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Individual-Employee-Termination-India NDA Article

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PRACTICE NOTE

Individual Employee Termination (India)


by Nipasha Mahanta, Sayantani Saha, and Vikram Shroff, Nishith Desai Associates

Status: Law stated as at 01-May-2023 | Jurisdiction: India

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A Practice Note addressing the legal and practical issues that arise when terminating the
employment of individuals in India.
This Note considers the reasons enabling lawful individual employee termination as well as what
constitutes an unlawful termination. It also addresses the procedures for individual employee
terminations and best practices to minimise the risk of legal challenges.

There are several important legal issues to consider There is no legal requirement to engage in consultation
when an employer or employee is seeking to terminate or have collective bargaining agreements with trade
employment in India. These include the reason for unions, unless the employer has recognised any
termination, any process that must be followed, the trade union in the establishment (that is, it accepts a
termination payments which may be owed to the particular trade union having a representative character
employee, and when a termination is unlawful. in its workforce).
This Note sets out the key details on these topics and The ID Act applies only to employees categorised as
explains which laws underpin them. It explains the “workmen”. Workmen are individuals employed to do
concept of retrenchment and distinguishes between any manual, unskilled, skilled, technical, operational,
how the law on termination applies to workmen and clerical, or supervisory work for hire or reward (section
non-workmen. The Note also outlines redundancy as a 2(s), ID Act). A workman excludes any employee
ground for termination and the courts’ position on this, primarily engaged in a managerial or administrative
and how the law on termination applies to an employee capacity, or in a supervisory capacity earning wages
on probation. exceeding INR10,000 per month.
No distinction exists between individual terminations
Relevant Laws on Termination and collective or mass terminations under Indian
labour law. In cases of reduction-in-force, there are
In India, employment can only be terminated for a certain specific provisions under the law with which the
reasonable cause or misconduct (see Misconduct). The employer must comply (see Redundancy).
concept of “at-will” employment is not recognised under
Indian law. For non-workmen category employees, termination
takes place as per the statutory state-specific notice
The Industrial Disputes Act, 1947 (ID Act) and requirements, the employee’s contract, and the
the corresponding state-specific rules provide establishment’s HR policies, as there is no central law
for employment termination (retrenchment (see which applies to termination of non-workmen.
Retrenchment). Additionally, several state-specific
labour laws (applicable to commercial establishments)
also contain employment termination provisions. Reasons for Termination
The terms of employment as contained in the Indian laws permit termination of employment for
employer’s standing orders (a set of terms and misconduct (see Misconduct).
conditions of employment as envisaged under the
Additionally, Indian courts have generally recognised
Industrial Employment (Standing Orders) Act, 1946
the following as reasonable causes for termination of
(IESOA), if any), employment contract, and HR policies
employment:
must also be considered. Generally, provisions in the
employment contract that are more favourable to the • Non-performance.
employee will override the law. • Redundancy.

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Individual Employee Termination (India)

• Loss of confidence in the employee’s ability to perform Conditions for Retrenchment


their duties and obligations.
The conditions for retrenchment of a workman who
The employer should support each of these reasons with has been in continuous service for at least one year
sufficient evidence or proof on record to successfully (interpreted as 240 days of continuous service (section
defend a claim for wrongful termination in the Indian 25B, ID Act)) are:
courts.
• The workman has been either:
Courts’ Power –– given one month’s notice in writing indicating the
reasons for retrenchment and the period of notice
If an employee (including non-workmen) files a claim for has expired; or
unlawful termination of employment and is successful,
the court may direct any or all of the following: –– paid in lieu of that notice wages for the period of
the notice.
• Reinstatement of the employee.
• The workman has been paid, at the time of
• Payment of back wages. retrenchment, compensation (severance) equivalent
• Compensation. to 15 days’ average pay for every completed year of
continuous service or any part of a year in excess of six
Indian courts are typically pro-employee. Therefore, months.
Indian employers should be meticulous with their
documentation as evidence or proof on record relating • Notice in the prescribed manner is served on the
government in the prescribed format.
to employment termination.
(Section 25F, ID Act.)
Retrenchment For industrial establishments such as factories,
mines, and plantations with at least 100 workmen on
Retrenchment is the termination by the employer of
an average working day in the past 12 months, the
the service of a workman for any reason, other than as
following are the conditions for retrenchment:
a sanction by way of disciplinary action (section 2(oo),
ID Act). • The workman has been either:
–– given three months’ notice in writing indicating the
Retrenchment Exclusions reasons for retrenchment and the period of notice
has expired; or
Retrenchment excludes:
–– paid in lieu of that notice wages for the period of
• Voluntary retirement of the workman.
the notice.
• Retirement of the workman on reaching the age of
• The workman, at the time of retrenchment, has been
superannuation if the employment contract between
paid compensation equivalent to 15 days’ average pay
the employer and the workman concerned contains
for every completed year of continuous service or any
a stipulation to that effect. (The ID Act does not
part of a year in excess of six months.
provide a specific age for superannuation but under
the Employees’ Provident Funds and Miscellaneous • The employer has obtained the prior permission of the
Provisions Act, 1952, it is 58 years old.) government before retrenching the workman.
• Termination of the service of the workman if their (Section 25N, ID Act.)
fixed-term contract (FTC) is:
The number of workmen required for the above
–– not renewed on its expiry; or conditions to apply is increased to 300 in select Indian
–– terminated for any other reason stipulated in the states. The proposed new labour codes in India also
contract. increase the limit to 300 workers (section 77, Industrial
Relations Code, 2020).
See also Practice Note, Fixed-Term Contracts
(India).
Notice of Retrenchment
• Termination of the service of a workman on the
ground of continued ill-health. The timeline and format for the notice of retrenchment
to the government is prescribed under the central or
• Termination of employment for misconduct, for which state rules corresponding to the ID Act. For example, as
a separate process applies in line with the principles per the Industrial Disputes (Maharashtra) Rules, 1957,
of natural justice (see Misconduct). the authorities should be notified either:

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Individual Employee Termination (India)

• Not less than 21 days before the date of retrenchment, The employer should create a business case of
if the notice of retrenchment has been given to a redundancy before employment termination. While
workman. this is not legally required, it would help demonstrate
• Within seven days of the date of retrenchment if the the genuineness of the reasons behind the termination
notice of retrenchment has not been given but the should the employee challenge the termination in a
workman is paid wages in lieu of notice. court of law or if they raise an allegation of victimisation.
All business cases should be documented at the Indian
• Where the retrenchment is carried out under an entity level as the Indian courts are unlikely to accept
agreement: some global decisions made at the parent entity level.
–– at least one month before the date of termination if The business case may alternatively be supported by a
that date is specified in the agreement; or
resolution of the board of directors of the Indian entity.
–– on the date of that agreement, where the date of If the termination is challenged in a court of law by
termination is not so specified. an employee or group of employees or trade unions,
a well drafted business case would help the employer
The Shops and Establishments Acts (state-specific laws
demonstrate that the redundancy was not a sham and
applicable to commercial establishments) require an
that there were adequate business reasons warranting
employer to provide at least one month’s (30 days’)
the elimination of those roles.
prior notice or pay in lieu if employment is terminated
for reasonable cause. The provisions on termination of
employment under most of the state-specific Shops and Redundancy Process for Workmen
Establishment Acts are applicable once the employee In cases of redundancy or reduction-in-force when
has completed a minimum period of employment. terminating an employee who is a workman under the
This is typically up to six months. Some of the Shops ID Act, the employer should take the following steps
and Establishments Acts do not specifically apply to before making a final termination decision:
employees working in a managerial capacity.
• Prepare and post (in a conspicuous place on company
See also Practice Note, Notice of Termination (India). premises) a list of all workmen who will be retrenched,
set out according to seniority of their service in
that category, seven days before the employees’
Redundancy retrenchment date.
Indian courts recognise redundancy of position as a • Follow the rule of last in, first out for selecting
valid ground for termination of employment (see for an employee to be terminated. The employer
example the Madras High Court judgment in India Type must justify any deviation from that rule (section
and Rubber Co v Their Workmen, AIR 1958 Mad 205). 25G, ID Act). This is only applicable to workmen
Courts have in the past upheld redundancies on account category employees. There is no such selection
of reasons such as: criterion mentioned under the law for non-workmen
category of employees.
• Cessation of a particular type of business activity.
• Automation and technological advancements. Neither redundancy nor reduction-in-force are legally
defined. Redundancy is typically interpreted in the
• Organisational restructuring in the case of a merger context of an employee’s role becoming redundant
and acquisition (M&A). owing to the employer’s business-related reasons.
As the courts in India (especially the lower courts) tend Reduction-in-force is generally used in case of mass
to take a conservative and pro-employee approach, it redundancies leading to employment downsizing.
is critical that the employer demonstrates (by way of The ID Act also requires the employer to provide
adequate documentation): an opportunity to the retrenched workmen to offer
• That the role is no longer relevant and is being themselves for re-employment if the employer employs
eliminated from the organisation due to relevant any persons in the future. These workmen must be
business reasons. given preference over others (section 25H, ID Act).
This typically applies only to workmen retrenched for
• How each employee was selected or shortlisted.
redundancies.
• Given each of the employees’ experience and skill
Indian labour laws do not provide for any consultation
sets, that there is no possibility of re-training them or
process before finalising the decision to terminate
providing other opportunities with the employer or its
individual employment for business reasons.
affiliates by way of an internal transfer.

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Individual Employee Termination (India)

The ID Act also has additional provisions for cases of In India, there is no legal requirement to provide a “last
closing down an undertaking. Employers are required to chance agreement” to a non-performing employee.
provide 60 days’ notice to workmen (in establishments However, the employer should document the fact that
with at least 50 workmen) before closing down an the employee was provided an opportunity to improve
undertaking along with payment of retrenchment their performance before it initiates the termination.
compensation (sections 25FFA and 25FFF). Closure
of establishments such as factories, mines, and so on
which employ at least 100 workmen (in some states, Misconduct
the threshold is 300) requires approval from the labour The IESOA typically applies to manufacturing
authorities at least 90 days before the date of closure establishments and commercial establishments in
(section 25O). states where the Payment of Wages Act, 1936 applies
under the state-specific Shops and Establishments Acts.
Under the IESOA, the Model Standing Orders prescribe
Performance or Capability the following acts as misconduct:
Reasons • Fraud.
Indian labour laws do not provide a specific list of
• Unauthorised absenteeism.
performance or capability reasons for which an employer
may terminate employment. Typically, in cases of • Willful insubordination.
employee non-performance, the employer should:
• Sexual harassment.
• Document the non-performance.
• Willful damage to the employer’s property.
• Inform or provide regular feedback to the employee
• Misappropriation.
regarding the non-performance in writing.
An employer may take disciplinary action against
• Provide an opportunity to the employee to improve
an employee for that misconduct. A similar list is
performance.
also provided under some state-specific Shops and
Since termination due to poor performance is largely Establishments Acts, such as Uttar Pradesh Dookan Aur
practice driven, employers adopt varied methods to Vanijya Adhishthan Adhiniyam, 1962.
handle the documentation. Typically, the employer
The employer’s policies or standing orders should set
should require their managers to provide performance
out what constitutes misconduct warranting termination
feedback to their subordinates to ensure timely
of an employee through specific examples or in general
documentation of any employee non-performance.
terms.
Although not a legal requirement, employers typically
implement a performance improvement process, Disciplinary Enquiry Process
whereby the employer documents its employees’
performance following certain subjective and objective Before the employer prescribes the applicable sanction
performance indicators. (proportionate to the misconduct), the misconduct must
first be proved through an internal disciplinary enquiry
A performance improvement plan may be helpful to process based on the principles of natural justice.
prove the employer’s efforts to provide the employee an
opportunity to improve performance before the decision Once the misconduct is established through a formal
for termination was taken. There is no legally stipulated enquiry, an employer can terminate employment
period for the performance improvement process, but it as a sanction, provided that the sanction applied is
generally ranges from 30 to 60 days. proportionate to the gravity of the misconduct (see BC
Chaturvedi v Union of India, 1995 6 SCC 749).
If the employee consistently fails to show improvement
in performance, the employer may adequately The disciplinary enquiry process typically includes the
document this and initiate a process of termination, if following:
deemed necessary. • Charge sheet. The employer must serve a charge
Performance issues are separate from misconduct. sheet on an employee against whom an enquiry is
initiated. The charge sheet states each of the charges
Employers should not confuse the two reasons for
against the employee and seeks their explanation for
termination. The documentation for performance issues
those charges. It must include adequate references to
should be limited to the employee’s inability to meet
the relevant provisions in the employment contract,
the desired performance standards (see the Supreme
policies, or any applicable standing orders. While
Court decision in Gupta v SNB National Centre, 2007(1) the charge sheet can be sent by registered post,
SLR45(SC)).

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Individual Employee Termination (India)

it should be served in person where possible. An enquiry officer can conduct the enquiry in the
acknowledgement must be obtained on the office copy. employee’s absence. Before holding an ex-parte
enquiry, the employer should make every possible
• Preliminary fact-finding. In some cases, the
effort to serve the notice of enquiry personally. If
employer may conduct a preliminary fact-finding or
service of notice is impossible, it should be published
investigation exercise to understand the nature of the
on the notice board of the company, as well as in
misconduct.
newspapers having wide local circulation. Generally,
• Appointment of an enquiry officer. An enquiry if it can be proven that the employee was deliberately
officer must be appointed to conduct the disciplinary and willfully refusing to accept notice and appear
enquiry. The enquiry officer must not be biased in any before the enquiry officer, the enquiry officer can
way and can be internal or external to the company. proceed with the inquiry ex-parte.
• Notice of enquiry. The employee must be served with • Calling witnesses. During the enquiry, the employee
a notice of the disciplinary enquiry stating the date, as well as the employer may present witnesses before
time, venue, name of enquiry officer, and so on. The the enquiry officer. The employee must be given
employer may need to issue appropriate letters to an opportunity to cross-examine the employer’s
the employee if they provide an explanation for the witnesses and vice versa.
charges or do not provide any explanation.
• Enquiry report. The enquiry must be conducted
• Principles of natural justice. The enquiry must be in accordance with any timeline provided by the
held in accordance with the principles of natural employer’s policies or standing orders (if any).
justice, that is, the employee must be given: Once the enquiry is complete, the enquiry officer
must prepare an enquiry report, clearly stating the
–– proper notice of the enquiry;
conclusion of the enquiry supported by reasons based
–– a fair chance to present their case and defend on the facts and evidence presented before the officer.
themselves; and
Based on the enquiry officer’s report and if the
–– an opportunity to produce any witnesses or cross- misconduct is proved, the employer can take appropriate
examine the witnesses produced by the employer. disciplinary action to sanction the employee, including
• HR policies. The employer must comply with any termination, if deemed proportionate and appropriate.
specific procedure for holding a disciplinary enquiry There is no legal requirement to communicate
set out in the company’s policies, standing orders (if the findings of the enquiry to the employee. Some
applicable), code of conduct, and so on. employers, based on their policies and standing
• Suspension and payment of subsistence allowance. orders (if any), and exercising caution, may provide a
The employer may suspend the employee during the second notice of cause to the employee, along with a
enquiry proceedings (although this is not warranted communication of findings of the enquiry report, before
in all situations). Suspension is generally a security proceeding with termination.
measure when the employee’s continued presence in
the workplace:
Resignation
–– may lead to tampering with evidence;
The ID Act does not contain any provisions on voluntary
–– may create unpredictable difficulties in conducting resignation. Resignation is a purely voluntary act on the
an impartial enquiry into the charges levelled part of the employee. Indian law does not prescribe any
against them; restrictions limiting an employee’s ability to resign.
–– could have an adverse effect on the morale of the The ID Act does not specify any notice period obligations
other employees; or
for a resigning employee. However, some standing
–– could cause further loss to the company. orders and state-specific Shops and Establishments
Acts require employees to provide their employer prior
The employee must be paid subsistence allowance
notice of a specific minimum period before stopping
during the period of suspension in accordance with
work after resigning.
the provisions of the applicable HR policies. If no
subsistence allowance is provided for in the HR Generally, offer letters or employment agreements
policies that are in place, the employer is required govern the notice period and other requirements relating
to pay full salaries to a suspended employee, in the to voluntary resignation. In most cases, there are no
absence of any laws permitting payment of a lower statutory requirements governing employee resignation.
subsistence allowance.
Certain statutory payments associated with termination
• Ex-parte enquiry. If the employee refuses to attend of employment, including severance (retrenchment
before the enquiry officer after proper notice, the

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Individual Employee Termination (India)

compensation) and notice period payments, do not not yet completed three months’ service. This definition
apply in the event of voluntary resignation. applies only to establishments to which the IESOA
applies (see Misconduct). However, since no other
Employers in India generally prefer to encourage or
federal law provides this definition, some guidance can
incentivise the employee to voluntarily resign rather
be taken from this definition itself.
than terminate their employment. Since unlawful
termination is one of the most litigated issues under In practice, the probationary period adopted by
Indian labour law, termination is typically considered employers in India varies between three to six months
the last resort. Voluntary resignation largely helps to from the date of commencement of employment. It is
mitigate litigation risk relating to unlawful termination. customary for the employer and employee agree the
probationary period based on the employee’s seniority
The concept of constructive dismissal has not been
level and experience.
statutorily recognised in India.
If an employee is within a probationary period which
is less than one year, the ID Act provisions relating
Unlawful Terminations to retrenchment do not apply, as the workman has
An employer is not legally allowed to serve a not completed the minimum work period threshold
termination notice to an employee in the following (which is at least one year of completed service) (see
circumstances: Retrenchment).
• When a female employee is absent from work in However, state-specific laws may apply. For example,
accordance with the provisions of the Maternity the Delhi Shops and Establishments Act, 1954 (DSEA)
Benefit Act, 1961, to: provides that the employer may terminate an employee
who has been employed for at least three months, on
–– discharge or dismiss that employee on account of
the absence from work; or giving one month’s notice or pay in lieu. Accordingly, if
the probationary period is more than three months, the
–– give notice of discharge or dismissal on a day so provisions under DSEA on termination are still applicable
that the notice will expire during the absence. since the applicability threshold is only three months.
• To dismiss, discharge, reduce, or otherwise punish an If the employee wishes to resign during the probationary
employee during the period the employee is: period, they must comply with:
–– in receipt of sickness benefit or maternity benefit; • The notice period obligations under any applicable
–– in receipt of disablement benefit for temporary state-specific Shops and Establishments Acts.
disablement; • Any employment terms and conditions in the
–– under medical treatment for sickness; or employment agreement between the parties.

–– absent from work due to illness arising out of Certain state-specific rules of central laws may also be
pregnancy or confinement rendering the employee applicable at the end of the probationary period. For
unfit for work. example, in Maharashtra, the employer must issue an
order in writing to make a probationer permanent in the
(Employees’ State Insurance Act, 1948 (ESIA).)
post in which they are provisionally employed after the
Employers should also be mindful of India’s anti- probationer has successfully completed three months’
discrimination laws, especially if the employee belongs uninterrupted service in that post, within seven days
to a protected category. The Rights of Persons with from the date of completion of that service (Section
Disabilities Act, 2016, the Transgender Persons (Protection 4-A, Maharashtra Industrial Employment (Standing
of Rights) Act, 2019 and the Human Immunodeficiency Orders) Rules, 1959). If the probationer’s services
Virus and Acquired Immune Deficiency Syndrome are unsatisfactory, the manager may terminate their
(Prevention and Control) Act, 2017 are some statutes that services after their probationary period.
provide protections against discrimination in employment
to certain categories of employees. Those employees may
bring discrimination-related claims if proper procedure
Termination Payments
has not been followed for their termination. The following statutory payments need to be considered
in relation to termination:

Probationary Periods • Accrued and unpaid wages up to the termination date.

The Model Standing Orders under the IESOA define the • Payment in lieu of the notice period (minimum of one
term “probationer” as a workman who is provisionally month as per the applicable laws. If the employment
employed to fill a permanent vacancy in a post and has contract provides for a higher notice period, that

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Individual Employee Termination (India)

higher notice must be provided). See also Practice Timelines


Note, Notice of Termination (India).
If the employment of any person is terminated by or on
• Severance (retrenchment compensation) calculated behalf of the employer, the wages they earned should be
at the rate of 15 days’ pay for every completed year of paid before the expiry of the second working day from
service or any part of a year in excess of six months. the day of termination (Section 5(2), Payment of Wages
This only applies to workmen category of employees
Act, 1936). Payment of retrenchment compensation
who have completed at least one year (interpreted
and notice pay should be before or on the date of
as 240 days) of employment. Severance payment
retrenchment.
calculations are based on the definition of wages
under the ID Act, which refers to gross wages.
• Gratuity in accordance with the Payment of Gratuity Date of Termination
Act, 1972 (POGA). This is payable only to employees The law does not specifically prescribe any guidance
(by an employer of at least ten employees) who have regarding the date of termination. Generally, the notice
completed at least five years (interpreted as four
of termination cites the last day of employment, which is
years and 190 days) of continuous service with the
considered the effective date of termination, and when the
employer. Gratuity must be paid at the rate of 15 days’
rights and obligations of the employer and employee end.
wages based on the rate of wages last drawn by the
However, there are certain termination-related payments
employee for every completed year of continuous
service or part of a year in excess of six months that must be made before the termination (see Timelines).
(Section 4, POGA). The definition of wages under
POGA is interpreted to mean basic wages. Gratuity is Termination and Other Related
capped at INR2 million (POGA).
Agreements
• Wages in lieu of accrued and unavailed (privilege or
annual) leave up to a state-specific prescribed limit. There is no statutory requirement to execute a termination
The term “privilege leave” is interchangeably used agreement in the case of employer-initiated termination.
with annual leave. It typically refers to leave which the
Indian labour laws do not contain any specific provisions
employee is statutorily entitled to receive as a matter
relating to mutual termination or mutual separation
of right under the law.
from employment. Generally, separation and release
• Arrears of statutory bonus, where applicable. agreements are signed in the case of voluntary resignation
or mutual separation (see Practice Note, Separation
Any other accrued contractual dues such as bonuses,
Agreements (Employment): India: Overview). In practice,
Employee Stock Option Plans (ESOP), and so on owed
and to ensure amicable separation, employers prefer to
to the employee must be paid at the time of termination.
enter into mutual separation agreements with employees
An employer cannot avoid compliance with the rather than initiate termination. However, these
requirement to have a reasonable cause or permissible agreements largely remain untested by Indian courts.
grounds for termination by offering severance,
A separation agreement contains clauses reminding
indemnification, or a similar payment.
the employee of their post-termination obligations,
If an employer terminates an employee and is unable including confidentiality, IP, and non-solicit and
to prove reasonable cause for termination before the non-compete restrictions. Post-termination non-
courts in an unlawful termination claim, the court may compete clauses are not enforceable in India but
order remedies (which may include compensation and post-termination non-solicit clauses may be enforceable
reinstatement, for example). if they are reasonable. Non-compete and non-solicit
clauses within the term of employment are enforceable.
If the employee resigns (rather than employer-led
termination), there is no legal requirement to pay Typically, a separation agreement also evidences the
severance (retrenchment compensation), or any notice payment of contractual ex-gratia payments to the
period payments mentioned above. However, all other employee, which also acts as consideration for signing
payments listed above must be made. the agreement. To be admissible as evidence in courts,
it is advisable to have the agreement stamped as per
applicable stamp duty law on or before the date of
execution (see the Indian Stamp Act, 1899 and state-
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