This country-specific Q&A provides an overview of Employment & Labour Law laws and regulations applicable in India.
What measures have been put in place to protect employees or avoid redundancies during the coronavirus pandemic?
In March 2020, a strict lockdown was imposed across India. Shortly thereafter, the central government and several state governments issued multiple orders and advisories to employers’ associations against withholding salaries or terminating employment if employees were unable to attend work due to the lockdown. Internal advisories were issued to the state labour commissioners requiring them to ‘rigorously take up issues / complaints of termination of employment’ made in the backdrop of COVID-19.
Specific helplines were also set up by the government to enable aggrieved employees to file complaints. Labour authorities in various locations initially closely monitored violations – there were a few instances of notices being issued to employers (and also of imprisoning employers) for mass redundancies.
The central government’s order against pay-cuts and terminations was later withdrawn. With this, in recent months, the surveillance over terminations has reduced by some extent. In a few recent rulings, courts have taken a view that employers could deduct salaries if employees absent themselves from work in areas where the lockdown has been lifted.
That said, the advisories against pay-cuts and terminations have not been revoked yet. With the recent surge in positive cases, the state governments have been imposing lockdowns at the local level.
It is, therefore, critical that in addition to having strong business reasons, employers should consider any state specific circulars or advisories and current practices of the labour authorities in a given location before proceeding with redundancies.
Does an employer need a reason in order to lawfully terminate an employment relationship? If so, state what reasons are lawful in your jurisdiction?
Yes. Indian law and courts do not recognize at-will termination of employment. A reasonable cause is necessary for terminations. Few examples of reasonable cause are misconduct, redundancy, loss of faith, poor performance, and continued ill health. Depending on the reasons, specific process needs to be followed and pay outs need to be made.
The Industrial Disputes Act, 1947 (IDA) is a key statute governing termination and it requires reasons for retrenchment (which includes termination for any reason, except certain limited scenarios, such as, misconduct, expiry of fixed-term contracts, etc) of ‘workmen’ to be recorded in writing. The term ‘workman’ is broadly defined to include most employees in junior and mid-level roles; it however excludes employees who predominantly work as supervisors or managers.
In addition, there are state specific shops and establishments laws (S&E Acts) that require employers to have a reasonable ground for termination for employees.
Not having a reasonable cause or not following due process could result in the termination being invalidated, with a risk of reinstatement and/or compensation.
What, if any, additional considerations apply if large numbers of dismissals (redundancies) are planned? How many employees need to be affected for the additional considerations to apply?
The retrenchment procedure under the IDA will apply, irrespective of the number of impacted workmen. Depending on the number of workmen employed and the nature of the establishment (i.e., whether a commercial establishment, factory, plantation, mine, etc.) additional considerations (such as, obtaining government permission) would apply.
That is, retrenchment (whether of a one workman or more) is complex in factories/mines/plantations which have 100 or more workmen (300 or more in some states) since they need prior government permission. Authorities consider representations from the impacted workmen against the proposed retrenchment. Such government permission is generally difficult to obtain. Thus, such additional factors are relevant in retrenchment (including redundancies) in factories/mines/plantations. In contrast, in commercial establishments, retrenchment processes are relatively easier (since government permission would not be required, and a notice to the government would suffice).
There would also be an obligation to pay the impacted workmen retrenchment compensation (statutory severance), which is calculated on the service tenure. This needs to be paid regardless of the type of establishment (whether a commercial establishment, or a factory/mine/plantation).
What, if any, additional considerations apply if a worker’s employment is terminated in the context of a business sale?
Indian law does not provide for automatic transfer of employees in case of a business sale. Individual employee-consent is required for transferring employment from the seller to the buyer.
The IDA has an enabling provision on transfer of employment when transferring an entire undertaking (i.e. inclusive of plant and machinery, employees etc.). This applies when the buyer recognizes past service and offers ‘as favourable’ terms of employment. If such offer is accepted, it could be argued that a workman’s consent is not required for the employment transfer. However, there are conflicting judicial precedents on this issue, and even if the business sale can be classified as transfer of an ‘entire undertaking.’ the position on taking workmen’s consent is contentious. Hence, it is advisable to obtain employee-consent before transferring employment.
If workmen refuse to transfer to the buyer, they continue to be employed by the seller, who can terminate for redundancy. In such case, the seller will need to comply with the retrenchment process under the IDA.
What, if any, is the minimum notice period to terminate employment? Are there any categories of employee who typically have a contractual notice entitlement in excess of the minimum period?
The minimum notice period would depend on several factors. For ‘workmen’, such notice varies based on the nature of establishment, the number of workmen at such establishment, and also the service tenure of the workman concerned.
One months’ notice is applicable in commercial establishments, or in case of factories/plantations/mines having less than the prescribed workmen threshold (generally 100, 300 in some states). In factories/plantations/mines with more than the prescribed number of workmen, three months’ notice will need to be given. These minimum statutory notice requirements under IDA are applicable only to workmen who have completed one year’s continuous service.
S&E Acts applicable in various states also require employers to provide a one months’ notice to employees with a minimum service tenure (three to six months’ service, depending on the state).
Of course, if the employment contract or service rules prescribe a longer notice period (than the statutory requirement), such higher notice period will apply.
For employees who do not qualify as a ‘workman’ and (a) who do not have the minimum service period prescribed under law; or (b) are excluded from coverage of the S&E Act (such as, supervisors or managers), the notice period would be as per their respective employment contracts.
In case of termination for misconduct, no statutory notice period requirements apply, and termination can be immediate (without notice or payment).
Is it possible to pay monies out to a worker to end the employment relationship instead of giving notice?
Yes. However, an employer’s right to pay in lieu of notice should emanate from a statute (IDA or the S&E Act) or the employment contract.
Can an employer require a worker to be on garden leave, that is, continue to employ and pay a worker during his notice period but require him to stay at home and not participate in any work?
There is no statutory right to place employees on garden leave. However, garden leave provisions can be enforced if employers retain such right under the employment contract or service rules. In the absence of such right, employees could raise a constructive dismissal claim. In India, it is common for employers to exercise contractual rights to place an employee on garden leave with pay during the notice period. During such leave, it is common to direct employees to not actively work for the organization, not to interact with colleagues/customers, and to also discontinue access to all servers, networks, physical office premises, etc.
Does an employer have to follow a prescribed procedure to achieve an effective termination of the employment relationship? If yes, describe the requirements of that procedure or procedures.
Yes. The specific procedure depends on the reason for termination. For instance, in a redundancy, retrenchment processes under the IDA get triggered. A key requirement in such case is to apply the “last in, first out” rule (which requires termination of employments of those who were last employed in the particular category of workmen). Deviation from this rule needs to be supported by well-founded and documented reasons. Compliance with this requirement usually proves to be rather onerous for employers.
Further, as discussed in response to question 2, depending on the nature of the establishment, there would also be an obligation to obtain prior government approval, or to simply notify the government. Other requirements would include drawing up a seniority list and making severance payments.
In case of misconduct, India does not recognize summary dismissals. While there is no statutory process, courts require employers to conduct a fair disciplinary inquiry and provide an employee an opportunity to defence. For this, a charge sheet needs to be issued (to apprise the employee of the specific charges). An independent person will need to hold the inquiry. In some circumstances (such as, an admission of guilt), a disciplinary inquiry could be dispensed with.
There are also no statutory processes prescribed for poor performance terminations. However, courts require that an employee is informed of the problem areas and is given a reasonable opportunity to improve.
If the employer does not follow any prescribed procedure as described in response to question 8, what are the consequences for the employer?
Non-compliance with the applicable termination processes could result in courts setting aside the termination. In such case, depending on the ‘workmen’ status, an employee could be reinstated (with or without back wages), or could be granted damages. This risk exists if key procedures are not complied with, such as, breaching rules on ‘last in, first out,’ obtaining government permission if required, not providing an opportunity of defence (in case of misconduct), or not providing an opportunity to improve (in case of poor performance).
How, if at all, are collective agreements relevant to the termination of employment?
Collective agreements assume relevance in a termination if they contain for more favourable terms. For instance, they could prescribe additional processes (such as, consulting trade unions in case of retrenchment or making more beneficial severance payments than that prescribed under law). To the extent collective agreements offer more favourable terms, they will prevail over the employment contract and applicable statutory provisions. Collective bargaining agreements are more common in the manufacturing sector and in some regulated industries (such as, banks). Such agreements are not typically seen in the services or technology sectors.
Does the employer have to obtain the permission of or inform a third party (e.g local labour authorities or court) before being able to validly terminate the employment relationship? If yes, what are the sanctions for breach of this requirement?
Yes. Mandatory government approval or government notification requirements depend on the nature of establishment and also the reason for termination. For example, such permission/notification requirement does not apply in misconduct terminations. Please see our detailed response to question 2.
Failure to notify authorities could be punished with nominal monetary fines. However, failure to obtain prior government permission (if applicable) could invalidate a termination. Monetary penalties and criminal sanctions could also be imposed (although practically, the likelihood of criminal sanctions is low under labour laws).
What protection from discrimination or harassment are workers entitled to in respect of the termination of employment?
The IDA recognizes members/office bearers of registered trade unions as ‘protected workmen,’ and prohibits employers from discharging them, taking any disciplinary action against them or changing their service conditions, due to their involvement in trade union activities or in any industrial dispute.
Employees availing any leave under maternity benefit law or any sickness benefit under the Employees State Insurance Act, 1948 are protected from termination during their absence/the benefit period.
Other anti-discrimination laws also prohibit discrimination on the grounds of HIV or transgender status throughout the employment relationship and grant protection from termination on those grounds. Persons belonging to scheduled caste/tribes, or those with disabilities are protected against discrimination on grounds of their caste/tribe/disability. Such protection would also apply against termination based solely on such grounds.
What are the possible consequences for the employer if a worker has suffered discrimination or harassment in the context of termination of employment?
The specific monetary penalty could vary based on the statute. The penalties could be a monetary fine (approximately between USD 20 to USD 100) and/or with imprisonment (between 3 months to 1 year).
Along with a levy of civil/criminal sanctions, courts may reinstate workmen with back wages, and/or direct employers to compensate the employee. There could also be reputational risks to employers if details around such discrimination / harassment are made public.
Are any categories of worker (for example, fixed-term workers or workers on family leave) entitled to specific protection, other than protection from discrimination or harassment, on the termination of employment?
Yes. Please see the response to Question 12.
Are workers who have made disclosures in the public interest (whistleblowers) entitled to any special protection from termination of employment?
Yes. The Indian Companies Act, 2013 (CA, 2013) requires specific types of companies (such as, listed companies, companies with public borrowings, etc.) to set up vigil mechanisms. This is intended to provide a platform for the board of directors, employees and also third parties to report any genuine concerns. The vigil mechanism must have adequate safeguards against victimization, and must permit a whistle blower to directly access to the Chairperson of the Audit Committee (set up under the CA, 2013) in exceptional cases.
There is no express statutory protection for whistle blowers in other types of companies. However, ‘workmen’ can always claim that they were victimized by the employer for whistle blowing. Victimization amounts to an unfair labour practice under the IDA and could attract penalties. Generally, companies also have a whistle blower policies or ethics hotlines to encourage employees to raise concerns and also have zero-tolerance policies against retaliation or victimization.
What financial compensation is required under law or custom to terminate the employment relationship? How is such compensation calculated?
Yes. Retrenchment compensation (which is statutory severance) needs to be paid to workmen having a minimum service period of 1 continuous year. Similarly, employees with a minimum service tenure of 5 continuous years are eligible to gratuity (a long-term service payment) at the time of cessation of employment. Both, retrenchment compensation and gratuity are calculated at 15 days of salary for every year of completed service (though what is considered as salary differs for the two benefits). The law permits gratuity to be capped at a particular amount (currently INR 2,000,000/~USD 27,500); however, employers could choose to make uncapped gratuity payments. Failure to pay retrenchment compensation on or before termination could invalidate the termination.
Employees would also be eligible to receive other payments, such as, encashment of accrued but unutilized annual leave, unpaid salary, and payment in lieu of notice.
For all the above statutory exits payments, the law prescribes the manner of computation, salary components to be considered for the calculation, and also the timelines for making such payments. Employers will need to comply with all such statutory requirements.
In addition, employees would also have claims to any contractual dues. The terms of the contract would determine the quantum of payment.
Can an employer reach agreement with a worker on the termination of employment in which the employee validly waives his rights in return for a payment? If yes, describe any limitations that apply, including in respect of non-disclosure or confidentiality clauses.
Employees can agree to waive off their rights to non-statutory/contractual payments. However, a similar waiver is not enforceable in case of a statutory right to a payment. Although this is the legal position, it is commonplace for employers to obtain waivers or have employees agree to a release of claims at the time of termination (largely, with a view to deter claims). Despite such agreement, as waivers of statutory rights are unenforceable, employees would not be estopped from raising claims to such payments. It is advisable to build in appropriate set-off provisions in the release agreements to protect the company against any claims.
Is it possible to restrict a worker from working for competitors after the termination of employment? If yes, describe any relevant requirements or limitations.
No, legally, such restriction cannot be imposed. Indian law and courts do not give effect to non-compete restrictive covenants which operate beyond the term of employment. Any such agreements would be considered as a restraint on trade, and hence, void. This would be the legal position even if the post-termination non-compete restriction is limited by territory or duration. Despite this legal position, in practice, is it is very common for employers to impose such restrictions in employment contracts (from a deterrence perspective). In case of a breach, employers would not be successful in enforcing such clauses. Therefore, employers will need to look at alternative approaches to legitimately protect their confidential data and intellectual property (which is the main rationale for imposing a post-termination non-compete on employees).
Can an employer require a worker to keep information relating to the employer confidential after the termination of employment?
Yes, non-disclosure agreements and confidentiality clauses which indefinitely bind an employee after termination would be valid. It is common to include such provisions in the employment contracts, or require employees to execute a separate agreement, having detailed obligations on non-disclosure of proprietary information.
Are employers obliged to provide references to new employers if these are requested? If so, what information must the reference include?
Companies generally carry out a background verification process, and as part of this, it is common to contact previous employers for reference checks. However, there is no legal obligation upon the employer to provide references to new employers. Some organizations have strict internal policies to refuse such requests, while some others choose to limit the extent of information shared (such as, only name, period of employment, nature of work performed, and in some case, reasons for the exit).
What, in your opinion, are the most common difficulties faced by employers in your jurisdiction when terminating employment and how do you consider employers can mitigate these?
Managing terminations has always been a challenging issue for employers in India, given the need to balance business requirements, maintain discipline and optimize productivity of the workforce, along with the legal requirements relating to termination. There are various aspects to a termination which could prove to be a concern. For instance, as discussed, following the last-in, first-out rule in a redundancy is generally onerous. Employers would prefer to retain the best talent and let go of relatively underperforming employees in a redundancy. However, except in some limited circumstances, retaining top performers would be difficult since the IDA protects seniority. Obligations to obtain government approval for retrenchment (if applicable) is often a challenge and roadblock pushing employers to explore alternate mechanisms, like voluntary exit schemes.
Similarly, in the context of misconduct terminations, holding a disciplinary inquiry can be a long-drawn process (whereas employers usually look for immediate exits). For instance, in job abandonment matters, while businesses may not have the appetite to continue an employee on the payroll, a disciplinary inquiry may be necessary in such case as well. There have also been instances where company policies may not categorize an act/omission as a misconduct, which would curtail an employer’s ability to take disciplinary action against such behaviour.
Further, dismissal/discharge of any workman would be prohibited during the pendency of any industrial dispute between employers and the workmen before a conciliation officer, industrial tribunal, etc), unless express approval is obtained from the authority. The intent of this provision is to maintain status quo during the pendency of a dispute.
Terminations effected without a reasonable cause or without following the applicable process can result in the termination being challenged and consequently invalidated. Given the various nuances involved, involuntary/unilateral terminations are complex and negotiated/mutual-consent exits could be an easier alternative. Ensuring that the necessary flexibilities and rights are retained in the employment agreements and company policies also go a long way in managing exits better.
Are any legal changes planned that are likely to impact on the way employers in your jurisdiction approach termination of employment? If so, please describe what impact you foresee from such changes and how employers can prepare for them?
29 central employment laws in India are being consolidated into four labour codes. These codes are likely to come into force in 2021. The IDA (which is a key legislation governing retrenchment) would be subsumed by the Industrial Relations Code, 2020 (Code). The Code increases the threshold to obtain government approval (across all Indian states) to 300 or more workers in factories/mines/plantations – this is a welcome change.
The Code largely mirrors the retrenchment processes under current law; however, it offers scope for the government to increase the rate of retrenchment compensation (which is currently calculated as 15 days’ wages for every year of service). The Code also imposes an additional obligation on employers to contribute to a worker re-skilling fund. The intent of the government is to use such contribution to re-skill the retrenched worker. Thus, there would be additional financial liability on employers when retrenching ‘workers’ (akin to ‘workmen’).
The Code also imposes more stringent penalties for non-compliance. Employers should consider relooking at their existing practices and policies on termination to ensure compliance.
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