Indian labour and employment laws have not kept pace with India’s fast track liberalisation policies. Hiring and firing employees must be carefully considered because of the legal, regulatory, social and cultural idiosyncrasies that arise when doing business in India.
Indian law distinguishes between ‘workmen’, who are entitled to various statutory protections, and ‘non-workmen’ who receive only limited statutory protection. Foreign nationals can be employed by an entity in India, or employed overseas and seconded to an Indian entity. Foreign companies can also consider employing consultants directly in India.
Issues arising on hiring individuals
All foreign nationals wanting to work in or visit India will require a visa. The decision of whether to enter India on an Employment visa or Business visa depends on the nature of activity to be conducted in India. Foreign nationals must earn a minimum salary of USD 25,000 per annum to be eligible to apply for an Indian Employment visa (amongst other qualifying factors).
Foreign nationals must obtain the employment visa to work in India from their country of origin or habitual domicile whether employed directly by or seconded to work for an entity in India. The time spent in India is no longer an indicator of the type of visa required. Post-arrival formalities are required to be completed within the stipulated time lines, failing which exit from India can be delayed.
Foreign nationals are subject to payment of all applicable taxes in India whether employed directly by or seconded to work for an entity in India.
Employment structuring and documentation
Employers should offer employees working in India a clear written contract of employment. Often an “Offer Letter” is used for this purpose – however appropriate terms and conditions should be inserted in this Offer Letter to avoid ambiguity. Further, Indian employment law contracts can be for a fixed term or open term, although it is common to use a fixed term contract as it can assist with termination strategies.
Companies should ensure they comply with all foreign direct investment and exchange control regulations in India when structuring employment agreements in India. In addition, employers must ensure that all handbooks, rules and policies are suitable for use in India and enforceable under Indian law.
Finally, employers have certain obligations under specific legislation towards part time employees and may be held liable even where such employees are hired through an agent.
Issues arising during the employment relationship
Wages, annual leave and working time
Terms and conditions of employment are regulated by an employee’s employment contract which must meet minimum statutory requirements set out in the respective Shops and Establishment Act (SEA) of the state where the employee is based. The payment of overtime, notice periods, annual leave and sick leave can vary depending on both the state where an employee is based and the seniority of the employee. State specific compliance is required and varying terms of employment may need to be offered to different employees based in different states in India.
India has legislation that offers maternity benefits like maternity leave and pay, but there is no statutory provision for paternity leave.
The Constitution of India guarantees the right to life, liberty and equality, and the right not to be discriminated against on the grounds of nationality, race, sex, religion or disability. However, such right is ordinarily available only against the State and its instrumentalities and not against private persons. An important new law relating to discrimination is aimed at preventing and prohibiting sexual harassment of women in the workplace and mandates a complaint mechanism to deal with complaints relating to sexual harassment. This new law also places an onus on employers to educate their work force on the respective rights and remedies.
The Trade Union Act 1926 allows workers to organise themselves and form trade unions. Current trends suggest however that with the expansion of the service sector, there has been a decline in the importance of trade unions in the overall landscape of industrial relations in India. Political patronage to trade unions has also decreased over the years.
Tax and social insurance
Employees have an obligation to pay individual income tax. Further, companies must comply with corporate tax obligations which include an obligation to withhold tax on salary and pay this to the local tax authorities. In addition, both employers and employees have a statutory obligation to make a contribution to applicable social security schemes including provident fund, pensions and employee state insurance. India does not offer a universal social security scheme and courts seek strict enforcement of the obligations with respect to social security related laws.
India has signed social security agreements with countries including Belgium, Germany, Switzerland, Denmark, Luxembourg, Netherlands, Hungary, South Korea and France. This exempts expatriates from these countries from making social security contributions in India in accordance with the terms of the respective social security agreement. Foreign nationals of all other countries are required to make contributions towards provident funds in case they work at establishments that are subject to provident fund legislation.
Issues arising on termination of the employment relationship
The Industrial Disputes Act 1947 (IDA) provides protection to employees falling into the category of “workmen”. In the event of a transfer of an undertaking, eligible workmen are deemed to be “retrenched” (i.e. redundant) and will be entitled to notice and severance compensation only if the transfer results in adverse working conditions or an interruption in the continuity of service. In other words, no special rights or benefits are given if services have not been interrupted and the terms and conditions of employment are not altered to the detriment of the workman.
Employees who are “non-workmen” do not have statutory rights in the case of a transfer of an undertaking. However, employees will be entitled to contractual rights and/or benefits. An action may also lie against the employer in the case of a premature termination of employment or wrongful termination caused due to the transfer.
The IDA sets out the rules, processes and procedures to be followed by employers when terminating the employment of workmen. Certain categories of employees such as managers and those discharging supervisory duties and earning more than INR 10,000 per month are exempt from this statutory protection set out in the IDA. In such cases the terms and conditions of individual contracts of employment, or the applicable SEA, will dictate the process of termination.
All employers must comply with the minimum statutory requirements for notice periods and payments in lieu of notice as set out in the applicable SEA. Redundancy (commonly known as retrenchment) or termination without cause is permitted under Indian law subject to necessary compliances. Further, in the case of proven misconduct, or termination for cause, an employer may be entitled to terminate without notice or payment in lieu. Rules and procedures can vary depending on the nature of activity of the entity, or state where operations are based and the number of employees employed.
Above all, the cultural idiosyncrasies of operating in India must always be considered when terminating employment in India.
- Vineet Aneja & Vikram Bhargava