Indian employment laws do not distinguish between blue-collar and white-collar workers; employees are instead categorised according to their designation, remuneration, place of work, nature of work, type of industry, etc.
For instance, the workman category (which applies to lower income groups or non-managerial employees) is governed by various statutes, such as the Industrial Disputes Act, 1947 (ID Act), the Factories Act, 1948 (Factories Act) and the Industrial Employment (Standing Orders) Act, 1946 (SO Act). The ID Act defines the term "workman" to include any person employed in any industry to do any manual, skilled, unskilled, technical, operational or supervisory work. The ID Act specifically excludes people in managerial positions or whose wages exceed INR10,000 per month (approximately USD150).
The SO Act classifies employees as temporary workmen, permanent workmen, probationers, substitutes, apprentices and casual workers, based on the nature of their employment.
Another distinction exists between government employees and private sector employees. The terms and conditions of government employees are contained within the Indian Constitution and the rules enacted by the federal government and state governments covering different state professions such as the Indian civil services, the foreign services, the judiciary and subordinate category employees.
Private sector employees are governed under their employment contracts, the state-specific Shops and Establishments Acts (SE Acts) and other legislation governing private and government sector employees.
Further, there is a large population of workers engaged in unorganised sectors without any statutory benefits.
The category of agency or contract workers is regulated under the Contract Labour (Regulation and Abolition) Act, 1970. Normally, contract workers are not eligible for the statutory benefits payable to employees. However, the Indian government has recently proposed an amendment to the aforementioned legislation, suggesting a revision of the definition of "contract labour" to exclude workmen regularly employed in the establishment of the contractor. This would mean that these workers would be treated as employees of the establishment and eligible for the statutory benefits granted to the principal employer's employees.
Indian law and the Indian courts do not distinguish between full-time and part-time workers, with the latter being entitled to the same benefits, subject to the provisions of the ID Act.
India's employment laws do not have any provisions prescribing the term of an employment contract. Broadly, employment contracts can be for an indefinite term or a fixed term. Fixed-term contracts are commonly used for employees undertaking work of a temporary nature or project-based work. Consultants and contract employees also execute fixed-term contracts with employers. The Indian government has extended fixed-term employment to all sectors to ensure statutory benefits for fixed-term workers as well as those employed on an indefinite basis. From a practical standpoint, it is advisable to execute short-term contracts with employees to ensure flexibility in termination, and for better enforcement, particularly of restrictive covenants such as non-compete and non-solicitation clauses. However, in many cases, including that of government employees, open-ended agreements are preferred to secure long-term employment and to make use of the statutory benefits available to employees based on the length of their service. In the private sector, short-term agreements present hiring challenges for employers because well-qualified employees at all levels seek job security and long-term commitment. Accordingly, employers have to include clauses in their employment contracts that give them the flexibility to terminate the employment without incurring any liabilities or making potential claims by outgoing employees more likely.
Indian law does not mandate employer-employee contracts. However, certain state-specific SE Acts require an employer to issue an appointment letter in a prescribed form, containing basic information such as the employer’s name and address and employee details, wages, allowances and joining date. Furthermore, the rules under the SO Act (to the extent applicable) require that the employer issues a written order on the employee’s completion of the probation period.
Nevertheless, it is prudent to execute comprehensive employment contracts to capture the key terms and conditions of employment, which may vary based on the nature of work and the employees’ designations. There are certain implied terms in an employment contract, such as confidentiality obligations, the protection of trade secrets, good faith and duty of care.
Further, legislation including the ID Act, the Factories Act, the SO Act and the SE Acts, prescribe minimum employment terms such as work hours, wages, leave entitlement, holidays, notice and termination entitlements and health and safety standards. These must be clearly communicated to the workmen/employees.
A comprehensive employment contract must include all the important terms, such as the job description, rate of compensation, statutory entitlements, terms of employment, rights and obligations of both parties, termination conditions, confidentiality and non-disclosure provisions, intellectual property and technology assignment, compliance with company policies and the preferred dispute resolution mechanism. For senior designations the agreement may also include post-termination obligations such as non-competition and non-solicitation (to the extent enforceable, or also for deterrent purposes), stock options, indemnity and gardening leave.
In view of the proposed stringent data privacy regime in India, the employment contract may also include the employees’ consent for the collection and processing of their personal data, the employees’ obligation to safeguard against data breaches, and the liabilities for data breaches.
As regards the formalities, it is advisable to stamp the contracts by paying a nominal government levy (stamp duty) under the Indian Stamp Act, 1899, as applicable to the respective state in which the contract is executed. The contract must be stamped prior to execution, or within three months of its receipt in India, if executed abroad. An unstamped contract is inadmissible as evidence in Indian courts. Further, it may be time consuming to stamp the agreement at the litigation stage and may delay the proceedings, which may be prejudicial to employers seeking urgent relief in cases of employee breach.
The Factories Act, the SE Acts, the Model Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2016 (Model Shops Code) and the newly introduced Code of Wages Act, 2019 prescribe a maximum of nine working hours per day and 48 hours a week. Further, a worker shall not be made to work for more than five hours without taking a break of at least half an hour. The total spread-over period (that is the total length of time from the start of a working day to its conclusion including breaks) shall not exceed ten and a half hours under the Factories Act, and 11 hours under the SE Acts. Further, the workers must be given at least one day off a week. The foregoing work hours, overtime and the spread-over periods may be modified by the orders of chief inspectors under the respective statutes. The Model Shops Code does not prescribe the opening or closing hours, and the establishments can remain open throughout the week.
There is a restriction on women’s work hours, and women are not permitted to work between 7pm and 6am. This restriction can be relaxed by a chief inspector, but no permission can be granted to work between 10pm and 5am. Certain state governments have granted exemptions to specific commercial establishments, such as IT companies, hotels and media companies, allowing female employees to work beyond the permissible hours at night. These exemptions are conditional and the employer must follow the prescribed safety measures, such as special transport arrangements through verified drivers and cabs and other conditions as imposed by state-specific authorities.
The work hours of employees working in a managerial capacity, and those exempted under these statutes, are governed under their respective employment contracts and there is no cap on the maximum work hours.
Indian law does not have any provision granting flexible working hours to employees or workers. The Maternity Benefits (Amendment) Act, 2017 (MB Act) permits work from home or flexible work hours for eligible female employees, subject to the employer’s discretion and based on the nature of the work.
The ID Act does not exclude part-time workers from the definition of workmen, and the Indian courts have ruled in numerous cases that there is no distinction between full-time and part-time workers. Accordingly, part-time workers are entitled to the same terms and conditions of employment as full-time workers, on a proportionate basis and subject to the provisions of the ID Act. Further, the contractual terms for part-time workers can be the same as for full-time workers, and the same obligations can be enforced against part-time workers, including confidentiality and non-disclosure obligations.
If workers are required to work in excess of the maximum daily and weekly working hours stipulated under various statutes, they will be entitled to receive wages for that overtime work, at twice their normal wages. The Factories Act stipulates a maximum of 50 overtime hours in a quarter, which can be extended to a maximum of 75 hours in exceptional circumstances.
The SE Acts also contain provisions relating to overtime and permit up to 40-50 overtime hours in three months. However, the Model Shops Act and the respective SE Acts of Maharashtra and Gujarat have increased the permitted overtime hours significantly, to 125 hours in a quarter.
Additionally, the government has proposed the Code on Occupational Safety, Health & Working Conditions, 2018 which will be an important amendment once notified and will merge the 13 laws listed below.
The Code is expected to be notified by December 2019 or early 2020 and may increase the amount of permissible overtime to a maximum of 125 hours in cases of excessive workload or public interest, in addition to regulating other terms and conditions of employment.
The Ministry of Labour and Employment notified a unified and comprehensive employment law in India, Code on Wages 2019 (Wages Code) in August 2019. The Wages Code replaces the following laws:
The Wages Code applies to employees in the organised and un-organised sectors. It prescribes that the central (federal) government shall fix a floor wage based on the living standards of workers and the geographical region. The state governments shall fix the minimum wage for the respective states, which must be higher than the floor wage. In cases where the existing minimum wages fixed by the central or state governments are higher than the floor wage, they cannot reduce the minimum wages.
The central/state governments must revise the minimum wage at least every five years.
The bonus payment provisions under the Wages Code apply to establishments that have 20 or more workers. Annual bonuses are payable to all employees whose wages do not exceed a level notified by the central or state government. The bonus shall be at least 8.33% of the wages or INR100 (less than USD2), whichever is higher. Additionally, the employers must distribute a portion of the gross profits in proportion to the employees’ annual wages, subject to a maximum bonus of 20% of their annual wages.
The Wages Code disqualifies an employee from receiving their bonus if the employee is dismissed from service for:
Many employers pay signing bonuses, retention bonuses, performance-based bonuses, etc, to incentivise employees. These are not governed under the Wages Code. Although there are government-prescribed compensations, minimum wages, bonuses, etc, there is no government intervention. However, any instance of non-compliance with the Wages Code is punishable with imprisonment for not more than three months and/or a fine of INR100,000 (approximately USD1500).
Vacation and vacation pay entitlement is generally covered under employment contracts. The holiday/leave entitlement under Indian law includes the following:
The Factories Act also provides that every worker is entitled to one day's paid leave for every 20 days of work.
Employees are eligible for annual leave with wages once they have completed one year in the organisation and served for more than 240 days in that year.
The leave provisions under the Model Shops Code include five days of annual leave for every 60 days of work performed for workers who have been employed for at least 3 months in a year, one day of annual leave for every 20 days of work performed if an employee has worked for at least 240 days in the preceding year, eight days of casual leave every year to be credited on a quarterly basis, and eight festival holidays in a year. Currently, the states of Maharashtra and Gujarat have implemented these benefits.
Indian law does not have a specific required-leave category, and such necessity-based leave is normally part of casual leave.
The Maternity Benefit Act, 1961 and the MB Act govern maternity benefits in India and are applicable to any establishment with more than ten employees. Under the MB Act, a female employee who has worked in an establishment for at least 80 days in the twelve months preceding the date of her expected delivery is eligible for maternity benefits. The MB Act requires the employer to grant 26 weeks of paid maternity leave to the eligible woman for the birth of her first two children, of which not more than eight weeks shall precede the date of her expected delivery. For every child thereafter, the female employee will be entitled to 12 weeks of paid maternity leave, of which not more than six weeks shall precede the date of her expected delivery. 12 weeks of paid leave must be granted to women who adopt a child below the age of three months.
In the event of a miscarriage or the medical termination of a pregnancy, a female employee is entitled to six weeks of paid leave immediately following the day of her miscarriage or termination. The MB Act also provides for paid leave if the employee undergoes a tubectomy, or in cases of illness arising out of pregnancy, delivery or premature childbirth.
The recent amendments to the MB Act provide that commissioning mothers, in cases of surrogacy, are also entitled to 12 weeks of paid leave from the date the child is handed over to them. Surrogate mothers are also entitled to maternity leave under the MB Act.
Indian law does not provide for paternity leave, but many Indian companies provide one to two weeks of paternity leave to their employees.
Child Care Leave
The Child Care Leave (CCL) Rules, 2016 are applicable to female government employees. The child care leave is granted for a maximum of two years during the entire course of their government service in order to take care of their minor children (ie, children up to 18 years of age).
Disability and Illness Leave
The model standing orders under the SO Act and many SE Acts allow employees time off for illness, injury or disability, known as sick leave or casual leave. Normally, ten to 12 sick leave days are granted per year. The Employees’ State Insurance Act, 1948 (ESI Act) also prescribes that an employee in the private or public sector who suffers from a disability or illness is eligible for disability and sickness benefits, including the stipulated amount of paid sick leave. The SO Act further provides for “quarantine leave” to a workman who is prevented from attending work because of his coming into contact with a person suffering from a contagious disease, through no fault of his own. Wages for the period of quarantine leave shall be half of the regular wages payable to a workman (basic pay plus dearness allowance).
Limitations on Confidentiality
Indian law does not have any statutory limitations on confidentiality or non-disparagement requirements imposed on an employee. However, these obligations are regarded as implied terms of employment, and the employee has a fiduciary duty not to disclose the employer’s confidential information or trade secrets and not to disparage the employer, unless the disclosure is mandatory under any law in force.
The judicial approach has been that, although the employer cannot enforce a negative covenant in restraint of trade, the employer’s interests in its confidential information or trade secrets can be secured by restraining the employee from divulging confidential information.
An employee who has disclosed their employer’s confidential information in breach of their employment contract can be held liable for breach of contract under the Indian Contract Act, 1872 (Contract Act), and the employer can seek injunctive relief and damages from the offending employee.
The law governing contracts in India, including restrictive covenants, is the Contract Act, which holds as void any agreement that restrains the exercise of a lawful profession, business or trade of any nature. However, as an exception, if a party sells their goodwill to another, the seller can agree with the buyer that the seller will not carry on a similar business within a specified territory. Indian law is stringent and invalidates any agreement imposing restraint on carrying out a lawful business.
Therefore, a non-compete clause in restraint of trade is invalid and unenforceable, irrespective of any independent consideration paid to the employee.
The provisions of the Contract Act are silent on the enforceability of a non-compete clause in an agreement, other than in the case of the sale of goodwill. Therefore, the law on enforceability of non-compete covenants has developed through case law jurisprudence in India, keeping in mind the changing economic scenario and the interests of both the employers and the employees.
The courts have also differentiated between restrictive covenants operating during the term of the agreement and after the term of the agreement.
The current settled legal position in India is that non-compete covenants operating beyond the term of the agreement are regarded as a restraint of trade and are therefore unenforceable, and those operating during the term may be enforceable in certain exceptional circumstances.
In the landmark case of Krishan Murgai, the employment contract placed the employee under a post-service restraint that prevented him, for two years, from serving in any competing firm within the geographical area of his last posting. The Supreme Court of India ruled that the doctrine of restraint of trade could apply during the continuance of the contract, but a restrictive covenant extending beyond the term of service was void (Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai, AIR 1980 SC 1717).
In another leading case involving Pepsi Foods, the Delhi High Court refused to enforce the non-compete provision against the employee, inter alia, on the ground that the rights of an employee to seek better employment cannot be restricted by an injunction, and an injunction cannot be granted to create a situation such as "Once a Pepsi employee, always a Pepsi employee". It would, in the court's view, almost be a situation of "economic terrorism" or one creating conditions of “bonded labour” (Pepsi Foods Ltd. And Others v. Bharat Coca-Cola Holdings Pvt. (1999) DLT 122).
Additionally, the courts have refused to enforce non-compete clauses that operate beyond the term of the agreement, stating that an employee cannot be confronted with a situation where he or she either has to work for the present employer or be forced into idleness, and that the employer cannot be allowed to perpetuate forced employment with the employer under the guise of confidentiality.
In many cases, Indian courts have favoured the employers and upheld non-compete covenants against employees in cases where the restraint imposed was reasonable.
In a leading case on the enforcement of restrictive covenants in India, the Supreme Court of India upheld the non-compete clause against the employee on the ground that the restraint operated only during the term of the agreement. (Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co., 1967 SCR (2) 378).
Further, the Delhi High Court has observed that whether or not the contract is in restraint of trade would depend upon whether the contract was unreasonable, unfair, or unconscionable. In all probability, a contract imposing a general restraint would be void. Partial restraint would prima facie be valid and, therefore, enforceable.
Additionally, the courts have enforced non-compete provisions in the following circumstances:
Therefore, where the employee leaves the company prior to the contract expiring, depending on the employee’s designation and their exposure to the company’s confidential information, the court may enforce the non-compete provision against the employee during what remains of the term of the agreement, subject to the foregoing factors.
In view of the foregoing, many employers prefer to execute fixed and short-term employment contracts with renewal clauses and retain non-compete provisions in their employment contracts for deterrent purposes.
A non-solicitation covenant is enforceable under Indian law with reference to both employees and customers, because an employee’s obligation not to solicit other employees or customers of their previous employer is not regarded as a restraint of trade. The Indian courts have considered the enforceability of non-solicitation clauses in many cases and have decided on a case-by-case basis. The law does not prescribe any specific timeline for a non-solicitation provision to be enforced after termination of employment.
As regards non-solicitation of customers, the courts have held that merely approaching customers of a previous employer does not amount to solicitation until orders are placed by those customers based on that approach. (M/s FL Smidth Pvt. Ltd. v M/s. Secan Invescast (India) Pvt. Ltd., (2013) 1 CTC 886).
In another case involving American Express, the Delhi High Court held that an employee could not be restrained from dealing with their customers after they had quit the bank’s employment. The court observed that such a restraint order against an employee amounts to a restraint of trade on the employee (American Express Bank Ltd. v. Ms. Priya Puri, (2006) IIILLJ 540 Del).
Therefore, in the absence of a specific statute or settled case law, any future cases will likely be decided on the basis of their facts and circumstances.
Indian employment laws do not specifically cover employees’ data privacy. Personal and confidential information is protected through the IT Act and the rules made thereunder. In April 2011, the federal government notified the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (Data Protection Rules) under the IT Act, which govern the collection and processing of personal information in India.
Although the Data Protection Rules do not contain any specific provision regarding employee data, its provisions will apply if the employee data collected by the employer can be categorised as “sensitive personal data” as defined under the Data Protection Rules. Sensitive personal data includes information such as passwords, health and medical conditions and records, biometrics and financial information.
Some of the key applicable provisions are laid out below:
The Data Protection Rules mandate companies to obtain express consent from the data subject. It is advisable for the employers to obtain all employees’ consent either through their employment agreements or the company’s employee policies or handbook.
Transfer of Data
The Data Protection Rules provide that an entity can transfer sensitive personal data or information to another entity or person in India, or located in any other country, if the recipient entity ensures adherence to the same level of data protection, and only if the transfer of information is necessary to comply with a lawful contract or is performed with the data provider’s prior consent.
The foregoing data transfer restrictions/requirements will be applicable to the employees’ sensitive personal information when it is transferred within or outside India, such as to the employers’ other businesses, or to the investigating or forensic agencies for corporate fraud investigations or similar inquiry purposes.
Retention of Employee Data
The Data Protection Rules provide that a corporate body must not retain sensitive personal information longer than required for the purpose for which the information was initially and lawfully collected. Therefore, employers may retain employee data without the employees’ consent for a few years as deemed reasonable by the employer to deal with any potential employee claims.
The employer should ensure that the employees are made aware of the purpose for which the information is collected, the intended recipients of the information, the agency retaining the information, etc. Furthermore, the employees should be given an option not to provide the information, or to revise/withdraw the information.
The employer must not disclose the employees’ sensitive personal information to a third party without the employees’ consent.
Employers must have reasonable security practices and procedures for storing the sensitive personal information. ISO 27001 is provided as a reference standard.
The federal government has proposed an all-encompassing Personal Data Protection Bill, 2018, which is anticipated to become a law by 2020. The data collection and processing norms for employers will become stringent under the proposed regime.
Foreign nationals working with companies in India must obtain an appropriate employment visa depending on the duration of their stay in India. An employment visa may be extended on a yearly basis for a maximum period of five years. The key requirements include that the foreign nationals must be highly skilled or a qualified professional, or earn a minimum of USD25,000 per annum from the employer in India. If the purpose of a foreign national’s visit relates to commercial activity, such as exploring business opportunities or attending board meetings or other general meetings for the purposes of providing business service support, the foreign national may apply for a business visa. Foreign nationals must comply with the registration requirements and procedures of the Foreign Regional Registration Officer (FRRO) in the particular Indian state they visit.
The foreign nationals of certain countries (such as China, Pakistan and Afghanistan) that intend to work in India or visit India for business may require prior clearance from India’s Ministry of Home Affairs and the Ministry of External Affairs.
If the foreign national intends to stay in India for more than 180 days, they must register with the FRRO within 14 days of arriving, except where specifically informed that registration is not required. The foreign employees are permitted to depart India within 14 days of arrival without registering with the FRRO/ FRO. Previously, they could not depart until the registration process was completed.
In India, trade unions are governed under the Trade Unions Act, 1926 (TU Act) and the right to form trade unions is granted under legislation such as the ID Act, SO Act and certain state legislation, in addition to Indian courts upholding workers’ rights to form trade unions. Although the TU Act provides for registration, union rights, etc, it does not actually recognise trade unions. However, there are certain state-specific laws that do recognise trade unions, such as the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971 and the Kerala Recognition of Trade Unions Act, 2010. The TU Act provides for optional registration of trade unions. A registered trade union is deemed to be a body corporate and has the status of a juristic entity, with the power to acquire and hold property, execute contracts, and be involved in legal proceedings in its registered name.
One of the most significant rights of a trade union is to negotiate and secure terms of employment for its members through collective bargaining.
Trade unions can utilise their funds for salaries; allowances and expenses of the office-bearers; administration expenses; the prosecution or defence of any legal proceedings; the provision of educational, social or religious benefits for members; allowances for members’ loss on account of death, old age or sickness; contributions to benefit workmen in general, etc.
Traditionally, trade unions were formed in sectors such as transport, banking, manufacturing, construction and mining. However, in a recent trend in the private sector, IT employees have formed a trade union called the All India Forum for IT Employees (FITE), which has obtained registration in a few Indian states, including Maharashtra, Tamil Nadu and Karnataka. FITE represents and safeguards the rights of IT employees, including fighting illegal terminations and layoffs. This could be a turning point and more private sector employee representative bodies may emerge and pursue collective action.
The government has proposed amendments to the TU Act to include provisions for recognition of trade unions at central and state levels. The amendments are not as yet notified as law.
Indian law does not grant management representation rights to the employees on their company’s board. Besides the trade unions, the ID Act requires that any establishment with more than 100 workmen must appoint a Works Committee consisting of an equal number of representatives of the employer and the employees. The representatives of the workmen on the Works Committee must be elected in the statutorily prescribed manner and in consultation with the relevant trade union. The primary role of a Works Committee is to secure and preserve amiable relations between the employer and the workmen, and to discuss and bring resolution to any issues of common interest or concern.
Any establishment with 20 or more workmen must appoint a Grievance Redressal Committee to resolve disputes arising out of individual grievances. The committee can have maximum of six members, with an equal number from the employer and the workmen. The committee’s chairperson will be selected from the employer and the workmen on a rotating basis.
Any establishment with ten or more employees must constitute an Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, to handle instances of sexual harassment against women in the workplace. At least half the members of the ICC should be women, and the presiding officer must be a woman at a senior designation. At least two members of the ICC should be employees, and there must be one independent member from a non-government organisation or someone familiar with the issues relating to sexual harassment.
Collective bargaining is regarded as an effective dispute resolution mechanism, particularly in industries where the employees are largely unionised such as manufacturing, construction and mining. The terms and conditions of employment – including welfare activities, banking and medical facilities for the workmen – are negotiated and agreed through collective bargaining under the collective agreements. These collective agreements are also structured as memoranda of settlements, which specify various clauses governing the relationship between the workmen represented by trade unions and employers. It is also relevant to note that the SO Act requires the employer to consult the employees or their representatives to finalise the terms of employment contained in the organisation’s standing orders. Collective bargaining agreements do not usually exist in the private sector, and the employees’ collective grievances are dealt with through other means, including labour unions initiating online campaigns and resorting to social media to secure employees their statutory rights.
The termination of employees and consequent severance payment requirements are governed in India by both central and state-specific employment legislation.
The state-specific SE Acts apply to employees working in any commercial establishments in that state. The SE Acts provide that the employer can terminate an employee by giving prior written notice to the employee. Certain SE Acts require the employer to also give a reasonable cause for terminating the employment.
Indian law does not provide for 'at-will' termination, other than the newly introduced Model Shops Code and the corresponding Maharashtra Shops Act and the Gujarat Shops Act, which do not include any termination provisions, thus granting flexibility to both the employers and the employees to terminate the employment.
As regards central legislation, the ID Act provides retrenchment, lay off and business closure as grounds for termination of employment. The ID Act defines the term “retrenchment” and refers to the termination of workmen’s services by the employer for any reason other than disciplinary action, retirement (whether voluntary or otherwise) or grounds specified in a fixed term-contract (or the non-renewal of a fixed term contract). Judicial interpretation of the term "workman" has been wide and included various professionals within its scope, including software programmers, teachers, etc.
The termination procedure differs according to the grounds of dismissal and the number of workmen in an establishment.
Employment can be terminated with immediate effect and without any notice requirement on the grounds of misconduct. A dismissal on the grounds of misconduct or poor performance at work must be clearly documented and established with due inquiry procedure.
Termination on the grounds of retrenchment entails providing prior written notice to the workmen, providing compensation, and giving prior intimation and obtaining prior permission from the appropriate government authority based on the number of workmen in the establishment.
Indian law does not define redundancy. However, the courts have interpreted this term in the context of an employee’s role becoming redundant for reasons such as the cessation of business or the introduction of new technology. Therefore mechanisation, outsourcing, business restructuring and other business-related reasons are held to be valid grounds for termination. The ID Act does not prescribe any additional obligation or a different termination procedure for collective redundancies. However, from a practical standpoint, collective redundancies may trigger a higher risk of legal proceedings from the terminated workmen, and the courts tend to adopt a pro-employee approach in dealing with reductions in workforce.
Other than termination for proven misconduct, the employer must provide prior written notice to the employee/workmen, or salary in lieu thereof. Under the SE Acts, the employer can terminate an employee who has worked for the employer for a continuous period of at least one year by providing a 30-day prior written notice or pay in lieu of notice. If an employee has been in the employer’s continuous employment for less than one year but more than three months, the employer can terminate such employee by providing a 14-day written notice or pay in lieu of notice.
However, the Model Shops Code and corresponding Maharashtra Shops Act and the Gujarat Shops Act have omitted the provisions relating to termination, and do not have any notice requirements for the employees as well as the employers.
The ID Act requires that an employer that employs fewer than 100 workmen and wishes to retrench a workman who has been in continuous service for at least one year must provide one month notice or payment in lieu of notice.
Where an undertaking is closed down for any reason, every workman who has been in continuous service for not less than one year in the undertaking immediately before such closure, shall be entitled to the same notice and compensation as if they had been retrenched.
If there are more than 100 workmen, retrenchment will require at least three months' prior written notice or payment in lieu thereof.
Managerial and supervisory level employees exempted under the SE Acts or the ID Act can be terminated based on their contractual terms and conditions, and by giving a notice period specified under the employment contract.
As regards the severance, the Indian government has enacted the Payment of Gratuity (Amendment) Act, 2018, and has increased the gratuity limit for private sector employees to INR2 million (approximately USD30,000), which is now level with the one for government employees. Gratuity is a social security benefit provided to employees upon termination, if the employee has completed five years in the organisation.
The ID Act prescribes additional compensation to be given to workmen in cases of retrenchment. An employer that employs fewer than 100 workmen and wishes to retrench a workman who has been in continuous service for at least one year must pay compensation equal to 15 days’ average pay for every completed year of service, or any part thereof in excess of six months, in addition to the statutorily prescribed one month’s notice or payment in lieu thereof.
There are no formal requirements for severance payments. However, from a practical standpoint, it is advisable to have the outgoing workmen execute separation and release agreements with the employer.
If an employee is retrenched, a notice of the retrenchment must also be given to the central Government, the Regional Labour Commissioner (central), the Assistant Labour Commissioner (central) and the employment exchange concerned.
An employer who intends to close down an undertaking must serve a notice to the appropriate government at least 60 days (if less than 100 employees) and at least 90 days (if more than 100 employees) before the date on which the intended closure will be effective, stating clearly the reasons for the intended closure of the undertaking.
In the absence of any specific agreement between the employer and the workmen, the employer must follow the 'last in, first out, principle at the time of the reduction in force. Further, if the employer decides to make new offers, the employer is statutorily mandated to give preference and offer re-employment to the terminated workmen first. However, the courts have the discretion to permit departure from this rule, keeping in mind the employer’s business interests.
Any non-compliance with the prescribed termination provisions will render the termination invalid, and the courts may direct the employers to reinstate the employees, with back wages.
Indian law permits summary dismissal of employees for serious cause such as misconduct or indiscipline, with immediate effect without the notice requirement. A dismissal on the grounds of misconduct or poor performance at work must be clearly documented and established.
Misconduct is explained under the SO Act to include the following:
The SO Act requires the employers to conduct detailed investigation into misconduct based on the principles of natural justice. The procedure requires issuing a charge sheet, holding a domestic enquiry, reviewing the inquiry office’s report, showing the cause notice to the employee and (after giving adequate opportunity to the employee to present their case) issuing the final order based on whether the misconduct is established.
There are no statutory consequences for summary dismissal for serious cause. However, one cannot rule out the possibility of legal action in cases of summary dismissal. These kinds of disputes must be addressed on a case-by-case basis, the employers must maintain written records of their employee’s performance, communications, enquiry proceedings, etc. From a practical standpoint, in many instances payment of a few months’ wages, as appropriate, may be more prudent than engaging in protracted litigation with the employee, with the associated time and costs.
Indian law does not restrict employers from executing termination agreements with outgoing employees, which has become a standard as well as preferred industry practice. The employers prefer to sign the agreement simultaneously with the severance payment.
A termination agreement normally incorporates provisions such as settlement and release of claims by the employee, employee’s acknowledgement of receipt of final severance consideration, employee’s indemnity and representations not to defame the employer.
As regards the statutory formalities, a nominal government levy known as stamp duty must be paid on the agreement for it to be admissible as evidence in Indian courts. Further, it is a good practice to execute the agreement in a notary public’s presence to validate the parties’ signatures.
There are no statutory requirements or restrictions on termination agreement terms. Reasonable releases, non-disclosure and non-disparagement provisions may be enforceable against the employees.
Female employees are protected from dismissal during maternity leave, and employees receiving sickness benefit, maternity benefit, or disability benefit under the ESI Act are protected from dismissal during the period in which they receive the benefit.
Employee representatives do not come under the protected category.
An employee who has been in continuous service for more than a year cannot be terminated from employment at will, unless they are dismissed by way of disciplinary action, for non-renewal of contract or on the grounds of continued ill health. For termination on disciplinary grounds, the employer must establish that due process of inquiry and investigation was followed to establish the employees’ misconduct. An employee is regarded as wrongfully dismissed if they are terminated from employment under the following circumstances:
Wrongful dismissal can be challenged as an unfair labour practice, and claims can be brought before the competent authority under the ID Act or the civil courts, as appropriate.
The Constitution of India (Article 15) prohibits discrimination against any citizen on the grounds of religion, race, caste, sex, place of birth or other such grounds. This is a fundamental right guaranteed to Indian citizens and will normally be enforceable only against India’s Central government, state governments and local administrative authorities controlled by the government.
Further, the Wages Code mandates the payment of equal remuneration to male and female employees for the “same work or work of a similar nature”, in order to prevent discrimination on the grounds of sex against women in employment.
Although the earlier anti-discrimination law, Equal Remuneration Act, 1976 provided that there should not be any discrimination against women while recruiting, or in case of promotions, training or transfer, this provision has been omitted from the Wages Code.
Nevertheless, the Model Shops Code and the SE Acts of Maharashtra and Gujarat provide that women workers shall not be discriminated against in matters of recruitment, training, transfers or promotion or wages.
The burden of proof to establish discrimination in the payment of wages is on the employee. For claims of non-payment of remuneration or bonuses or lower wages, the burden of proof is on the employer that the dues have been paid to the employees.
Discrimination with regard to the payment of wages and violations of the Wage Code are punishable with a fine of up to INR100,000 (approximately USD1,500) and/or imprisonment of up to three months.
Non-industrial disputes or those relating to the private sectors or employment contracts are brought before the civil courts of competent jurisdiction.
There are specialised employment forums constituted under the ID Act for industrial disputes, which are broadly defined under the ID Act to include disputes between employers and employers, between employers and workmen or between workmen and workmen; in connection with the employment or non-employment, the terms of employment or conditions of labour. These forums are as follows:
Central government employees can file disputes relating to their service terms and conditions before the Central Administrative Tribunal, and state government employees can approach the State Administrative Tribunal.
As regards class actions, various Indian statutes provide for collective actions, including the ID Act, which permits class actions in the form of collective bargaining. However, class action claims in courts are infrequent and it is not a popular civil remedy in India.
In writ jurisdiction to the Supreme Court or the high courts for the enforcement of fundamental rights under the Constitution, representative actions or class actions brought in the public interest through Public Interest Litigation (PIL) have gained much popularity and are widely used.
Furthermore, the Companies Act, 2013 permits shareholders and depositors to file a petition collectively against a company, its directors, auditors or advisers if they commit any act that is prejudicial to the company’s interest.
Arbitration is an increasingly common choice of dispute resolution in employment contract disputes, and pre-dispute arbitration agreements are enforceable under Indian law.
For employees covered under the ID Act, the statute provides for voluntary referral of disputes to arbitration. Where any industrial dispute exists or is apprehended, and the employer and the workmen agree to refer the dispute to arbitration, they may do so by a written agreement, and the presiding officer or officers of a Labour Court or Tribunal or National Tribunal will act as an arbitrator or arbitrators.
Indian courts do not normally award punitive damages. The court may grant reasonable attorney's fees, however, it will not be sufficient to meet the actual expenses incurred.