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Terminating an Employee in India: Understanding Key Provisions, Challenges

By Rohit Kapur

Businesses in India have to contend with overlapping and convoluted employment laws derived from multiple sources. These include the laws passed by Parliament and state governments, as well as other labor statutes, judicial precedents, and collective and individual bargaining agreements.

This means that employers in India can be exposed to a number of legal and reputational risks if they do not follow due process while hiring and terminating employees.

Consequently, businesses need to formulate contracts and human resource (HR) materials keeping in mind the regulatory, social, and cultural idiosyncrasies that are framed in Indian labor laws and court decisions. This will ensure that senior management, HR personnel, and employees are fully apprised of their rights and responsibilities, thereby minimizing scope for disputes.
Inside_GPRDec17_India Terminate

Indian Labor Law Nomenclature

In Indian law, there are two types of employers and two types of employees:

Employers are either:

  1. Establishments—a term that encompasses all employers
  2. Factories—a term that typically refers to manufacturing units. Mines are sometimes included in this category.

Employees are either:

  1. Employees—a term that covers all types of employees in any kind of role
  2. Workmen—a term used in the Industrial Disputes Act, 1947 that defines those employees whose primary role is not supervisory, managerial, or administrative.

In addition, certain state laws may exclude senior management employees from their scope of application. In these instances, employment contracts take precedence.

In case of contract workers, Indian law prohibits their employment in certain sectors. Suppliers of contract labor (temporary workers) are called contractors and must hold a license. The employer hiring such contract workers must be registered as a “principled employer.”

Laws Governing Termination of Employment

Because labor law is a concurrent subject in the Indian constitution, labor and employment regulation in the country are governed at both the federal and state levels. The main federal statutes that regulate the termination of employment include the Industrial Employment (Standing Orders) Act (IESA), 1946 and the Industrial Disputes Act (IDA), 1947, as amended.

In addition, Indian labor is regulated by the Shops and Establishments Act, which is enacted in most states with minor differences in rules of implementation. The Shops and Establishments Act regulates labor and employment in all premises where a trade, business, or profession is carried out. Further, the implementation of respective state laws differs according to the area of operations of the employer—these are outlined in the laws and their supporting rules.

Given the structure of Indian labor laws, there is no standard process to terminate an employee in India. An employee may be terminated according to terms laid out in the individual labor contract signed between the employee and the employer. Equally, the terms may be subject to the country’s labor laws. Here, employers should note that India’s labor laws supersede the provisions of labor contracts—any termination policy or clause outlined within a contract should be checked against the law by a professional.

In cases where there is no labor contract, or the labor contract does not define a method of termination, the matter comes under the jurisdiction of the specific state’s labor legislation. This is because Indian federal law does not explicitly require that employment contracts be in written form.

Laws in India offer workers and employees considerable protection. The courts as well as state and federal labor departments often embrace a pro-worker stance in employment termination disputes. It is not uncommon for employees who have been dismissed from employment to exercise their right of appeal, or coordinate through trade unions in cases of mass retrenchment.


Six Important Compliance Rules When Terminating Employees in India

  1. The Industrial Disputes Act, 1947 mandates a 30- to 90-day notice period when terminating “workmen.” In the case of manufacturing units, plantations, and mines with 100 or more workmen, “termination for convenience” requires government approval; in other sectors, it requires only government notification.

  2. India’s labor laws cite the following reasons that justify termination for cause—willful insubordination or disobedience; theft, fraud, or dishonesty; willful damage to or loss of employer’s goods; partaking of bribes or any illegal gratification; absence without leave for more than 10 days; habitual late attendance; disorderly behavior during working hours; or habitual negligence of work.

  3. Employers that terminate for convenience must ensure that the last person to join the organization in the same role is first made redundant. It is an ideal practice that when such firms rehire for the same role, workmen who were terminated for convenience should be given the opportunity to rejoin the company.

  4. In case an employee being terminated is pregnant or seeking maternity leave, employers must balance their convenience against the risk associated with noncompliance with the provisions enshrined in the Maternity Benefit (Amendment) Act, 2017.

  5. Non-compete agreements are not enforceable under Indian law, while non-solicitation clauses can be enforced only in limited ways.

  6. The “work for hire” principle applies under the Indian copyright regime; employees must thus provide formal assignments.


State Labor Legislation Governing Termination

As previously mentioned, any termination needs to comply with federal and state law because these laws supersede contract provisions. Thus, contract provisions need to be compatible with the law. State laws (enshrined and linked to the Shops and Establishment Act) are particularly important when no defined procedure for termination exists or there is a dispute in the interpretation of those procedures.

In the following section, we examine the laws governing termination in several prominent investment destinations in India, including Delhi Union Territory, Maharashtra, Karnataka, and Tamil Nadu. These case studies represent wider norms and trends in state labor legislation throughout India.

  • State labor law in Delhi Union Territory—Under the Delhi Shops and Establishments Act of 1954, an employer cannot terminate an employee who has been with the corporation for more than three months without giving the employee at least 30 days of notice or a salary in lieu of such notice. The employer need not give notice if misconduct is the cause for termination. However, the employee, in such circumstances, should have an opportunity to reasonably explain the charge against them prior to termination.

  • State labor law in Maharashtra—Under the Maharashtra Shops and Establishments Act of 1948, an employer cannot terminate an employee who has been with the company for more than a year without giving the employee at least 30 days of notice in writing. If an employee has been with the company for more than three months but less than a year, the employer must provide at least 14 days of notice. The notice is not necessary if the employee is being terminated for misconduct.

  • State labor law in Karnataka and Tamil Nadu—Under the Karnataka Shops and Establishments Act, 1961 and the Tamil Nadu Shops and Establishments Act, 1947, an employer cannot terminate an employee who has been with the enterprise for more than six months, except on the grounds of “reasonable cause.” In addition, an employer must provide one month notice. If misconduct is the cause for termination, no notice or associated payoff is required.


Termination Procedures in India—Key Considerations

In most cases, employment contracts are very specific about the process for terminating employment. This eases the process of termination when it is by mutual agreement and when the employment is contracted for a fixed period. An employee is considered terminated at the conclusion of such a contract, unless a new contract is offered or the clauses in the initial contract are amended.

As in most countries, employees in India who are terminated by employers are often given one month notice or payment of one month of wages in lieu thereof.

In the case of terminations where the employee has been with the company for at least two years and the reason for termination is redundancy, a severance package is calculated: it depends on the duration of employment, performance, and salary level.

Wrongful termination, or not following due process as defined by the respective state and federal laws, will result in legal punitive consequences for the employer. In addition, the courts may order the employer to pay fines and award additional compensation to an employee who was terminated.

Employers must ensure that management teams and HR professionals are fully briefed on termination procedures. Contracts can protect employers; yet, firms must ensure labor law compliance to protect them from instances of litigation. In case there are areas where compliance is difficult, legal and practical advice should be sought to maintain best practices and safeguard against risk.


RohitKapur

Rohit Kapur is the India Country Manager for Dezan Shira & Associates, based in the New Delhi office. A Chartered Accountant by qualification, Rohit brings a diverse and rich experience of more than 29 years in starting up and managing companies. He has also acquired experience in restructuring and turning around companies to align them with changing and evolving economic and market conditions.