Due Process for Terminating an Employee in India

Employers are exposed to a number of legal and reputational risks resulting from wrongful termination, or not following due process.

Employers should, therefore, plan to construct contracts and human resource (HR) materials to ensure that senior management, HR personnel, and employees are fully apprised of their rights and responsibilities.

Laws governing termination of employees in India

In India, labor law is a concurrent subject in the Indian Constitution, which implies that labor and employment regulations in the country are governed at both the federal and state levels. The main federal statutes that regulate the termination of employment include the Industrial Employment (Standing Orders) Act (IESA), 1946 and the Industrial Disputes Act (IDA), 1947, as amended.

Additionally, the Indian labor is regulated by the Shops and Establishments Act, which is enacted in most states with minor differences in rules of implementation. The Shops and Establishments Act regulates labor and employment in all premises where a trade, business, or profession is carried out. Further, the implementation of respective state laws differs according to the area of operations of the employer—these are outlined in the laws and their supporting rules.

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Given the structure of Indian labor laws, there is no standard process to terminate an employee in India. An employee may be terminated according to terms laid out in the individual labor contract signed between the employee and the employer. Equally, the terms may be subject to the country’s labor laws. Here, employers should note that India’s labor laws supersede the provisions of labor contracts—any termination policy or clause outlined within a contract should be checked against the law by a professional.

In the case that there is no labor contract, or the labor contract does not define a method of termination, then the employer has to follow the state law. In this scenario, an employer needs to abide by India’s distinct, state-specific labor legislation in order to terminate the employee.

In cases where there is no labor contract, or the labor contract does not define a method of termination, the matter comes under the jurisdiction of the specific state’s labor legislation. This is because Indian federal law does not explicitly require that employment contracts be in written form.

The new labor codes, which are yet to be notified soon by the federal government, further make the termination process more flexible for the employers.

Types of employees and employers recognized in India

Indian law mainly recognizes two types of employers and two types of employees.

The types of employers include:

• Establishments– This term takes all kinds of employers under its umbrella.
• Factories– This term specifically refers to employers in the manufacturing sector.

Types of employees include:

• Employees– A term which refers to all employees in any kind of job position
• Workmen– This term was defined in 1947. Employees who are not employed in administrative, supervisory, or managerial roles are termed as workmen.

Types of termination of employment

Voluntary termination

Voluntary termination means that an employee voluntarily terminates his/her employment with a company. This might involve personal reasons on behalf of an employee, such as getting a new and better job, resigning from a field, or starting up their own venture. This might also be due to professional reasons, as a result of constructive dismissal. Constructive dismissal refers to a situation where an employee is dissatisfied with his/her workplace. They may be facing harassment, low wages, long work hours, long commute, etc.

Forced discharge of employees from an organization also falls under construction dismissal. An employee facing a forced discharge may be eligible for some form of unemployment benefits. Voluntary termination requires an employee to hand in a formal letter of resignation to the employer. The standard notice period is 30 days. But this term may be shorter depending upon the organization.

Involuntary termination

Involuntary termination is when an employee is made to leave an organization against their own free will. A company may opt for involuntary termination during layoffs, firing employees, downsizing, etc.

Layoffs and downsizing

Layoffs and Downsizing refer to a company reducing its workforce. Employees who are downsized are usually let go without their own fault. Companies downsize to save costs and restructure their workforce. Downsizing is common when a company is bankrupt or goes for a merger. Layoffs may also happen because an employee’s skill set is no longer useful for a company in the present day.

Getting fired

Employees may be fired from their jobs due to unsatisfactory work performance, or because their behaviors and attitudes cause trouble at the workplace. In many countries, including India, an employee who is fired for misconduct need not be given a 30-day notice. Employees that are fired for violating company policies must be given a chance to explain themselves before they are fired.

Illegal dismissals

An employer is in complete charge of hiring and firing people in his/her organization. However, an employer cannot fire an employee without sufficient cause or reason. Terminating an employee based on caste, race, color, gender, etc. are illegal causes of termination in many countries. An employee who has taken maternity leave or a leave of absence, or has reported wrongdoings in an organization cannot be fired on these grounds.

If one’s company is found guilty of wrongfully terminating employees, you would be liable to compensate them and restore their job positions or offer similar ones. Companies might also be penalized if found guilty of wrongful termination.

Termination under contract

In most cases, employment contracts are very specific about the process for terminating employment. This is mostly the case when the termination is by mutual agreement, and in particular cases where contractual employment is set for a fixed period. For instance, consultants with international organizations or interns at private organizations, often have defined employment periods.

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An employee is considered terminated at the conclusion of such a contract, unless a new contract is offered or the clauses in the initial contract are amended. As in most countries, employees that are terminated by employers are often given one month notice or payment of one month of wages in lieu thereof.

Termination by law

As previously mentioned, any termination needs to comply with federal and state law because these laws supersede contract provisions. However, state law becomes particularly important when no defined procedure for termination exists. In such scenarios, state law becomes the rule of thumb for terminating an employee. State law itself is dependent on the area of operations of the employer.

Labor legislation governing termination of employees in Indian states

In the following section, we examine state laws for termination in several prominent investment destinations in India.

State labor law in Delhi Union Territory

Under The Delhi Shops and Establishments Act of 1954, an employer cannot terminate an employee who has been with the corporation for more than three months without giving the employee at least 30 days of notice or a salary in lieu of such notice. The employer need not give notice if misconduct is the cause for termination. However, the employee, in such circumstances, should have an opportunity to reasonably explain the charge against them prior to termination.

State labor law in Maharashtra

Under the Maharashtra Shops and Establishments Act, an employer cannot terminate an employee who has been with the company for more than a year without giving the employee at least 30 days of notice in writing. If an employee has been with the company for more than three months but less than a year, the employer needs to give at least 14 days of notice. The notice is not necessary if the employee is being terminated for misconduct.

State labor law in Karnataka and Tamil Nadu

Under The Karnataka Shops and Establishments Act, 1961 and the Tamil Nadu Shops and Establishments Act, 1947, an employer cannot terminate an employee that has been with the enterprise for more than six months, except for a ‘reasonable cause’. In addition, an employer must provide a one-month notice. If misconduct is the cause for termination, no notice or associated payoff is required.

State Labor Law in Andhra Pradesh

According to the Andhra Pradesh Shops and Establishments Act, 1988, The notice period of an employee who has given the service of at least 6 months, there would be no notice period. The employee has the right to tell and explain the Separation in the notice of Resignation letter.

State Labor Law in West Bengal

The employer shall give a notice period to the employee of 30 days according to the law. Even if there is no employee eligible for gratuity payment, the Act is still applicable to the establishment. This can take place within 30 days of termination.

State Labor Law in Rajasthan

According to the Rajasthan Shops & Commercial Establishments Act, 1958 no employee how has been in continuous employment for a period of fewer than 6 months can leave the organization without giving him a month’s notice period.

Rules governing termination of employees in India

The employee termination decision most probably falls under one of the reasons described above. Whatever the cause of firing the employees, certain federal and central rules must be followed by every organization. Here are the 6 important rules that one must abide by before terminating one’s employees.

A 30-to-90-day notice period is standard for terminating the workforce in one’s organization. Stated under the Industrial Disputes Act of 1947, the law mandates that when terminating more than 100 members working in a manufacturing plant, mine or plantation unit, government approval is required. Terminating employees in other sectors requires only a government notification.

Under the Indian labor laws, an employee can be lawfully terminated from an organization for one of the following reasons:

1. Disobedience or will full insubordination
2. Fraud, dishonesty, or theft
3. Loss or Damage to the employer’s goods willfully.
4. Taking bribes or illegal gratifications.
5. Absence without applying for leave for more than 10 days.
6. Late attendance.
7. Disorderly behavior during work.
8. Negligence of work.

When organizations terminate their workforce for convenience, the policy regulates that the last person to join the organization must be the first one to leave. Also, when the organization rehires for the same or similar job roles, the terminated workforce should be prioritized.

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When an organization fires an employee for convenience who is pregnant or seeking maternity leave, they run the risk of non-compliance with the Maternity Benefit Act of 2017 in the Indian constitution.

Non-solicitation clauses can be used in a limited fashion, whereas non-compete agreements cannot be enforced according to Indian law.

Most states in India have laws that allow for up to 10-15 days of paid leave in a year. In addition, employees can get up to 10 days of sick leave, and another 10 days of casual leave. Employees seeking leave under these criteria cannot be considered terminated.

HR checklist for employee termination

Here’s a quick checklist that outlines some of the procedures that one must follow when terminating employees.

Consult the company’s HR policies

Before serving a notice of termination to any employee, one must take a look at one’s company’s HR rules and policies. Every company has a specific set of procedures for dealing with different scenarios.

Refer to the employee agreement

The employee agreement will contain provisions relating to the notice period, severance pay, compensation and so on that must be offered to the employee upon termination. This agreement is often signed at the beginning, and it serves as an important reference that holds up in a court of law.

Serve a notice

Serving a notice is a crucial part of employee termination. The severance notice must be given 30 to 90 days before termination. This notice must be given in writing, stating a clear reason as to why the employee is being terminated.

Settle the severance pay

Severance pay is offered to employees who retire, are laid off, or reach the end of the contractual agreements. One month’s salary must be paid to employees who have worked for a year or more. For mass termination in protected sectors, 3 months of wages must be offered to employees. Payment of Gratuity Act, 1972 entitles employees to gratuity payment after five years of continuous service.

The Industrial disputes Act of 1972, also states that retrenched ( involuntarily dismissed) workmen must be given 15 days of severance pay for each year of service that they have completed.

Conduct an exit interview

Exit interviews help an organization to gain feedback and evaluate their work culture, environment, ethics etc. It also helps organizations to narrow down their areas of improvement when it comes to enhancing employee experience in the office.

Employee protection and court jurisdiction in case of disputes

An employee who has been dismissed has a legal right to appeal to his/her jurisdictional authority. The employee could appeal to a court for one of the following reasons-

1. The employer has terminated an employee without stating a specific reason.
2. The employee has not been proven to be guilty of misconduct and pleads innocence.
3. The employee feels that their dismissal was based on unfair grounds.

When an employee seeks redressal of any of the following grievances, they have to first establish a case and seek the approval of their local labor authorities. Once the approval is granted, the case may be overseen by jurisdictional conciliation officers, industrial tribunals or labor courts. The Indian Industrial Act of 1947 seeks to address grievances for workmen in an industrial workforce.

Most workforce disputes in India take anywhere between six months to two years to get resolved.

Protections that employees have against dismissal

All dismissals on grounds of misconduct must be superseded by a domestic inquiry conducted in accordance with the principles of natural justice. The employee must be given a reasonable opportunity to be heard as part of the enquiry process. If the services of a workman (who has completed continuous service of at least one year) are terminated on grounds other than misconduct, in addition to Notice of Retrenchment, the employer is also required to serve notice to the appropriate government. Further, retrenchment compensation equal to 15 days average pay for each completed year of continuous service or any part thereof in excess of six months (Retrenchment Compensation) shall be payable to the workmen.

Compliance with Maternity Benefits Act

In addition to the protection afforded by the Industrial Disputes Act to workmen, the Maternity Benefits Act also prohibits dismissal or discharge of women during their maternity leave.

Additional obligations for employers

An employer with a workmen headcount of more than 100 is required to obtain prior permission of the appropriate government for dismissing workmen. Further, workmen shall be entitled to three months’ notice (or salary in lieu of notice) along with Retrenchment Compensation. Further, the employer shall ordinarily be required to retrench the workman who was the last person to be employed in a particular category.

Impact on employers

Wrongful termination, or not following due process as defined by the respective state laws, will result in legal punitive consequences for the employer. In addition, the courts may order the employer to pay fines and award additional compensation to an employee that was terminated.

Employers that review labor laws and, explicitly, state procedures for terminating employees in their contracts, significantly reduce the potential for labor disputes related to the termination of an employee.

Beyond this, however, employers must ensure that management teams and HR professionals are fully briefed on termination procedures. Contracts can protect employers; yet, management teams and HR professionals must ensure labor law compliance to protect them from any adverse litigation.

This article was originally published June 2017. It was last updated September 9, 2021.

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