What are the key employment laws and regulations in India that companies must comply with?
Some of the key employment legislations in India that are relevant to all businesses are as follows:
- The Industrial Disputes Act, 1947: regulates industrial dispute resolution and conditions for layoffs and closures.
- The Factories Act, 1948: ensures health, safety, and welfare in manufacturing establishments.
- The Employees Provident Funds Act, 1952: mandates retirement benefits schemes.
- The Payment of Gratuity Act, 1972: provides gratuity payments for long-term employees.
- The Payment of Bonus Act, 1965: mandates bonuses for eligible employees.
- The Minimum Wages Act, 1948: sets minimum wage rates.
- The Payment of Wages Act, 1936: regulates timely wage payments.
- The Maternity Benefit Act, 1961: provides maternity leave and benefits.
- The Equal Remuneration Act, 1976: ensures equal pay for equal work.
- The Sexual Harassment of Women at Workplace Act, 2013 (‘POSH Act’): protects against workplace sexual harassment.
- The Employees State Insurance Act, 1948: provides social security and health insurance.
- State-specific Shops and Establishments Acts: regulate working conditions in commercial establishments.
- Industrial Employment (Standing Orders) Act, 1946 along with state wise regulations under the same.
- Contract Labour (Regulation and Abolition) Act: regulates contract labour
It is to be noted that some of these laws become applicable, eg, laws related to Provident Fund and ESIC only upon the business undertaking reaching a minimum threshold number of employees – these thresholds are different for different regulations. Further, state governments are empowered and typically do have their own set of rules for implementation of statutes in their respective states, which creates a degree of variance in the implementation of the statutes from state to state. Compliance with these laws is critical for businesses operating in India as non-compliance often carries the risk of financial penalties as well as imprisonment of key managerial persons such as directors.
How do Indian employment laws compare to those in other major jurisdictions?
Some key points of difference are as follows:
- At will employment – Indian employment laws are fundamentally structured around the concept of a ‘workman’ (a definition that roughly covers the blue-collar and grey-collar workers). Most of the protections under the Industrial Disputes Act (the keystone statute to Indian employment law) are intended for the workmen which essentially includes all employees below the managerial level. The interpretation of this term is largely driven by judicial interpretation and stare decisis. While at will and purely contractual termination of employment is fairly common at the management level, there are strict guidelines governing reduction in force or layoffs of employees below the management ranks. Further, many of the terminal benefits of employment like gratuity and provident fund are not consolidated yet and operate under various statutes and departments.
United States: in our understanding the employment is generally at will meaning either party can terminate the relationship at any time, without cause, subject to anti-discrimination laws and contractual obligations. - There is significant variance in the positions related to non-compete clauses in the United States with some States like California taking an extreme pro-employee stance. In India, any agreement in restraint of trade will be considered void. However, restrictions related to confidentiality of trade secrets, restrictions related to a reasonable geographic area or a limited business field where the person concerned on whom the restriction applies has a skill that allows him to find employment in another field, or paid gardening leave would be some examples of reasonable restrictions that have been upheld by courts (India) from time to time. For key managerial employees reasonable non-compete obligation with buy-back of shares at a lower price, as a consequence of breach are established practices. By non-compete obligation here, we are strictly speaking about post-employment non-compete obligations. Typically, we advise exclusivity of employment to be expressly mentioned in the employment agreements.
- A centralised social security law, Code on Social Security (2020), has been passed by the Houses of Parliament in India, and is an attempt to consolidate labour welfare legislations in the country. However, the statute awaits implementation as the same is subject to framing of rules by the respective provinces.
In conclusion, the most distinctive difference between India and US employment laws would be with regards to the wide variance in employment regulations amongst the states as witnessed in the US vis a vis a far more central legislation driven approach to employment laws in India. While in India, currently welfare mechanisms for employees are provided through various statutes, the proposed new legislations intend to address the same through a consolidation mechanism. Termination of employment in US is almost always driven by contracts whereas in India there are significant statutory safeguards for the same. - With regards to the European Union, our view has been that the EU laws are far more protective of employment and relatively the Indian laws provide a bit more flexibility.
What are the implications of Indian employment law for multinational companies operating in India?
Other than the key statutes mentioned above the following points should be kept in mind by any multinational entity operating in India:
- Indian labour law statutes often carry penalties including imprisonment and therefore a strict compliance with the same is mandatory.
- Issues related to state holidays and minimum number of paid leaves in a year are often regulated by state level shops and establishments statutes and could vary significantly from state to state.
- Laws related to protection of women’s rights at workforce including Maternity Benefits Act and POSH Act should be complied with strictly.
- Layoffs or reduction in force must always follow the ‘last in first out’ guidelines and in the event, there are any deviations from the same, justification for such deviation must be recorded in writing.
- Any plan to provide for participation of India resident employees in the foreign company ESOP policy must be framed in compliance with the extant overseas investment guidelines of the Reserve Bank of India as well as tax-related aspects of such transactions.
- With regards to expat employees that issues related to withholding tax between the country of origin and India and all issues related to transfer of terminal benefits are to be considered carefully.
What are the best practices for ensuring compliance with employment laws in India?
- It is important for multinationals to be cognisant of the nature of compliance involved with regards to employment laws. We suggest a one-time audit of the employment law compliance by a reputed firm followed by a half-yearly maintenance audit to ensure that no non-compliance occurs, or any existing non-compliance is immediately addressed with corrective measures.
- A clear delineation of roles and responsibilities at a level below the directors, with regards to labour law compliance, in order to protect the highest management from avoidable departmental inquiries and lawsuits.
- Regular workshops for sensitisation of employees with relation to issues like POSH Act are highly recommended.
- Any exit of an employee from the organisation must be accompanied by a fully enforceable, validly executed contract of full and final settlement to avoid claims related litigation.
- We highly recommend the HR policies of the companies to broadly follow the standard set by the standing orders applicable to them.
Are there any anticipated changes or trends in Indian employment law that might affect future business operations?
As a part of labour regulation reforms, the existing regulations in the regime, have been codified into four Codes namely,
- Code on Wages.
- Industrial Relations Code.
- Code on Social Security.
- Occupational Safety, Health and Working Conditions Code.
The Codes have been passed by both the Houses Parliament and have been notified, awaiting implementation. Most states, but not all, have pre-published draft rules for consultation under the same.
Once implemented, these will have significant impact in the labour regulations of the country.