There are two main kinds of classification of employees – one based on the nature of work, and another based on the duration of employment.
Classification Based on Nature of Work
Depending on the predominant nature of their responsibilities, an employee may be classified as (a) a workman (as defined in the Industrial Disputes Act 1947 (ID Act)) or (b) a managerial employee. To determine whether an employee is a “workman”, the actual or primary work performed by the employee is examined. Some cases wherein the courts have considered the functions of an employee as being of a managerial nature are looking after the progress of work vis-à-vis quality and timeliness, ensuring compliance, manpower planning, contract management, monitoring costs, mentoring team members, and involvement in policy-making decisions regarding any aspect of the business or service, the conditions of workers/employees and other such similar powers.
The significance of this classification is that persons qualifying as a “workmen” are entitled to various statutory protections/entitlements, such as severance compensation and notice (or the payment of a fixed salary in lieu thereof) in cases of termination of employment for reasons other than the employee’s misconduct and prior notice in case of any adverse change in the conditions of service.
Classification Based on Duration of Work
An employee could be either a permanent employee or a fixed-term employee, depending on the duration of work. For fixed-term employees, the duration is predetermined and limited, often tied to specific project requirements. For permanent employees, the employment relationship continues until one of the parties terminates it.
The significance of this classification is that there are certain benefits which are linked to the tenure completed by an employee in an organisation (such as gratuity, which is a statutory benefit received by an outgoing employee who has completed four years and 240 days of continuous service). Accordingly, fixed-term employees may not be entitled to such benefits in the event that the tenure of their employment is shorter (which is commonly the case). That said, the stipulations set out by the central government and certain states under the Industrial Employment (Standing Orders) Act 1946 (the “IESO Act”) (which applies to large establishments typically engaged in manufacturing operations) allow pro-rated statutory benefits for fixed-term employees under applicable laws even if they do not fulfil the minimum service period for qualifying criterion.
Other than the above broad classifications, there may be other kinds of classification for very limited purposes. For instance, under the social security regime, namely the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, the manner of contributions by employers and employees varies depending on whether an employee is a domestic employee (an employee working in India and holding an Indian passport), or an international worker (an expatriate employee).
In India, employment contracts can be definite (fixed-term) or indefinite (permanent), depending on the purpose/duration of the relationship envisaged by the parties. The distinction between the two kinds of employment is explained in 1.1 Employee Status.
An employer-employee relationship can either be express or implied, written or verbal. However, to avoid any dispute regarding the terms of employment, it is a common practice to execute an employment contract. Only a few Indian states such as Karnataka and Delhi require a commercial establishment (a non-manufacturing establishment) to issue written appointment letters to employees, which would set out basic particulars such as wages, job designation, the nature of their duties, etc.
Certain terms that are generally incorporated in an employment contract include nature of work (job description), place of employment, date of commencement of employment, remuneration structure, assignment of intellectual property by the employee to the employer, cessation of employment (including notice period) and restrictive covenants (such as non-solicitation). However, the Indian courts have taken the view that certain terms and conditions of service which are regulated by statute will constitute implied terms of a contract of employment. Therefore, provisions relating to payment of wages, bonuses, gratuity payments and contributions towards employees’ provident funds and employees’ state insurance can be considered to be implied terms of a contract of employment and need not be recorded in writing. Similarly, an employee’s duty to remain faithful in their duties towards the employer and to maintain the confidentiality of the employer’s proprietary information is considered to be implicit in the employment contract.
The working hours are primarily governed by the Factories Act 1948 (the “Factories Act”) (for manufacturing establishments) and state-specific shops and establishments statutes (the “S&E Acts”) (for non-manufacturing commercial establishments). For some specialised sectors, working hours are governed by special statutes (such as the Mines Act 1952 for mines, and the Building and Other Construction Workers’ (Regulation of Employment and Conditions of Service) Act 1996 for construction work).
The applicable laws provide normal working hours which range mostly from eight to nine hours a day and are typically set at 48 hours a week. Any additional time spent by the employee towards work is subject to an overtime payment, which is twice the ordinary wages payable to the employee. Some statutes also provide weekly/quarterly limits to the number of overtime hours an employee may be required to work. Flexible working arrangements are possible, subject to adherence to the above-discussed statutory limits. It may be noted that several laws dealing with work time regulations exempt managerial employees from their purview, and for such employees, the work time requirements are contractually-driven.
The labour laws in India recognise both full-time and part-time employment. Part-time employees are ordinarily entitled to all benefits given to permanent employees. Having said that, there may be some restrictions on part-time employees that employers must be privy to. For instance, the S&E Acts applicable to Maharashtra and Gujarat provide that part-time workers cannot be allowed to work more than five hours in a day.
The minimum wage requirements are governed as per various periodic central government as well as state notifications under the Minimum Wages Act 1948, which determine minimum wage rates for three major categories of workers:
The Payment of Bonus Act 1965 regulates the amount of statutory bonus payable to employees (earning wages not more than INR21,000 per month) employed in certain establishments based on their profits. The law applies to every establishment employing 20 or more persons and sets out provisions relating to payment of minimum bonus (at the rate of 8.33% of the salary capped at INR7,000 or statutory minimum wages, whichever is higher), and the maximum bonus (at the rate of 20% of the salary capped at INR7,000 or statutory minimum wages, whichever is higher).
Government Intervention in Compensation
Other than the above-mentioned requirements and certain other stipulations around the time and mode of payment of wages, as well as permissible deductions from wages, there is typically minimal intervention by the government in terms of determination of compensation and increments. These aspects are contractually-driven but may further be impacted by the presence of a unionised workforce and any collective bargaining agreements entered by them or their representatives.
Leave and Holiday Entitlements
The working conditions of employees, including their leave entitlements, are mostly regulated depending on the nature of the entity by which they are employed.
If the entity is a factory (engaged in manufacturing activity) covered under the Factories Act, employees who have worked in the factory for 240 days or more in a calendar year must be allowed, in the subsequent calendar year, privilege leave with wages at the rate of one day for every 20 days of work performed (for adults). This leave is additional to public holidays to which workers are entitled.
If the entity is a shop or a commercial establishment, the number of days of privilege leave to which employees are entitled would depend on the state-specific S&E Acts (depending on the location of the establishment). The minimum threshold usually ranges from 12 to 20 days. This leave is pro-rated for the first year of employment. In several states, employees are also entitled to casual leave (that is, leave to attend to personal needs) and sick leave.
At the time of separation, an employee is also entitled to a fixed salary for accrued but unused privilege leave, up to the maximum accrual limits set out under the Factories Act or the state-specific S&E Acts (unless the employer contractually provides more beneficial terms).
Note that there may be special laws in addition to the above that deal with leave entitlements for special kinds of workforce. For instance, the Sales Promotion Employees (Conditions of Service) Act 1976 deals with leave entitlements for employees engaged in sales activities in notified sectors such as the pharmaceutical industry.
As per the Maternity Benefit Act 1961 (the “MB Act”), every woman who has completed 80 days service with the employer is entitled to paid maternity leave of 26 weeks. However, women with two or more surviving children are entitled to 12 weeks of paid maternity leave. Commissioning mothers and adoptive mothers are also entitled to paid maternity leave. Other kinds of paid leave envisaged under the law are in respect of special situations such as miscarriage, medical termination of pregnancy, tubectomy operations, etc.
Confidentiality and Non-disparagement
There are no standard laws as regards confidentiality and non-disparagement, but it is a standard practice to include these provisions in the appointment letter/employment agreement. Note that these obligations are typically continued even after cessation of employment. The employee can be held liable under the law of contract if there is a violation of such stipulations.
The Indian Contract Act 1872 stipulates that an agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void. A restrictive covenant, such as a non-compete, extending beyond the term of service is void, irrespective of the reasonability of such restriction, except in cases involving sale of goodwill.
There is, however, case law recognising an exception to the rule covering restrictions aimed at protecting the employer's legitimate business interests, such as its business connections and trade secrets. Therefore, clauses relating to post-employment non-solicitation of employees or customers and the protection of confidentiality with respect to trade secrets are not caught by the above restrictions and have been enforced by the courts, albeit on a case-by-case basis.
For a breach of a restrictive covenant (being a breach of contract), the remedies discussed in the following points are available to an employer in such cases, to the extent the covenant is valid and enforceable.
Where a breach has occurred, but the employer has not suffered a loss, and the contract provides a pre-estimate of the loss (in the form of liquidated damages) which might be incurred due to breach of contract, the party may claim the said amount (to the extent the court determines it to be a genuine pre-estimate of the loss) irrespective of any actual loss arising on this account.
However, where the contract does not provide for such pre-estimate and the breach has occurred (as is usually the case with employment contracts), courts would typically grant an injunction restraining the former employee from continuing the breach.
Where a breach has occurred and the employer has suffered an actual loss, then, irrespective of whether the employer has stipulated a pre-estimate of the loss in the contract, it can claim unliquidated damages for the loss caused to it which the parties knew would be caused as a result of the breach.
As mentioned in 2.1 Non-competes, covenants with respect to non-solicitation and non-disclosure of confidential information may be enforced post-cessation of employment on a case-by-case basis, depending on the impact of the restriction on the ability of an individual to exercise lawful pursuits. In the case of Desiccant Rotors International Private Limited v Bappaditya Sarkar and Another [CS (OS) Number 337/2008], the Delhi High Court noted the following: “Clearly, in part at least, the obligation agreement sought to restrain defendant number 1 from seeking employment with an employer dealing in competitive business with the plaintiff after he had ceased to be an employee of the plaintiff, and that too for a period of two years. Such an act cannot be allowed in view of the crystal-clear law laid on this issue. However, in the impugned order dated 20 February 2008, the injunction restraining defendant number 1 is limited in scope, in the sense that it does not restrain defendant number 1 from working with defendant number 2 or any other person/company, thereby steering clear of impinging the former’s freedom to choose their own workplace. The injunction only restrains defendant number 1 from approaching the plaintiff’s suppliers and customers for soliciting business which is in direct competition with the business of the plaintiff. Hence, the injunction which has already been granted by order dated 20 February 2008, is made absolute.”
At present, the limited provisions on protection of one’s information are set out under the Information Technology Act 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (the “SPDI Rules”) framed thereunder. The SPDI Rules protect individuals (whether employees or otherwise) from an entity obtaining access or using of their sensitive personal data or information (SPDI). The term “sensitive personal data or information” is defined in the SPDI Rules to mean personal information which consists of information relating to:
If the requested information falls within the purview of the SPDI Rules, consent from the employee would be required before the data is collected. Typically, such consent is taken at the commencement of employment itself (through a consent clause in the employment contract/company policy), but even so, it is advisable that employers procure consent even at the time of collection and/or transfer of such protected information, so that an employee has an effective opportunity to withdraw consent, which is an opportunity that must be given to the employee as per the SPDI Rules.
Employers are also required to implement reasonable security practices and procedures in relation to storage of SPDI.
It should be noted that India recently enacted the Digital Personal Data Protection Act 2023 (the “DPDP Act”). The DPDP Act received the assent of the President of India on 11 August 2023, although the provisions therein state that the same would come into force on such date as the central government would notify. The DPDP Act widens the ambit of the data protection regime in India by not only covering SPDI but also including within its purview, any data about an individual who is identifiable by such data. The DPDP Act provides that a person (which would include an employer) may process the personal data of a data principal (who would be an employee in the context of an employer-employee relationship) (i) for a lawful purpose for which the data principal has given their consent or (ii) for certain “legitimate uses’”(where an express consent would not be needed). The expression “legitimate uses” includes purposes associated with employment, and measures to secure the interests of the employer.
Indian labour laws do not prescribe any limitations in respect of the engagement of foreign workers by Indian establishments. However, there are certain additional compliance requirements from a social security standpoint that an employer will have to undertake (such as making employees’ provident fund contributions in case the foreign worker qualifies as a non-exempt “international worker” under the Employees’ Provident Funds Scheme 1952).
Specifically with respect to Overseas Citizens of India (OCI), in 2021, the Ministry of Home Affairs of the Government of India prescribed various conditions/requirements to be fulfilled by OCI cardholders before being engaged as an employee of an Indian entity. Primarily, all OCI cardholders are now permitted lifelong multiple entries to India for any purpose. However, OCI cardholders will have to seek special permission from a specified competent authority, the Foreigners Regional Registration Office (FRRO) or the relevant Indian mission, to be engaged as research scholars, in journalistic activities, or as interns or employees in foreign diplomatic missions/foreign government organisations in India (which is a special category). For OCI cardholders who are employed with an Indian entity to render services apart from the work falling within the ambit of the special category, there is no requirement for them to seek prior permission from any competent authority or FRRO.
Depending on the duration of a foreign employees’ stay in India and the nature of services proposed to be rendered, they will also have to comply with the applicable immigration laws for obtaining the appropriate visa (ie, a business/employment visa) to enter India.
Foreign nationals entering India on an employment visa which is valid for more than 180 days are required to register themselves with the FRRO within 14 days of their arrival in India. No such registration is required if the employment visa is valid for 180 days or less.
Further, all OCI cardholders residing in India (including those rendering services apart from those in the special category) are required to notify the FRRO by email of any change in their permanent residential address or occupation (this is not a registration requirement per se).
In 2022, the Government of India amended the Special Economic Zones Rules 2006 in relation to work from home arrangement for employees working out of Special Economic Zones (SEZ). A company in an SEZ may allow certain employees to work from home or any place outside the SEZ and needs to notify the same to the Development Commissioner through an email on or before the date on such work from home is permitted. The unit can provide an employee working from home duty-free goods, such as a laptop, desktop and other electronic equipment, and the same shall be allowed to be taken outside the SEZ without payment of duty, subject to such goods being duly accounted for in the appropriate records.
Apart from the above, Indian laws in their current form do not regulate and/or resolve issues that may arise out of employees working remotely. Most Indian labour and employment legislations are silent about the work from home/hybrid concept, and do not provide any specific guidelines that may regulate the employer-employee relationship in such scenario. Accordingly, the onus is on employers to determine and notify employees of the guidelines in relation to working remotely. Employers continue to be liable for the health and safety of their employees when working remotely and should ensure that employees take relevant measures to ensure that their remote workplace is ergonomically sound, clean, safe, free of obstructions and hazardous materials, and does not pose a risk to their health and safety. Employers should also require their employees to comply with all building/social codes and health and safety requirements as may be applicable to employees. Employers may also be required to pay compensation to employees who are injured (which includes partial or permanent disability) or die due to accidents arising out of or in the course of their employment, whether working remotely or otherwise.
Indian data privacy laws and social security laws are central legislations and do not vary from state to state. Accordingly, there would be no change in the employers' or employees' obligations in this respect on account of working remotely.
Sabbatical leave is not statutorily governed under Indian labour laws. Organisations consider and allow employees to avail themselves of sabbatical leaves as per their discretion and as per mutually agreed terms and conditions. Typically, sabbatical arrangements are unpaid and would envisage the complete absence of any pecuniary relationship between the employer and the employee. Since no salary is paid to the employee during this period, no statutory social security contributions have to be made. However, employees may continue to be covered under any other contractually agreed or policy-driven benefits like insurance coverage during the sabbatical period.
With remote and flexible workplaces becoming the new norm, employers have adopted (and continue to adopt) new practices to ensure the seamless flow of work. Hybrid workplaces which offer flexibility to employees to work from both the office and home have now become a standard requirement for most job seekers. To reduce on real estate costs, many companies have switched to “co-working” spaces and “hot-desking” practices. Further, with most companies having resumed working from the office (while retaining the hybrid model), employers have been making efforts to take care of the wellbeing of their employees, in order to help them to adjust to this shift. The stress of additional commuting hours, the expensive cost of living, managing new methods of work and physical health issues have been some of the contributing factors to employees’ ailments.
In India, the Trade Unions Act 1926 provides for registration of trade unions (which is an optional process for a trade union), and such registration confers on the union certain rights and liabilities which a non-registered trade union does not have. For example, a non-managerial employee who is a party to an industrial dispute can be represented by a registered trade union. Further, a registered trade union can acquire and hold movable and immovable property and can contract, sue, and be sued in its name.
At the state level, however, there are a few states which have made provisions for the recognition of a trade union. Maharashtra, for instance, has enacted the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act 1971. Said statute sets out a procedure which may be followed by a registered trade union to obtain the status of a recognised trade union. Where a state government has not enacted legislation for the recognition of a trade union, an employer may accord its recognition to a union by way of a collective bargaining agreement.
A trade union which is both registered and recognised is conferred with the right to collective bargaining with an employer, such that if the employer refuses to negotiate with such union on the terms and conditions of employment of the workers being represented, the union can file a claim before the competent authority alleging unfair labour practices by the employer.
In addition to trade unions, the ID Act provides for the constitution of a works committee in an establishment with 100 or more non-managerial employees, in the event that the relevant government issues any specific or general directions to that effect. Such works committees have an equal right of representation of non-managerial employees’ representatives and employers’ representatives, and to discuss the terms and conditions of employment of non-managerial employees in an amicable manner.
In India, collective bargaining agreements are primarily the product of a charter of demands and several rounds of negotiations between a particular employer and its employees who are typically members of a trade union. Collective bargaining agreements are a predominant feature of employment in the manufacturing sector, although the existence of such agreements in the services sector is not uncommon. Collective bargaining agreements can only establish better employment conditions than those prescribed under various employment and labour laws, and therefore these instruments cannot be used to opt out of statutory payments, benefits and protections. Collective bargaining agreements typically entail provisions relating to working hours, working conditions (such as health and safety), remuneration (including bonus and yearly increments), leave and holiday entitlements, etc.
For more details in relation to collective bargaining, please see 6.1 Unions.
In India, an employer may terminate the services of an employee on two main grounds:
Termination Without Cause
The termination of employment at the employer’s discretion for any reason other than proven misconduct, by simply invoking the notice period provisions in the employment agreement/applicable law/policies. Such termination could be on account of:
Termination without cause (or termination simpliciter) includes scenarios wherein there may be underlying reasons for the separation but the employer, as per its assessment of such reasons or cause does not intend to or does not deem it appropriate to:
The employee will be entitled to all service benefits (statutory as well as contractual) which have been earned up to the date of cessation of employment. Non-managerial employees who have rendered at least 240 days of service will be entitled to notice of at least one month (or salary in lieu thereof) and statutory severance compensation (computed at 15 days' wages for every year of completed service or part thereof in excess of six months). (“Retrenchment Compensation”). Additionally, in cases of collective redundancies involving non-managerial employees, as per the ID Act, employers will also have to comply with the “last in, first out” principle.
Termination with Cause
This includes termination of employment for breaches of the terms and conditions of employment, misconduct, etc. Termination on account of misconduct should be preceded by a domestic enquiry conducted in accordance with the principles of natural justice (ie, the employee should be given a fair opportunity to present their case and defend themself against the charges levelled). In cases of termination on the grounds of misconduct, the employee would not be entitled to receive notice pay or any other statutory and contractual payments except gratuity (with necessary adjustments for losses due to misconduct, if any) and leave encashment.
The concept of “at will” employment (or hire and fire policy) is not recognised in India. Employers are required to comply with notice period requirements (or pay salary in lieu of notice) as per applicable laws/employment agreements and policies (whichever is higher) in case of termination of an employee’s services for any reason other than proven misconduct. The ID Act, as well as state-specific S&E Acts, prescribe a minimum notice period of one month in the event of termination simpliciter. While the ID Act and most S&E Acts only apply to non-managerial employees, certain S&E Acts (such as those of Haryana and Delhi) also apply to managerial employees. Notice period requirements in respect of managerial employees will be governed by the terms of their employment agreement/employer’s policy in this regard.
In case of termination simpliciter (which includes termination of employment on account of redundancy or unsatisfactory performance), non-managerial employees who have rendered at least 240 days of service will be entitled to Retrenchment Compensation. Further, employers are also required to notify the jurisdiction's labour commissioner regarding such termination (please note that this is not an approval requirement).
Additional Requirements for Factories, Mines and Plantations
In cases of the termination of services of non-managerial employees (who have rendered at least 240 days of service) engaged in factories, mines or plantations employing at least 100 or 300 non-managerial employees (the threshold varies from state to state), an employer is required to:
There is no set list of acts of “serious/gross misconduct” or statutory guidance on what amounts to serious misconduct warranting summary dismissal. While determining an act to be misconduct or gross misconduct, factors such as whether the alleged act affects discipline in the organisation should be considered, or whether the act is backed by an improper motive and whether the act, if condoned, would send the wrong message to others.
As a general principle, termination on account of misconduct (gross misconduct or otherwise) should be preceded by a domestic enquiry conducted in accordance with the principles of natural justice. The employee should be given a fair opportunity to present their case/defend themself against the charges levelled. To commence the domestic enquiry/proceeding, an employer is required to share a charge sheet or serve a show-cause notice to the concerned employee so that they are aware of the charges levelled against them and can prepare to present their case. The parties should also be allowed to present their evidence/witnesses and cross-examine the witnesses presented by the other party. Post the enquiry, the findings should also be recorded and communicated to the employee.
As per judicial precedents, in some cases, the requirement of conducting a disciplinary enquiry may be dispensed with, if:
While there is no statutory requirement for executing termination agreements/exit documentation, it is industry practice (and a recommended practice) to record the terms of an employee’s exit in an appropriate document and set out the exit payments, the release of claims provisions, post-employment obligations and restrictive covenants, etc.
There are no prescribed procedures/formalities or limitations in respect of the execution of termination documents. Depending on the nature of the exit, the documentation may vary.
In the case of resignation by an employee, a resignation acceptance letter is issued by the employer pursuant to receipt of written resignation letter/email from the concerned employee and it will have to be countersigned by the employee. In the case of key employees, employers may require them to execute more detailed “settlement and release agreements” that record the full and final settlement payments, as well as the related logistics and conditions.
In the case of termination of employment by the employer, the employer will issue a termination letter/notice, which is not required to be countersigned by the employee (since such termination is a unilateral act of the employer). In the case of termination simpliciter, there is no requirement to mention the circumstances of the exit in the termination notice, while in cases of termination for cause/misconduct, the termination letter will have to set out the details of the proven misconduct against the employee.
Industrial relations laws in India (such as the ID Act, the IESO Act and most S&E Acts) provide protection against dismissal for the non-managerial category of employees. Protections prescribed for non-managerial employees against dismissal include prior notice requirements, payment of retrenchment compensation, prior approval requirements (in cases of employees engaged at factories, mines and plantations engaging beyond the specified number of employees), etc.
Further, the MB Act also prohibits dismissal or discharge of women (engaged in managerial or non-managerial roles) during their pregnancy or while on maternity leave.
Employees may initiate wrongful dismissal claims on various grounds, including shortfall/denial of exit payments and failure to follow the due procedure for termination (ie, failure to comply with a notice period in case of termination simpliciter, failure to conclude a disciplinary inquiry in cases of termination on account of misconduct, failure to comply with the last in, first out principle in cases of collective redundancy involving non-managerial employees, etc).
Only non-managerial employees may approach the labour courts/industrial tribunals constituted under the ID Act, with a claim of wrongful dismissal. Managerial/supervisory employees would be precluded from approaching the labour commissioner, labour court, industrial tribunal, High Court or Supreme Court for any relief, and they may only approach the competent civil courts or the appropriate authorities prescribed under the S&E Acts (if applicable).
In the case of a successful claim of wrongful dismissal in respect of non-managerial employees, the competent authorities may award relief of reinstatement of services (with or without back wages) and/or damages. However, in respect of managerial employees, depending on the facts and circumstances of the case, the civil courts may only award compensation/damages by way of relief. Managerial employees are not entitled to any relief which is akin to reinstatement of services.
Employees may raise claims/disputes in cases of contravention/non-compliance with any of the following anti-discrimination legislations in India:
The relief granted to the aggrieved employee can be in form of an injunction, punishment of the offender, a penalty, compensation, reinstatement of services or another form of relief and is subject to the provisions of the applicable law, the nature of discrimination, the impact/consequences of such discrimination, etc.
There have not been any regulations around virtual hearings as far as employment disputes are concerned. In most labour courts/industrial tribunals, hearings continue to be conducted in person, although depending on the jurisdiction, a few judicial forums have allowed online filings.
The ID Act provides for the appointment of conciliation officers, boards of conciliation, labour courts and industrial tribunals to hear the claims of non-managerial employees. A non-managerial employee can raise a dispute directly before a conciliation officer in case of discharge, dismissal, retrenchment or any form of termination of service. All other “rights disputes” (as mentioned in the Second Schedule of the ID Act) and “interest disputes” (as mentioned in the Third Schedule of the ID Act) may be raised by the trade union or management before the labour courts or industrial tribunals, respectively.
Managerial employees may approach the civil court, or the appropriate authorities prescribed under the S&E Acts (if applicable).
The common law principles of class action suits or representative litigation are found in the ID Act, which permits and facilitates collective bargaining by employees/workers (whether through a trade/labour union or otherwise).
Disputes between employers and employees may be subject to arbitration. In fact, the ID Act provides that the employer and non-managerial employees may agree to refer industrial disputes to arbitration (as per the procedure prescribed under the ID Act) before approaching the labour courts.
As regards the arbitration of disputes arising between employers and managerial employees, the parties may certainly agree to refer the disputes to arbitration in accordance with the Arbitration and Conciliation Act 1996, provided that the agreement containing the arbitration clause is adequately stamped. However, subjecting employee disputes to arbitration proceedings in India is uncommon given the personal nature of the contract as opposed to commercial agreements. Also, costs involved in arbitration proceedings mostly tend to exceed the litigation costs in employee disputes in India. Accordingly, arbitration clauses are typically not included in employment agreements in the ordinary course and are largely restricted to key executive and founders agreements.
While the relevant judicial authority may, at its discretion and depending upon the facts and circumstances of the case, award attorney’s fees to the prevailing employee, there is no statutory entitlement/right in this regard.
The landscape of the employment market is undergoing several changes and with it is dawning a new era of ways to work. From remote working to back to work schemes and the advent of the gig economy in the last few years has forced a reassessment of workforce structures, expectations and the future of work.
India is witnessing its own challenges and new trends that are setting the course for the employment market's trajectory. This chapter covers the recent trends of the Indian employment market.
From Couches to Cubicles
The COVID-19 pandemic reshaped the traditional workplace with businesses worldwide swiftly adopting remote work to ensure continuity and employee safety.
As the pandemic’s effect has eased, employers are looking to reinstate traditional workplace models. However, given that working from home has proven that productivity could thrive beyond the confines of the traditional office, organisations are facing challenges in bringing their employees back to their cubicles from the comfort of their couches. Employees are demanding greater flexibility and a better work-life balance and are foregoing job offers or resigning from their present jobs as a result of businesses putting the brakes on work-from-home constructs.
However remote working in India has faced challenges such as:
To address these issues and moving towards a possible hybrid work environment, the following measure are being taken:
Embracing Unity in Diversity
The Preamble to the Constitution of India inter alia secures its citizens social justice, liberty of expression and equality of status and opportunity. It recognises the diversity of the country, and the need for inclusivity.
These principles have permeated in Indian labour legislations and have been interpreted in various judicial pronouncements where legislators and judges have acknowledged that the workforce is diverse in its characteristics, that there is a need for equity to enable the workforce to prosper and that workplaces are bound by compliance laws to ensure inclusivity.
The past few years have seen a focus on the enactment of laws to promote the agenda of diversity, equity and inclusivity (DE&I), such as the Rights of Persons with Disabilities Act, 2016 (which mandates employers to put in place necessary accommodations to enable persons with disabilities to work, and prohibits discrimination against disabled employees in terms of recruitment, the terms of their employment etc.) and the Transgender Persons (Protection of Rights) Act, 2019 (which prohibits discrimination of transgender persons in terms of recruitment, the terms of their employment etc.).
Further, the Courts of India have time and again paved the way for equality in the workplace through various judgements such as equal pay for equal work being a constitutional goal; the right of women to be safe and protected in the workplace; the dismissal of women on account of their first pregnancy being made unlawful; the career of women in armed forces not ending due to a short service commission; the recognition of transgender people; and the decriminalization of homosexuality thereby giving persons with a different sexual orientation the right to freely express themselves.
Given the flurry of legislation and the evolving approach of the courts, Indian workplaces have begun to hire consciously, make accommodations to enable a diverse workforce to work without hassle and have implemented measures to increase inclusivity eventually leading to increased productivity. A diverse and inclusive workforce has led to increased creativity due to multiple perspectives, an increase in social and reputational impact, and attracting a previously untapped workforce, especially employees with disabilities.
Recent trends indicate an attention to DE&I by implementing internal policies which lay down compliance rules on diversity and inclusivity along with measures to redress any breach of such policies - such as equal opportunity policies for transgender employees and employees with disabilities, and anti-sexual harassment policies. In addition, companies are making infrastructural changes to their premises, such as the setting up of gender-neutral washrooms, the availability of assisted devices and overhauling of the software and hardware for the benefit of employees with disabilities. Companies are also conducting sensitivity training sessions on focused topics as a part of their orientation programmes for new joinees and refresher sessions on what amounts to sexual harassment, how to address unconscious bias in the workplace, allyship and enabling employees to express their identity through their preferred pronouns in employee on-boarding forms. They are setting up of support groups for LGBTQ+ employees and those with disabilities and appointing officers and committees to oversee compliance standards and addressing complaints, and more. The increased trend of hiring for the position of “chief diversity officer” in India demonstrates that DE&I is a priority.
Apprentices – Building a Skilled Workforce
With the objective of building a skilled workforce and enhanced employability, the Government of India enacted the Apprentices Act, 1961 (the “Apprentices Act”). The Apprentices Act creates an obligation across industries to impart practical training to apprentices in any trade, occupation or any subject field in engineering, non-engineering, technology or any vocational course. Since the enactment of the Apprentices Act, few organisations were compliant and strict measures were not taken to ensure implementation and enforcement. However, the increasing requirement for a skilled workforce and the advancement in technology in recent times has rekindled focussed attention towards upskilling and training the workforce in India.
The Board of Apprentices Training (the “BOAT”) is the agency that is taking active steps to promote and enforce the engagement of apprentices and has been issuing notices to organisations which are non-compliant to ensure that they take active steps to comply with the Apprentices Act. Where organisations are found to be non-compliant, in addition to the penal consequences outlined under the Apprentices Act, it is possible that the regulatory authorities could share the list of defaulters with various other departments in the Government of India to imposing further sanctions. While there are practical challenges in some industries where the operations are highly technical in nature, the expectation is compliance. To this end, the BOAT is open to providing guidance and support so as to facilitate compliance with the Apprentices Act.
Many organisations have understood the value of investing in apprentices to bridge the skill gaps and create a sustainable talent supply chain. Though this is an added cost to the business, shifting focus to capacity building, upskilling, re-skilling with the new age tools of artificial intelligence, cybersecurity and professional skills such as out-of-the-box thinking, leadership, multi-tasking and good communication skills can be a lucrative investment for the future of the economy.
Equity-Linked Incentives Gain Popularity
Equity-linked incentives in the nature of employee stock option plans (ESOPs), phantom stocks, restrictive stock units (RSUs) and share appreciation rights (SARs) have become a popular retention mechanism for organisations. These incentives are often used to provide an attractive compensation package to employees while limiting the immediate cash outflow for companies.
This has further picked up owing to the recent changes to exchange control laws in India. The new Overseas Investment (OI) Directions (as revised in August 2022) give resident Indians a general permission to make or hold overseas investment by way of the acquisition of shares or interest under Employee Stock Ownership Plans or Employee Benefits Schemes, provided that the incentive scheme is offered by the issuing overseas entity globally on a uniform basis. Under the erstwhile exchange control regulations, the general permission to acquire foreign securities was only given in relation to cashless ESOPs or where remittance was required; the ESOP scheme had to be implemented by the foreign entity on a globally uniform basis.
With the new OI Directions, the ambit of participation by Indian employees in the equity-based incentive plans of foreign entities has been expanded with the introduction of the words “employee benefits scheme”. “Employee Benefits Scheme” has been defined to mean any compensation or incentive given to the directors or employees of any entity which gives such directors or employees ownership interest in an overseas entity through ESOPs or any similar scheme.
The requirement to issue ESOPs or employee benefit schemes on a uniform basis globally implies that the schemes have uniform provisions applicable across all jurisdictions in terms of eligibility, participation and exercise, and there is no specific carve-out in this regard for employees in any particular geography or jurisdiction. There is a half-yearly reporting requirement prescribed under the OI Directions to be carried out by the Indian employer entity concerned in order to monitor the investments.
In the case of private Indian companies, acquiring equity-linked incentives of a listed foreign parent is lucrative for employees, by giving them a sense of ownership in the global business growth of the company. Vesting these incentives is typically linked with the length of service, performance of the employee and overall company growth. This works as an effective retention mechanism for employees as they aim to receive incremental benefits with each successful year at the company. Another element to these incentive schemes that benefits employers is that these could be used as a tool to deter employees from breaching any post-employment obligations such as confidentiality, non-solicitation and non-competition at a global level.
As regards the Indian market, ESOPs have evolved over time with detailed regulations and jurisprudence on the administration of ESOPs provided both under the Indian Companies Act, 2013 as well as the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (SBEB Regulations). While the SBEB Regulations now apply to even RSUs and SARs that are equity settled, where these incentives are cash-settled, companies have greater flexibility in terms of the manner of their structuring and administration. It is due to this that these incentives have become the preferred mode of compensation for most start-ups in the Indian market.
Start-up companies, being mostly cash sensitive, tend to allocate a higher percentage of the share capital towards the ESOP pool which is gradually reduced over the lifespan of the company with an increase in paid-up capital. It ensures that the employees stay and participate in the growth of the company until it becomes investment-ready. Some start-ups with larger pool sizes link the exercise with occurrence of a liquidity event taking place within a specified number of years of the vesting, or employment coming to an end. In our experience, where a company is looking for a strategic buyer, its equity incentive plans usually provide for a single trigger acceleration. However, where it is financial buyer, investors prefer double trigger acceleration events in which the options gets an accelerated vesting with a change-in-control event, along with a commitment to remain in employment for a specified duration post-investment.
While these incentives are currently only allowed to employees and directors in India, it remains to be seen if these will be extended to non-conventional engagement structures such as consultancy, third party employees, gig workers, etc. as well in the future.
The Higher Pension Dilemma
On 4 November 2022, the Supreme Court of India, in the case of Employees Provident Fund Organisation & Ors. v Sunil Kumar B. & Ors. etc. (AIR 2022 SC 634), decided the long-pending and controversial question of validity of the Employees’ Pension (Amendment) Scheme, 2014 (the “2014 Amendment”). The court’s decision sparked a wave of uncertainty amongst both employers and employees.
On 16 November 1995, the Employees’ Pension Scheme, 1995 (the “Pension Scheme”) was framed under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (the “EPF Act”) to provide for payment of pension to retiring employees. Under the Pension Scheme, employers were required to contribute 8.33% of the salary up to the prescribed threshold amount detailed in the pension fund. The Pension Scheme was amended in 1996 to provide that the employer and employee may agree that the employer will contribute towards the pension on the actual salary of the employee and not limit the contribution on the prescribed threshold. The threshold amount at the time of framing of the Pension Scheme was INR5,000, which was subsequently revised to INR6,500 in 2001 and enhanced to INR15,000 by the 2014 Amendment.
When the 2014 Amendment was introduced, it omitted the option to contribute towards pensions on actual salary; however, it did insert a new provision. As per the new insertion, the contribution on the actual salary could continue for those employees for whom the employer had been doing so by submitting a fresh option to the statutory authority to be made jointly by both the employer and employee. Such fresh option was to be exercised within a period of six months from 1 September 2014, extendable by another six months at the discretion of the statutory authorities. The validity of the 2014 amendment was challenged by the Employees’ Provident Fund Organisation, which caused a surge of confusion amongst its members regarding its validity.
After three High Courts quashed the 2014 Amendment and declared it to be invalid in law, the Supreme Court on 4 November 2022 finally upheld the validity of the Amendment with a few exceptions. As per the judgment of the Supreme Court, the following category of employees were eligible to exercise a fresh option for contribution towards pension on actual salary:
It is pertinent to highlight that employees who retired prior to 1 September 2014 without exercising any option under the pre-amendment Pension Scheme would not be entitled to exercise the option to contribute towards a higher pension.
The 2014 Amendment also required employees who opt for contributions towards a higher pension to make an additional contribution at the rate of 1.16% of their salary up to an amount of such salary exceeding INR15,000 per month. However, the Supreme Court found this provision to be ultra vires the intent of the EPF Act and therefore, suspended the operation of this part for a period of six months in order to enable the EPFO to make adjustments to the scheme so that the additional contribution can be generated from some other legitimate source.
Pursuant to the notification of the Government of India dated 3 May 2023, the additional 1.16% is required to be directed from the employer’s contribution of 12% towards the provident fund. Therefore, in respect of members who exercise the option, the employer would now contribute 9.49% towards the pension fund (8.33% plus 1.16%). The EPFO has directed its field offices to work towards the calculation of the dues and eligible members will soon be able to assess their dues towards the pension fund.
As members wait for approval of their option to contribute towards pensions on actual salary, there still seems to be uncertainty regarding the pay-outs of the pension amount. This revamping of pension laws has created difficulties for employers in the market owing to the administrative challenges in diverting funds from provident funds to pension funds, the lack of clarity from the EPFO’s end and the possibility of additional financial exposure.
Protection for Gig Workers
The Rajasthan Government passed the Rajasthan Platform-Based Gig Workers (Registration and Welfare) Bill, 2023 (Bill) in the Rajasthan Legislative Assembly on 24 July 2023. The Bill is yet to receive the assent of the Governor and has yet to come into force. The Bill aims to promote welfare and social security of gig workers.
The key provisions of the Bill are as follows:
This Bill will protect the rights of gig workers especially in light of the protests and demands raised by them. This Bill from the Government of Rajasthan is first of its kind and could inspire other states to introduce a similar regulatory framework for gig workers. As the gig economy is continuing grow, it is expected that that more governments will follow suit for the protection of the rights and interests of gig workers.