The principal sources of law and regulations relating to employment relationships in India are the Constitution of India, 1950, labour statutes, judicial precedents and collective and individual agreements. The applicability of employment law in India is based on several factors, most of which relate to the function of the employee, the activity being performed by the employer and the number of persons employed in the organisation. Briefly, India’s employment laws can be categorised as below:
- a certain laws (such as the Factories Act, 1948 (Factories Act)) apply only to a factory that is engaged in manufacturing;
- b certain laws apply to an individual who is a ‘workman’, regardless of the organisation in which they are working; and
- c certain laws apply to all employees working in an establishment, without distinguishing the category of employee.
Indian employment laws are highly protective of workmen and it can be a challenge for employers to comply with all applicable laws, some of which date back to the 1940s. The labour laws require an employer to act in accordance with multiple regulatory compliances, which relate to obtaining registrations, filing periodic returns, maintaining various registers and physical display of extracts of specific laws. These compliances can be tedious and problematic, as the information is usually voluminous and an employer may have specific internal formats to maintain the information.
i Legal framework
India is a federation of states. The Constitution of India demarcates the areas where central (federal) and state governments can legislate. Most employment laws are central pan-India legislations. These include laws relating to employment disputes, social welfare benefits, etc. States are generally empowered to pass amendments to these laws, with specific local applicability.
The Industrial Disputes Act, 1947 (ID Act) is the main central legislation dealing with ‘workmen’. A workman would generally be any employee, inter alia, engaged to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, but would not include an employee engaged in:
- a a managerial or administrative capacity; or
- b a supervisory capacity and drawing wages more than 10,000 rupees per month. Typically, all employees who are not in a managerial or supervisory role would be considered as workmen.
A main legislation that is usually enacted by a state is the Shops and Establishments Act (SEA). This law deals with issues like working hours, leave, overtime, etc.
ii Court procedure in labour disputes
Complaints involving industrial disputes fall under the ID Act, which provides for various adjudicatory bodies including jurisdictional conciliation officers, labour courts and industrial tribunals to resolve disputes between workmen and management. An employer and workmen may also agree to refer an industrial dispute to arbitration under the ID Act. Further, the High Courts of the states2 and the Supreme Court of India3 (India’s apex court) also have jurisdiction to hear certain labour disputes under constitutional law.
Litigation in India is drawn and the duration of an industrial dispute is difficult to predict with certainty – it may range from six months to over two years.
The dispute process would vary for employees who are non-workmen. In this case, the remedy would be mainly for breach of the employment agreement, where the parties have the option to approach the jurisdictional civil court (which includes the state High Court) for relief or the appropriate authority under the applicable SEA.
Ii YEAR IN REVIEW
As part of its objective to make it easier to do business in India, the government of India has proposed that the most important central labour laws be revised and possibly amalgamated into two or three labour codes. If this is implemented, substantive procedural requirements relating to compliance and filing will be streamlined. Amendments have also been proposed to federal laws relating to factories and the use of apprentices.
As a precursor to pan-Indian changes, certain states in India, including Rajasthan and Maharashtra, have implemented changes to their state laws relating to industrial disputes, factories and contract labour.
The year 2016 saw a substantive amendment to the Payment of Bonus Act 1965 (the Bonus Act), a social welfare legislation law providing for payment of statutory bonuses to eligible employees. The amendment increased the eligibility threshold for coverage from a monthly salary or wage of 10,000 rupees to a substantially increased 21,000 rupees. The monthly ceiling for payment of the minimum statutory bonus was also doubled from 3,500 rupees to 7,000 rupees or the minimum government-notified wage, whichever is higher. These amendments had retrospective effect from 1 April 2014, causing widespread pushback from employers, as it required an employer to account for a higher payout for eligible employees going back two financial years. This retrospective application of the amendments has been legally challenged by different trade establishments and companies in various states across India. Interestingly, the High Courts across several states, including Tamil Nadu, Karnataka and Uttar Pradesh, have passed interim orders staying the retrospective application. It will be important to see how final decisions in the cases will play out.
In August 2016, the government introduced the Maternity Benefit (Amendment) Bill 2016 (the MB Bill), aimed at amending the Maternity Benefit Act 1961 (the MB Act). The MB Bill is currently pending before the Rajya Sabha (the Parliament’s Lower House). The MB Bill brings in key changes, including increasing paid maternity leave from 12 weeks to 26 weeks. The concepts of ‘commissioning mother’ (a biological mother who uses her egg to create an embryo implanted in a surrogate) and ‘adopting mother’ have been introduced. Other women-friendly changes include the introduction of ‘work from home’ after paid maternity leave and the requirement for an establishment with 50 or more employees to set up a crèche facility.
The Child Labour (Prohibition and Regulation) Amendment Act 2016 was passed in July 2016, amending the Child Labour (Prohibition and Regulation) Act 1986. The most notable change through this Act is the substantially comprehensive restriction on the employment of children in any occupation. There are certain exceptions to this, provided the concerned activities do not interfere with the child’s education. Penalties for employing a child have been substantially increased.
III BASICS OF ENTERING AN EMPLOYMENT RELATIONSHIP
i Employment relationship
Under the Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959, if notified by the concerned state government, a private-sector employer with 25 or more employees is typically required to notify any vacancy to a local government employment exchange 15 days before the date on which applicants will be interviewed. In practice, this is often observed in the breach.
There is no central statute dealing with the issue of an appointment letter or employment contract. Certain state-specific statutes may require the employer to issue an appointment order in a specified format. In practice, most companies provide an appointment letter or an employment contract indicating the join date, position, compensation and general terms of employment. Typically, the compensation break-up is mentioned in an annexure, which can be modified as required. The compensation break-up is largely based on the taxation aspects of the different compensation components.
Companies would also have an employee handbook or manual, with details of company policies relating to discipline, leave, etc. In addition, it is quite common for companies (especially in the IT/R&D sector) to enter into confidentiality and non-disclosure agreements separately.
In case the employer wishes to amend the employment terms, one would need to check if the employee is a workman or not. For workmen, the ID Act prescribes a specific process to be followed for change in specified working conditions, including wages, working hours, etc., including provision of prior notice of 21 days. For a non-workman, it is recommended that the employer obtain consent of the impacted employee to effect the change, as a unilateral change to the employment may be held as arbitrary and void.
There are no direct laws dealing with probation on a general basis in India; however, this is a common practice. The (federal) Industrial Employment (Standing Orders) Act, 1946 (IESO Act) regulates working conditions for workmen and generally applies to industrial establishments employing 100 or more workmen.4 Under the IESO Act, a workman can be employed on a probationary basis to provisionally fill a permanent vacancy up to a maximum of three months. Any such probationer is not entitled to dismissal notice or payment in lieu during the probation.
Certain States (such as Maharashtra) have built in the concept indirectly in their local SEA, by requiring an employer to provide termination notice if the employee has worked for a specific duration (in Maharashtra, three months). No notice is required if the employee has worked less than this period.
Typically, a probation period lasts between three and six months and should ideally not exceed 240 days, as several statutory social welfare laws apply to employees who have worked for such period and a probation period exceeding this limit may be construed as a method to avoid complying with law. It is generally accepted that the services of probationary employees can be terminated at any time by either the employer or the employee as per the terms of the employment contract.
iii Establishing a presence
Hiring of employees requires the establishment of a legal entity to do business in India. There are various routes to set up such an entity, such as establishing a company, a branch office, a liaison or representative office, or a limited liability partnership.
Until the legal hiring entity is set up, if a foreign company wishes to get people on board, it can examine options like entering into an independent contractor agreement or using a manpower agency as a temporary measure. The use of an independent contractor, especially in relation to the duration of the contract term, would need to factor in possible adverse tax implications on the foreign company by way of having a ‘permanent establishment’ in India.
iv Contract labour
Multinational companies in India often do not hire direct or regular employees for ancillary services, such as security, housekeeping and catering. A company would usually hire a ‘contractor’ to provide such support services and the provision of labour by such a contractor would be regulated by the Contract Labour (Regulation and Abolition) Act 1970 (CLRAA). The CLRAA envisages registration of the ‘principal employer’ and licensing of a contractor. A ‘principal employer’ would be any person responsible for supervision and control of an establishment, namely, the company hiring the contractor. It is the responsibility of the contractor to make timely payment of salaries and other emoluments to the contract labour. A key aspect of the CLRAA relates to defaults in such statutory obligations of the contractor – in such case, the principle employer may need to make good the defaults (which can include payments) to the contract labour and subsequently recover the same from the contractor. A principle employer should ensure that the contractor undertakes and is liable to comply with all statutory obligations for its personnel.
IV RESTRICTIVE COVENANTS
Restrictive covenants in the form of non-compete and non-solicitation clauses are frequently included in an employment agreement. Strictly speaking, a blanket non-compete clause post-termination of employment would not be enforceable under Indian laws as it would be held as a ‘restraint of trade’, but is usually included for deterrent value.
Non-solicitation agreements post termination of the employment relationship may have limited enforcement between two employers but not against the employees per se. The law on non-solicitation agreements is not very well developed. It is possible to have employees sign an employee bond – if the employee is provided with substantial training at significant cost, the employer can require him to remain with the organisation for a reasonable period. If the employee leaves prior to the expiry of this period, he may be required to repay the actual or reasonable costs incurred by the employer for such training.
The Minimum Wages Act 1948 (the Minimum Wages Act), the Payment of Wages Act, 1936 (the Payment of Wages Act) and the relevant SEAs generally govern the payment of wages to employees.
The Minimum Wages Act stipulates the minimum rates of wages in certain employments. These rates differ from state to state and are periodically revised.
The Payment of Wages Act regulates the payment of wages including method and period for disbursement to employees earning up to 18,000 rupees per month.
i Working hours, overtime and leave
The SEA usually provides for working hours, which average around eight to nine hours per day. Most SEA provide for a break of 30–60 minutes after four to five hours of work. Any work beyond these limits would warrant overtime payment, which is usually twice the average wages. The SEA may also provide for overtime caps, usually on a daily, weekly, monthly or annual basis. There are no exemptions from paying overtime. However, overtime provisions are often observed in the breach, as companies may not pay overtime when employees stay late by their own volition to complete work.
Ordinarily, companies need to adhere to government norms on opening and closing hours and need to be closed for one day a week. As per standard business practice , this is usually Sunday. Exceptions have been made under the SEAs for certain sectors, such as the IT/ITEs sector, for which specific permission is required from state labour authorities.
Women employees are generally not permitted to work at night (8pm to 6am) for safety reasons. Some state governments provide exceptions for sectors such as IT/ITES, for which specific approval has to be obtained from the labour authorities. Any such approval is subject to stringent security conditions.
The Factories Act is the main central law dealing with factories, distinct from ‘regular’ commercial establishments. The Factories Act provides for working hours for factory workers (a maximum of 48 hours a week or nine hours a day, or both), overtime (usually at twice the ordinary rate of wages), leave, etc. Other relevant features of the Factories Act are detailed safeguards for the health of factory workers, safety, improvement of physical conditions of the workplace and welfare amenities.
Typically, the SEA provide for about 15–20 days of regular leave and about 10 national or public holidays. Some national holidays are compulsory, while others may be chosen out of a larger list of holidays notified by the state government.
ii Employee benefits
An employer may be required to provide statutory social welfare benefits to its employees according to various central legislations. The main legislations include the EPF Act, the Employees’ State Insurance Act 1948 (the ESI Act), the Payment of Gratuity Act 1972 (the PG Act), the Bonus Act and the MB Act.
The EPF Act applies to establishments inter alia employing more than 20 persons and is compulsory for employees earning a salary upto 15,000 rupees per month. The employer and employee are required to make contributions to various funds (provident, pension and deposit-linked insurance) for the benefit of the employee. As a matter of practice, companies often provide this benefit to all employees regardless of their monthly compensation. If a company chooses to voluntarily follow the EPF Act, it would need to comply with all requirements thereunder, including in relation to contribution caps and filings.
Companies with foreign employees and companies sending Indian employees to work overseas would need to factor in the concept of ‘international workers’ under the EPF Act, where a higher amount of the employer’s contribution typically needs to be deposited in the provident and pension funds as compared to ‘regular’ Indian employees.
The ESI Act applies to factories, which are defined as establishments engaged in manufacture with the aid of power with 10 or more employees. In establishments engaged in manufacture without the aid of power, 20 or more employees are required for the ESI Act to apply. The central government may also notify other establishments to fall under the ambit of the ESI Act. According to the labour authorities, the ESI Act is applicable to all establishments. However, there is some ambiguity on this. The ESI Act aims to provide proper medical facilities and insurance to a workman and to his immediate family through a contributory fund. All employees, whether employed directly, employed through a contractor or employed part time, who receive a salary of up to 25,000 rupees per month (with effect from 1 January 2017) are entitled to be insured under the ESI Act. The employer and the employee are required to contribute a specified percentage of the salary, which is deposited by the employer in the Employees’ State Insurance account.
Gratuity under the PG Act is a lump sum payment made to an employee on retirement, death or termination of employment due to disablement. Other than in the case of death or disablement, it is required to be paid to employees who have completed five years of continuous service. The requirement to pay gratuity inter alia applies only to an establishment in which 10 or more persons are employed and applies to all employees regardless of monthly remuneration. Gratuity is determined at the rate of 15 days’ salary for every year worked or part thereof in excess of six months, capped at a maximum of 1 million rupees.
The Bonus Act applies to every establishment with 20 or more employees during an accounting year. An employee receiving a salary of 21,000 rupees per month or less is entitled to a bonus for every accounting year if he has worked for at least 30 working days in that year inter alia on the basis of profits or on the basis of production or productivity. The minimum bonus is 8.33 per cent of the salary earned by an employee during an accounting year, or a sum of 100 rupees, whichever is higher. The Bonus Act also provides that the maximum bonus payable to an employee should not exceed 20 per cent of the salary earned by an employee during the relevant accounting year.
The MB Act provides for paid maternity leave and other benefits (such as a maternity bonus) in relation to childbirth, medical termination of pregnancy, miscarriage, etc. A woman employee is generally entitled to 12 weeks of paid maternity leave. The law prevents a woman employee from having her employment terminated if she is on statutory maternity leave.
Vi FOREIGN WORKERS
As mentioned above, a significant difference between Indian and foreign employees is evident under the EPF Act. The threshold to qualify, the manner of deduction and the benefits are different for a foreign employee, and differ further depending on whether the country of origin has a social service agreement with India.
There are no other substantive distinctions between local and foreign employees.
Immigration issues in India are regulated broadly by federal laws, with inputs from the Ministry of Home Affairs and Ministry of External Affairs of the government. While the tourist visa-on-arrival provision has recently been introduced for a limited number of countries (such as Singapore and Finland), work-related visas typically need to be applied for well in advance.
In order to stay in India and work long term with an Indian company, a foreign national requires an employment visa (E visa), unless he or she already holds a valid Overseas Citizen of India (OCI) card, which is granted to certain foreign nationals of Indian origin. To be eligible for an employment visa, a foreign worker should earn a salary of more than US$25,000 per year and should not be appointed to a job for which qualified Indians are available. A separate category of business visa exists that is issued only for a short-term purpose, such as a visit to India to explore possible business ventures.
Foreign nationals are generally required to register with a jurisdictional Foreigners’ Registration Officer or Foreigners’ Regional Registration Officer, within 14 days of their arrival in India if they hold a visa for more than 180 days.
Given the fluidity of international relationships, it is recommended that any foreigner wishing to travel to India receives specific prior advice on the type of visa he or she needs to obtain.
Vii GLOBAL POLICIES
The IESO Act, briefly discussed above, provides for formation of standing orders defining the working conditions for workmen in covered establishments. The orders need to be certified by the labour authorities and made available to all workmen. Matters covered in the standing orders include:
- a classification of workmen (permanent, temporary, probationer, etc.);
- b intimation of working hours, holidays and wages;
- c shift working;
- d termination of employment and related matters, including suspension or dismissal for misconduct;
- e sexual harassment matters; and
- f retirement.
While most companies would have an employee handbook or manual dealing with issues under the IESO Act, it is advisable to check if there are any state laws that require the company to actually adopt the format of the standing orders under the IESO Act.
State laws may require statutory employment-related documents to be maintained or displayed in the local language or the language understood by the majority of employees. An employment agreement would not need to be framed in such a manner and is usually in English. What is important is that the employee should be able to understand all employment-related documents.
IX EMPLOYEE REPRESENTATION
i Works committee
Under the ID Act, if an industrial establishment employs 100 or more workmen, the government (state or central) may require the establishment to constitute a works committee with a maximum of 20 members. The works committee needs to promote measures for security and good relations between the employer and workmen; and to mediate or facilitate any material difference of opinion between the parties. The committee would consist of an equal number of representatives nominated by the employer and workmen.
ii Trade union
The legal right for collective bargaining exists in India through the means of a trade union. A trade union may be formed in accordance with the Trade Unions Act 1926 for regulating relations between an employer and employees. For the purpose of registration, any seven or more members of a trade union can subscribe their names to the charter of the trade union and apply for registration of the trade union. A trade union is entitled to enter into binding contracts and settlements with an employer. In practice, white-collar employees are usually not represented by a trade union or any other collective bargaining unit. Further, trade unions are largely absent in services businesses, including in particular India’s large software, BPO and call centre industry, though there is some move to form trade unions in the IT sector.
Certain states in India have laws dealing with 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.
X DATA PROTECTION
i Requirements for registration
There are no requirements for an employer to register with any data protection agency or other government body.
ii Sensitive personal data or information
iii Background checks
Background checks are a common feature that employers in India generally follow before hiring anyone, and successful completion of the same is a precondition to employment (and continuing employment) with the company. Often, employers retain the right to also conduct background checks on existing employees in case it is required for business purposes.
There is no prohibition on conducting background checks on employees, including candidates, provided their consent for the same has been obtained. Background checks could include verifications on education, criminal history, credit rating, etc. The most common background check is of academic credentials, which is typically outsourced by an employer.
Criminal verifications are becoming somewhat common in India, though it is not an easy process as criminal records are not digitised or consolidated centrally.
Under current Indian credit rating structures, an individual can obtain information on his or her credit rating. An employer can also access this information with the employee’s permission and on providing necessary proof of identity. Access to credit rating information is more common in banks and financial institutions.
Xi DISCONTINUING EMPLOYMENT
The termination of employees, whether large-scale or of a single employee for convenience (and not for cause, such as termination on disciplinary grounds) would be held to be either ‘retrenchment’ or ‘termination of services’, depending on the category of the employee under applicable Indian law.
i Retrenchment of workmen
As mentioned above, the ID Act applies to an employee who qualifies as a workman. Under the ID Act, retrenchment would mean termination of a workman inter alia for any reason other than as a punishment by way of disciplinary action.
In an establishment (other than a factory, mine or plantation with a minimum of 100 workmen), an employer needs to follow certain conditions for retrenchment of workmen who have been in continuous service for not less than one year5:
- a provide the workman with one month’s written notice indicating the reasons for the retrenchment or make payment in lieu thereof;
- b provide the workman with 15 days’ pay for every year or part thereof in excess of six months of continuous service ; and
- c serve notice to the appropriate government.
From a practical perspective, many companies do not provide this notice (especially where only a few employees are being retrenched) because they fear that this may lead to enquiries by the labour authorities. However, not providing the notice would be a violation of law.
In case of specified establishments engaging at least 100 workmen, prior approval would need to be obtained by the employer from the appropriate government before effecting retrenchment. The notice period requirement to the workmen would increase to three months. The government may make an inquiry into the reason for the proposed retrenchment and give the involved parties an opportunity to be heard. Approval for the retrenchment would be given only after such hearing.
Under the ID Act, the employer needs to follow the principle of ‘last come, first go’ in case of retrenchment. An employer is statutorily required to retrench the workman last employed in the particular employment category in the establishment, unless:
- a the requirement is contacted out by both parties; or
- b the employer can provide valid reasons from deviating from the requirement.
An employer should have reliable and sufficient evidence to justify the deviation from the rule, preferably in the recorded employment history of the employees.
An employer is not required to provide any alternative employment to retrenched workmen. However, a retrenched workman has a right to priority in case of any re-hiring, where an employer is required to first offer employment to those workmen who were retrenched by it and are citizens of India.
Notification of employee representatives is not required in case of retrenchment unless there are recognised employee representatives or a trade union and the agreement with such body or union requires notification, especially in case of large-scale retrenchments. From a practical perspective, an employer would hold a meeting with the impacted employees or workmen and explain the termination requirement to them and thereafter commence with the formal retrenchment process.
It is important to note that, notwithstanding the provisions of the ID Act in relation to retrenchment, if a workman’s employment agreement has better termination provisions (such as a longer notice period or severance pay), the employer would be bound by the same.
ii Termination of non-workmen
The SEA may specify a notice period to be provided to all employees, including non-workmen. For example, under the Karnataka SEA, an employer is required to provide one month’s written notice or wages in lieu thereof for any employee who has been in continuous employment for six months. Further, the employment contract would need to be examined for termination of non-workmen and related severance conditions.
In practice, an employer may ask for the resignation of the employee rather than terminate him. Most employees are willing to resign as it is a face-saving method for them to leave the company. If this method is resorted to, this should not be a reason to deny the employee any due compensation under the law or contract.
iii Termination for misconduct
The above rules may not apply to termination of an employee due to misconduct. For example, certain state SEAs (including the Karnataka SEA) mention that the notice period requirement need not be followed if the employee is being terminated for misconduct. Termination due to misconduct would occur in the event of a breach of the rules of the employer or some objectionable conduct. An employer can provide detailed rules in the employee manual or appointment letter of what an employee can and cannot do in the workplace.
If the termination of an employee (in particular, a workman) is by way of disciplinary action, the employer would need to follow the principles of natural justice and the guidelines evolved from various court decisions, including inter alia proving the misconduct of the employee. Additionally, if there were any standing orders or service rules applicable to such termination, the same would need to be followed. Broadly speaking, in order to prevent the possibility of an employee challenging the termination before a court of law on the grounds of mala fide intentions, victimisation, etc., it is recommended that an employer follow the procedure described below:
- a issue a charge sheet or a show-cause notice on the employee;
- b hold a domestic inquiry (a single individual may be appointed as an inquiry officer to conduct the internal domestic inquiry). The person conducting the inquiry and taking the decision should not be directly involved in the conduct in question, and should preferably not be the immediate superior of the employee;
- c peruse the report of the inquiry officer; and
- d issue an order of dismissal.
An order of dismissal may be challenged in a labour court and if it is found to be flawed, the court has the power to order reinstatement with continuity of service, back wages, and consequential benefits.
iv Termination under employment contract
An employment contract would normally mention a notice period or payment in lieu thereof for termination of an employee other than for misconduct. In the case of senior management this is likely to be three months, and in the case of other employees this would be one month. In practice, at the time of termination the employer would check whether the compensation payable under law is more than that prescribed under the contract.
Xii TRANSFER OF BUSINESS
Under the ID Act, where the ownership or management of an undertaking is transferred, whether by agreement or by law, from the employer to a new employer, the new employer is required to ensure that:
- a the service of the workmen is not interrupted by such transfer (i.e., continuity of service must be maintained, which is relevant for the provision of certain statutory welfare benefits);
- b the terms and conditions of service applicable to the workman after the transfer cannot be less favourable than those applicable to him immediately before the transfer; and
- c under the transfer terms or otherwise, in the event of future retrenchment, the new employer is legally liable to pay to the workman compensation on the basis that the service has been continuous and not interrupted by the transfer.
If the new employer does not comply with the above conditions, the workmen who have been in continuous service of one year immediately before the transfer are entitled to notice and compensation as if they were being retrenched.
While not specifically provided under the ID Act, case law provides that transfer of workmen is not automatic and the employer should obtain the consent of the workmen. If a workman refuses to be transferred, then the current employer has the option to terminate by way of retrenchment.
With the focus of the current government on major employment legislation reforms, it will be important to see how the changes play out over the next few years. The overall outlook is very positive, with the move to increased digitisation of process and transparency in compliance and governmental interventions.
1 Debjani Aich is a partner with Kochhar & Co.
2 Each state has a High Court with superintendence over all courts and tribunals in the state.
3 The Supreme Court of India exercises original and appellate jurisdiction in relation to employment laws.
4 There are state-specific modifications, such as those seen in Karnataka, where the IESO Act will apply to industrial establishments with 50 or more workmen. Further, states can exempt the applicability of the IESO Act to certain sectors. E.g., in Karnataka, the IT/ITES sector is exempt from the IESO Act.
5 ‘Continuous service’ generally means the working in an establishment for 240 days in the immediately preceding 12-month period.