Problems we solve

Services

Solutions

Why CXC

Resources

Connect

Global Hiring Contact us

OUTLINE

Notice period in India

Termination of employment in India

Post-termination restriction in India

Waivers in India

Transfer of undertakings in India

Minimise risk with our end-to-end global employment solutions

Dismissal of an employee in India

Navigating the end of employment process in India is not a task to be taken lightly. It demands careful attention to both statutory provisions and established best practices.

Dismissing an employee in India must be conducted with a clear understanding of India’s labour laws and regulations to ensure compliance. A proper dismissal process that is compliant with legal standards establishes orderly procedures within your business operations. It helps maintain a secure and stable work environment by setting clear expectations and providing a roadmap for handling sensitive workforce changes.

How to dismiss an employee in India compliantly?

Adhering to statutory provisions like the Industrial Disputes Act, 1947, helps in avoiding costly legal disputes that can arise from wrongful termination claims. The Act outlines specific grounds and procedures for terminating employment. This includes providing a clear and documented rationale for the dismissal, which should be performance-based, misconduct-related, or due to the operational requirements of the business.

Here are other things you need to keep in mind when it comes to termination of employment:

Conduct a fair and transparent performance review: Prior to dismissal, a fair and transparent performance review process should be in place, allowing employees the opportunity to improve with appropriate support and guidance. In cases of misconduct, conducting a thorough internal investigation is crucial, ensuring that any decision to terminate is well-documented and justified.
Follow the appropriate notice period: You must strictly follow the notice period requirements as per the terms of the employment contract or the statutory minimum, whichever is higher. Failing to adhere to this can result in legal penalties or compensation claims. Additionally, severance pay may be applicable, particularly in cases of termination due to operational changes within the company.
Ensure clear communication throughout the process: A well-structured dismissal letter should be prepared, detailing the reasons for termination, and encompassing any entitlements such as unused leave or severance pay.

Non-compliance can lead to significant financial penalties and litigation costs that could negatively impact your business operations.

Reinstatement of a dismissed employee in India

The reinstatement of dismissed employees in India is allowed under certain circumstances, particularly if the dismissal is found to be unlawful, unjust, or not in accordance with the prescribed procedures under law. Indian courts have the authority to order the reinstatement of employees, along with back wages or compensation, if they deem the termination of employment to be illegal.

Moreover, the Supreme Court of India has clarified that reinstatement with full back wages is not automatic in every case of wrongful dismissal. The final decision on reinstatement, back wages, or any other form of compensation depends on the specific details and circumstances of each case.

India’s labour regulations are generally viewed as employee-friendly, and employers are advised to proceed with dismissals and terminations in strict compliance with applicable laws and procedures to avoid potential legal and financial repercussions, including the possibility of having to reinstate a dismissed employee.

Notice period in India

Standard notice period in India

To avoid any ambiguity or potential legal disputes, employers need to clearly outline the stipulations concerning the employee notice period in the employment contracts.

For categories such as ‘workmen’ (as defined in the Industrial Disputes Act, 1947), employers are required to give 30 days’ notice for termination for convenience or make a payment in lieu of the notice period.

When it comes to other types of workers, the notice period can ideally range from 15 days to 90 days, subject to the organisation’s size, local employment laws, and the contractual agreement between the employer and the employee.

What are the employee rights during notice period in India?

During the notice period, workers have specific rights that are protected under various employment laws. These rights are designed to protect the welfare and interests of employees during this transition period. Generally, the rights include the continuation of employment benefits, the right to seek new employment, and sometimes the option to negotiate an early release or payment in lieu of a notice period.

Moreover, employees in India have the right to negotiate with their employer for a shorter notice period. This is particularly relevant when an employee has found new employment and wishes to join the new company before the end of the notice period in their current job. If both parties agree, they can shorten the notice period and require the employee to pay the employer a sum equivalent to their salary for the remaining notice period, as stipulated in the employment contract or company policy.

What are the consequences of not serving a notice period in India?

If an employee in India does not serve the notice period as stipulated by the terms of their employment contract, there can be several potential consequences. One of the most common consequences is legal action from the employer. The employer may choose to sue for breach of contract, and the court may require the employee to pay damages to the employer. These damages could vary depending on the terms of the contract and the impact of the employee’s abrupt departure on the employer’s business.

Another consequence may include withholding the final settlement, including any pending salary, benefits, or dues that the employee is entitled to. This can also extend to withholdings from the employee’s provident fund, gratuity, or any other retirement benefits that may be due to the employee, depending on the company’s policies and the terms of the employment contract.

Apart from legal and financial repercussions, there may also be professional and reputational consequences. An employee who leaves without serving the notice period might receive a negative reference from the employer, which can impact future employment opportunities. Such unprofessional conduct could result in industry blacklisting or hinder future job opportunities.

Probation period in India

Although a probationary period is not legally mandated in India, it is a common employment practice. Typically, probationary periods range from 3 to 6 months, but the exact duration can vary depending on the organisation’s policy and the nature of the job.

Termination of employment in India

The termination of employment process in India follows a standardised process. Typically, the notice period ranges from 30 to 90 days. This is a helpful practice that gives both employers and employees enough time to prepare for the next steps—employees can start job hunting, and employers can look for a suitable replacement.

However, employers have the right to terminate employment without prior notice if an employee’s actions negatively impact the workplace. Only scenarios involving misconduct, disobedience, lack of skill or qualification, neglect of duties, or unauthorised absence can justify such instances with sufficient cause. These actions are considered detrimental to the business’s operations and, as such, warrant immediate dismissal to protect the company’s interests and workforce integrity.

Employers in India must approach termination with diligence, ensuring proper documentation and adherence to legal guidelines. This mitigates potential disputes and reinforces a culture of accountability and professionalism.

Compensation for termination of employment in India

When employers face the tough decision of letting employees go due to redundancy, they are required to provide severance pay to help their employees’ transition. The exact amount can vary but it is often based on the employee’s tenure and last drawn salary.

Here are the things you need to keep in mind:

Retrenchment compensation: This is essentially a financial package owed to employees if they’re laid off due to the company needing to reduce its workforce for reasons not related to the employees’ personal performance. This equals 15 days’ average pay for each year the employee worked with you, applicable for those who’ve worked over six months in a year.
Continuous service calculation: The key term here is ‘continuous service’..’ If an employee has been with your company for over six months (and it could be just a day over), that year counts as a full year when calculating their severance pay.
Variable compensation rate: While the base rate for calculating the payout is 15 days’ average wages per year of service, this amount could be adjusted based on government notifications or updates.
Worker re-skilling fund contribution: A newer requirement involves contributing to a fund designed to help train workers for new jobs after they have been retrenched, equally calculated at 15 days’ wages per affected employee.
Other termination benefits: On top of severance pay, you might also need to settle any unused leave days (leave encashment), provide a gratuity if they’ve been with you for five years or more, offer payment in place of a notice period if such notice wasn’t given, fulfill statutory bonus payments, and ensure any other amounts contracted under the employment agreement are paid. Employees terminated due to misconduct are not eligible for these benefits.

Compensation for wrongful termination in India

Wrongful termination refers to the termination of an employee’s service in violation of legal provisions or contractual agreements. Circumstances considered wrongful can vary widely, but typically include dismissals that breach specific terms of an employment contract or labour laws protecting employee rights.

Here are some common grounds on which a termination might be deemed wrongful in the Indian context:

Dismissal without a valid reason or without following due process: Employers are required to provide a valid, justifiable reason for terminating an employee and must follow the due process as established by law or the employment contract.
Discrimination: Terminating an employee based on discriminatory factors like race, caste, sex, religion, or disability unlawful and can be contested legally.
Retaliation: If an employee is terminated for participating in legally protected activities, such as filing a grievance against the employer, this could also be deemed wrongful.
Non-compliance with the terms of the employment contract: Any termination that violates terms specified in the employment contract, such as notice requirements or stipulated termination procedures, can be contested as wrongful.

The compensation for wrongful termination varies depending on the details outlined in the employment agreement and the unique aspects of each case. The principle used by the courts, known as “”mitigation of damages,”” comes from Section 73 of the Indian Contract Law of 1872. This principle dictates that the amount of compensation awarded should align with what is specified in the employment contract.

Post-termination restriction in India

Post-termination non-compete clause in India

According to Section 27 of the Indian Contract Act, any agreement that restrains an individual from exercising a lawful profession, trade, or business of any kind is void. Therefore, while non-compete clauses during employment are valid, imposing such restrictions after the termination of the employment contract is not considered legally enforceable. The Indian judiciary consistently holds the view that everyone has the right to earn a living through any legal trade or profession, and thus, post-termination restrictions are against public policy.

Moreover, it has been observed in courts that such post-termination non-compete clauses are coined as ‘restraint of trade’ and are impermissible under Indian law, rendering the contract void because it is unfair and deprives an individual of their fundamental right to earn a livelihood.

Post-termination customer non-solicits in India

Certain provisions that aim to prevent a former employee from interacting or engaging with a company’s clients after their departure—often referred to as post-termination non-dealing or non-solicit clauses—may have potential legal standing. One could argue that these provisions constitute a ‘restraint of trade’, particularly if their adherence impacts the former employee’s ability to conduct business. The validity of such clauses is often dependent on the specific circumstances of each case.

Although these non-solicitation clauses might be recognised by the courts, they typically allow the employer to seek financial compensation rather than prevent interactions between the customers and the former employee. It is quite rare for Indian courts to issue orders, called injunctions, which would actively stop a customer from choosing to work with a former employee.

In some instances, if an employer can convincingly demonstrate that such a clause is vital for protecting confidential information and doesn’t unfairly limit the former employee’s ability to do business, then the company might have a successful claim for financial reimbursement due to a breach of the employment contract.

Post-termination employee non-solicits in India

Certain circumstances deem post-termination employee solicitation clauses permissible. These clauses are specifically designed to restrict former employees from soliciting their ex-employer’s staff after they leave the organisation. Unlike non-compete clauses, which are generally unenforceable post-termination, non-solicitation of employee clauses does not fall within Section 27 of the Indian Contract Act, 1872, which invalidates agreements that restrain trade.

The courts have enforced these clauses on a case-by-case basis, particularly when they are reasonable and intended to protect the employer’s legitimate business interests, such as safeguarding a stable workforce and preserving trade secrets or confidential information.

However, the enforceability of these clauses is contingent on them not being overly broad or excessively long in duration, and they must be reasonable to the extent necessary to protect the company’s interests. Any clause that is overly restrictive may not hold up in court. For instance, the Madras High Court held that a non-solicitation clause valid for a period of three years was reasonable to prevent the disclosure of confidential information.

Waivers in India

India’s contract law acknowledges and implements the concept of a waiver.

A waiver is essentially a clear and deliberate indication by one party to forego certain rights or claims, doing so with a full understanding of the relevant facts and implications. When a business or a worker decides to waive a right, they must do so openly and with full awareness of the situation. This ensures that the waiving party fully understands the implications of their decision.

However, there are limits to the enforceability of waivers. Specifically, waivers attempting to bypass statutory entitlements are unlikely to be enforceable. Waivers, on the other hand, concerning more general contractual rights can be enforced.

Transfer of undertakings in India

Unlike certain jurisdictions with specific laws, such as Transfer of Undertaking Protection of Employment (TUPE) in the UK, India does not have clear-cut regulations that exclusively address employee rights in the case of business transfers. Furthermore, Indian labour legislation does not acknowledge the automatic transfer of employees.

As per the Industrial Disputes Act (ID Act), employees defined as ‘workman’ who have completed a minimum of one year of continuous service are considered to be involuntarily separated from service (retrenched) if there is a change in the ownership or management of the enterprise.

These workers are entitled to severance pay, calculated as 15 days of average wages for every year they have been with the company, plus a one-month notice or equivalent salary if not given notice, unless the following two conditions are met:

The employee agrees to move to the new company.
The acquiring company guarantees to maintain or improve the terms of employment that were in place before the transfer.

Alternatively, the workman has the right to opt for compensation if they do not wish to continue with the new employer.

From the transfer date, the acquirer assumes all responsibilities and obligations towards these employees, including taxes at both the central and state levels, contributions to provident funds, gratuities, compensation for accidents, and employee state insurance contributions. Should there be any liabilities dating back before the business was handed over, both the original and new employers share responsibility, in line with the Employee State Insurance (ESI) Act and the Employees’ Provident Funds (EPF) Act, for ensuring contributions to provident funds and insurance are made up to the transfer date.

However, the new employer’s liability is capped at the value of the assets received through the acquisition. Non-worker employees generally resign and are then rehired by the acquiring entity, unless they opt out. If the new employer opts to ensure job continuity, this will be documented in the updated employment contracts.

Understanding these regulations ensures that business leaders can navigate mergers and acquisitions efficiently, maintaining compliance while ensuring a smooth transition for their workforce, thereby reaffirming the trust and confidence essential for successful business continuity and leadership.

Minimise risk with our end-to-end global employment solutions

Ending employment agreements can be a complex and sensitive matter that demands a profound understanding of the in-country specific labour laws and regulations to mitigate risks.

At CXC, we specialise in providing a comprehensive global employment solution designed to protect your business through every stage of the employment cycle—from the moment of onboarding to the eventual offboarding of staff and all steps in between. Our approach is tailored to adapt to any situation and changes, all while ensuring compliance.

Speak to our team today.

Read about EoR services

Compliantly hire workers anywhere with CXC

With our EoR solution, you can engage workers anywhere in the world, without putting your business at risk. No more worrying about local labour laws, tax legislation or payroll customs — we’ve got you covered.

Learn more

DISCLAIMER: The information contained on this website is provided for general informational purposes only and should not be construed as legal, tax, or other professional advice on any subject matter. While we endeavor to ensure that the content is accurate and up to date, we make no warranties or representations of any kind regarding the completeness, accuracy, reliability, suitability, or availability of the information contained herein. The content on this site is not intended to be a substitute for professional advice. Users should not act or refrain from acting based on any information on this website without seeking the appropriate legal, tax, or other professional advice tailored to their specific circumstances from qualified professionals. We expressly disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this website. Use of the information on this site does not create an attorney-client, tax advisor-client, or any other professional-client relationship between the user and the website or its authors.

BLOG

Helping businesess to compliantly engage talent since 1992