”), agreements in restraint of trade are void. The courts in India have generally held that while non-compete clauses may be valid during subsistence of the employment contract, they cannot operate post termination of the contract and shall be void. A restrictive covenant extending beyond the term of the contract is void and not enforceable. The doctrine of restraint of trade does not apply during the continuance of the contract of employment and it applies only when the contract comes to end.

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

    Confidential information of the employer can be protected even in the post-employment period. A clause which prohibits the employee from disclosing commercial and trade secrets is not restraint of trade as the intention is to protect legitimate interests in relation to the business of the employer. Restraining use of trade secrets during or after cessation of employment does not result into ‘restraint of trade’ under Section 27 of the Contract Act and therefore, can be enforceable under certain circumstances. However, such a clause should not restrict the employee from carrying on any lawful trade, occupation or business.

    The courts in India have generally held that while employees may be restrained from using the employer’s confidential information and trade secrets after termination of employment, such a bar cannot apply in respect of knowledge available in the public domain or which was self-acquired during the course of employment.

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

    There is no legal obligation for an employer to provide a reference under existing legislations.

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

    Common issues faced by employers while terminating the employment of an employee are:

    • Determining which employee will fall under the category of ‘workman’: Most labour legislations in India including the ID Act primarily apply to workmen who are mainly engaged in performing non-managerial or non-administrative roles. As discussed above, the ID Act lays down various benefits for workmen such as retrenchment compensation, retrenchment notice, etc. Therefore, in order to effectively terminate the employee’s services, it becomes imperative to identify the nature of such employee’s engagement with the establishment to determine whether such employee will fall under the category of ‘workmen’.

      Most employers are of the assumption that the remuneration of an employee shall determine whether an employee is a ‘workman’ or not, which is not the case. Most of the times, the employers tend to wrongly identify the category of the employee (i.e. workman / non-workman) and categorise them in the ‘non-workmen’ category, due to which the employer fails to comply with the provisions of the ID Act.

    • Multiplicity of labour laws: Due to a plethora of labour laws applicable to different sectors or industries, it is difficult for the employer to keep a constant track of the various labour laws, amendments to such labour laws and to comply with the same. For instance, the provisions for termination of an employment are set out in the ID Act as well as the S&E Act. The employer is required to ensure the compliance of the aforesaid Acts upon termination of the employment of the employee.
    • Trade Unions: The trade unions in India are usually present in manufacturing sector and are often backed by political parties. They often negotiate more for their self-interest than workers’ rights. Due to the interference of such trade unions, the termination of employment of workers sometime becomes a difficult task.

    To mitigate the aforesaid, the employer should ensure the following:

    • be well aware of the labour laws that are applicable to the establishment and the amendments to such labour laws;
    • test to determine whether the employee falls under the category of ‘workman’ to be done in a prudent manner;
    • the termination of the employment is in accordance with law and the employee has been paid all the benefits / dues;
    • the terms and conditions of the employment agreement / appointment letter are well defined and in accordance with applicable laws.
  21. Are any legal changes planned that are likely to impact on the way employers approach termination of employment? If so, please describe what impact you foresee from such changes and how employers can prepare for them?

    Some important changes proposed in the labour law sector are as follows:

    • The Ministry of Labour and Employment has envisaged consolidating several labour laws into four codes. Some key highlights in one of the proposed codes i.e. the Labour Code on Industrial Relations Bill 2015 are:
      • Increase in the amount of severance compensation which is equivalent to 45 days average pay for every completed year of continuous service payable on termination of employment as opposed to the compensation presently payable under the ID Act i.e. equivalent to 15 days average pay for every completed year of continuous service.
      • Increasing the number of workmen from 100 to 300, to trigger the requirement of obtaining permission from the Government for retrenchment of employees