INDIAN LABOR LAWS

AND
BEST PRACTICES

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 SYNOPSIS
1. Overview of labor laws in India
2. Compliances under labor laws
3. Hiring aspects and employment documentation
4. Termination of employment & RIFs
5. Confidentiality & Assignment of Intellectual Property
6. Enforceability of non-competition and non-solicitation clauses
7. Compensation structuring, employee stock options & tax considerations
8. Recent regulatory developments - immigration laws and social security

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OVERVIEW OF LABOR LAWS IN INDIA

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 OVERVIEW
• List III Concurrent List of Seventh Schedule of Constitution of India
• In certain cases, enactments passed by the Centre but implemented by the States
• Labor laws are traditional and archaic; more than 100 central + state laws
• Over 90% of the workforce are unorganised labor; more than 12.6 million child laborers

• Labor market has undergone tremendous changes, however the labor laws have not kept
pace with industry requirements

• Unemployment rate expected to be 30% in 2020

• It is estimated that 16% of the employees in the organised sector are actually redundant

• Poor implementation of several labor laws

It is unfortunate that while labor laws in India were designed to be employee-

friendly, they have ended up becoming anti-employment

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 IMPORTANT LABOR LAWS
I. Laws Relating to Conditions of Employment
• Industrial Employment (Standing Orders) Act, 1946
• Contract Labour (Regulation and Abolition) Act, 1970
• The Factories Act, 1948
• Maternity Benefit Act, 1961
• Child Labour (Prohibition and Regulation) Act, 1986
• Inter-State Migrant Workmen (Regulation of Employment and Conditions
of Service) Act, 1979
• Sales Promotion Employees (Conditions of Service) Act, 1976
• State specific shops and establishments act

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 IMPORTANT LABOR LAWS (Contd.)
II. Laws Relating to Compensation*
• Minimum Wages Act, 1948
• Payment of Wages Act, 1936
• Payment of Bonus Act, 1965
• Workmen’s Compensation Act, 1923
• Equal Remuneration Act, 1976
* The Income Tax Act, 1961 also provides for certain perquisites for employees

III. Laws Relating to Social Security

• Payment of Gratuity Act, 1972
• Employee State Insurance Act, 1948
• Employees Provident Funds and Miscellaneous Provisions Act, 1952

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 IMPORTANT LABOR LAWS (Contd.)
IV. Laws Relating to Liabilities and Disputes
• Employers’ Liability Act, 1938
• The Industrial Disputes Act, 1947
• Industrial Disputes (Banking and Insurance Companies) Act, 1949

V. Laws Relation to Discrimination / Harassment

• Constitution of India, 1950
• Equal Remuneration Act, 1976
• Indecent Representation of Women (Prohibition) Act, 1986
• Maternity Benefit Act, 1961
• Indian Penal Code, 1860
• Protection of Women against Sexual Harassment at the Workplace Bill, 2007*
• Protection of Civil Rights Act, 1955

*To be legislated
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 IMPORTANT LABOR LAWS (Contd.)
VI. Miscellaneous Laws
• Trade Unions Act, 1926
• Apprentices Act, 1961
• Employment Exchanges (Compulsory Notification of Vacancies) Act,
1959
• Labour Laws (Exemption from Furnishing Returns and Maintaining
Registers by Certain Establishments) Act, 1988
• Motor Transport Workers Act, 1961

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 HIRING ASPECTS AND
EMPLOYMENT DOCUMENTATION

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PROCEDURE FOR HIRING EMPLOYEES

• Employment application form

• Offer letter
• Appointment letter
• Employment agreement
• Confidentiality and IP assignment agreement
• Training bonds
• HR policies / employee handbook
• Relieving letters / release letters / separation agreements
• Employment vs. consultant / independent contractor

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 EMPLOYMENT AGREEMENT:
ESSENTIAL PROVISIONS
• Employment and term
• Responsibilities and duties
• Remuneration and taxes
• Confidential information
• Non-competition and non-solicitation
• Intellectual property
• Termination
• Company’s property – employee’s duty to return
• Company policies
• Notices
• Dispute resolution

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 HR POLICIES (MANDATORY)
• Sexual Harassment
• Guidelines laid down by the Supreme Court in the case of Vishakha
vs. State of Rajasthan (1997)
• Complaints Committee

• Insider Trading Policy

• All listed companies and organisations associated with securities
markets are required to frame a code of internal procedures and
conduct on the basis of the Model Code of Conduct for Prevention of
Insider Trading under the SEBI (Prohibition of Insider Trading)
Regulations, 1992

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 HR POLICIES (OPTIONAL)
• Alcohol & drugs • Foreign and outstation trips
• Benefit packages • Grievances
• Billing and collection • Health & safety
• Bullying • Use of social media sites
• Business expenses • Induction
• Business gifts • Information security
• Communication • Intellectual property
• Computers • Public holidays
• Confidentiality of information • Reimbursements
• Directorship • Retirement
• Discipline • Sabbatical
• E-mail • Sickness absence
• Internet usage • Smoking
• Environment • Time off work
• Equal opportunities • Travel
• Ethics and code of conduct • Use of company property

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COMPLIANCES UNDER LABOR LAWS

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 COMPLIANCES UNDER LABOR LAWS
• Registration & enrollment: Certificate of registration

• Registers and records: Register of employment, register of wages, register

of fines, register for Inspector visit, register of leaves, register of refusal of
leave etc.

• Returns: Annual/ quarterly/ monthly

• Display: Standing Orders, statements, registration certificates etc. at

entrance/ common areas of the establishment

• Sign Board: Name of the establishment to be displayed in local language

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TERMINATION OF EMPLOYMENT
AND REDUCTION IN FORCE

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 TERMINATION OF EMPLOYMENT
By Employer
• For cause/ reason
• For misconduct upon following an internal inquiry based on the
principles of natural justice
• By Employee
• Voluntary resignation by the employee/ Acceptance of resignation
• Retirement

• Expiry of a fixed-term contract

INDIA HAS NOT ADOPTED AN ‘AT-WILL’ EMPLOYMENT SYSTEM

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 TERMINATION OF
•
EMPLOYMENT
Laws regarding employment termination
– Cause / Misconduct
– Notice / Severance
• Exit Interview Form
• Termination Certificate
• Separation & Release Agreement
– typically used for senior level employees
– specifies the terms and conditions of termination
– includes clauses on severance, non-disclosure, confidentiality, non-compete
and non-disparagement etc.
– provides to the exiting employee a monetary bonus or settlement in addition
to compensation payable under law
– such agreements still to be tested in Indian courts
• Relieving Letter/ Experience Letter

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 LAWS WITH RESPECT TO
TERMINATION
• Retrenchment under Section 25-F of the Industrial Disputes Act, 1947 (notice to
indicate cause, severance payment and notifying the appropriate authorities)
• Termination provisions under state-specific SEA
• Termination provisions under Standing Orders
• Contractual provisions and HR policies
• “Retrenchment” under Section 25-N of the Industrial Disputes Act, 1947 - prior
government permission required for retrenchment in certain industrial
establishments.
• Related aspects:
– Exit interview
– Termination certificate / relieving letter
– Release letter
– Post-termination non-compete clause not enforceable in India

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 ‘REASONABLE CAUSE’

• ‘At-will' employment not recognized in India

• ‘Reasonable cause' to be established prior to terminating an employee's
employment
• Termination due to non-performance

Exception: Employees in a managerial position to whom the labour law

provisions may not apply.

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 TERMINATION DUE TO MISCONDUCT
• What constitutes misconduct:
– Wilful insubordination/disobedience
– Theft, fraud or dishonesty with respect to the employer’s business
– Wilful damage/loss of employer’s property
– Habitual late attendance
– Habitual negligence of work
– Striking work or inciting other to strike work in contravention of law
• Notice under Industrial Disputes Act, 1947 and state-specific shops and
establishments acts not required where termination is due to misconduct
• No retrenchment compensation required to be paid to employee
• Employer must conduct an internal inquiry to establish misconduct
• Internal inquiry to be based on basic principles of natural justice

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EMPLOYER’S PAYMENT OBLIGATIONS
IN THE EVENT OF TERMINATION
• Salary payment upto date of termination (including overtime payments, if
any)
• Payment in lieu of notice period
• Retrenchment compensation under the Industrial Disputes Act, 1947
• Service compensation, if any, under state laws
• Gratuity
• Payment for accrued but unused leave days
• Any other contractual obligations
Some of the above payment obligations do not arise in the event the
employee voluntarily resigns from service.

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 RESOLVING EMPLOYMENT DISPUTES
• Governing law and jurisdiction
• Dispute resolution authorities under Industrial Disputes Act, 1947
– Works Committee
– Boards of conciliation
– Courts of Inquiry
– Labour courts
– Tribunals, National Tribunals
• Voluntary reference to arbitration under section 10-A of the Industrial
Disputes Act, 1947
• Arbitration under the Arbitration and Conciliation Act, 1996

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CONFIDENTIALITY & ASSIGNMENT OF
INTELLECTUAL PROPERTY

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 NON-DISCLOSURE OF PROPRIETARY
INFORMATION AND TRADE SECRETS
• Detailed definition of confidential information

• Non-disclosure obligations during the term of employment and after

employment termination

• Disclosure only on a “need-to-know” basis

• Restrictions on sharing passwords / log-in details

• Exceptions for disclosure to government and regulators

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 INVENTIONS AND INTELLECTUAL
PROPERTY DEVELOPED BY
EMPLOYEES
• Indian IP laws are in compliance with TRIPs

• Copyright: Ownership belongs to employer

• Patents: Need to be specifically assigned by employee

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 ENFORCEABILITY OF NON-
COMPETITION AND NON-SOLICITATION
CLAUSES

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 NON-COMPETITION AND NON-
SOLICITATION

• Non-compete clause enforceable during term of employment

• Non-compete clause NOT enforceable after employment

termination – restraint of trade void under law of contracts

• Garden leave only during employment term

• Non-solicit clause generally enforceable

• Non-poaching agreements generally enforceable against the

parties

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COMPENSATION STRUCTURING

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 SALARY COMPONENTS
• Basic salary (different from “base salary”)
• House Rent Allowance
• Leave Travel Allowance
• Conveyance Allowance
• Child Education Allowance
• City Compensatory Allowance
• Special Allowance
• Provident Fund and Employee State Insurance contributions
• Bonus
• Gratuity

…Certain limits / ceilings under tax laws

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 EMPLOYEE STOCK OPTIONS
• Common in certain progressive sectors such as information technology
and services
• ESOPs and sweat equity more popular as compared to share purchase
plans, RSUs and phantom stock
• Perquisite tax at the time of exercise of options / issuance of shares
• Appointment of Indian merchant banker to determine fair market value
• Regulatory compliances under Indian exchange control law

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RECENT REGULATORY
DEVELOPMENTS

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 RECENT REGULATORY
DEVELOPMENTS
• Payment of Gratuity Act, 1972: Gratuity limit increased from INR 350,000
to INR 1,000,000
• Employees’ State Insurance Act, 1948: Enhancement of wage ceiling
(salary limit) from INR 10,000 to INR 15,000 per month
• Employees Provident Fund and Miscellaneous Provisions Act, 1952:
Extended to IT establishments.
• Maternity Benefit Act, 1961: Maternity bonus increased from INR 250 to
INR 1,000
• Payment of Wages Act, 1936: Enhancement of wage ceiling (salary limit)
increased from INR 1,600 to INR 6,500 per month
• Payment of Bonus Act, 1965: Enhancement of wage ceiling (salary limit)
limit increased from INR 3,500 to INR 10,000 per month

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 RECENT REGULATORY
DEVELOPMENTS
• Immigrations Laws (employment visa / work permits)
– Clarity on the nature of activities that can be performed under employment visa and
business visa
– Eligibility criteria includes high level of skill and qualification, minimum salary of
US$25,000 per year

• Social security (provident fund contributions for expatriates)

– Expats (International Workers) required to contribute to Indian social security system
– The amount can be withdrawn after 58 years of age
– Relaxations under Social Security Agreement between India and expat’s home country

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