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.
There is no standard process to terminate an employee in India. An employee may be terminated according to the individual labor contract signed between the employee and the employer, if the contract defines a process for termination. Employers should be aware, however, that 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.
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.
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 in Indian states
In the following section, we examine state laws for termination in several prominent investment destinations in India, including Delhi Union Territory, Maharashtra, Karnataka, and Tamil Nadu.
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 of 1948, 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.
Federal labor legislation governing termination in India
The Industrial Disputes Act of 1947 applies to workers who are not working in a managerial or administrative capacity. The Act states that any such employee who has been employed for greater than a year can only be terminated after permission is granted by a suitable government office. Additionally, an employer must provide valid reason for termination and pay a severance amount that is equivalent to 15 days’ average salary for each year of uninterrupted employment.
Legal protections for employees in India
Laws in India offer employees a great degree of protection, and both the judiciary and the government tend to have a pro-worker stance in employment-termination disputes. It is, therefore, not unusual for employees who have been dismissed from employment to exercise their right of appeal. In these cases, employees often challenge their dismissal on the ground that there was no reasonable cause for dismissal or that they had not been guilty of misconduct as held by the employer.
This has been most recently illustrated in the case of the IT sector (Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu states) where mass lay-offs have resulted in unionization and appeals to respective state labor departments.
Termination procedures in India
- Termination for cause – Upon being found guilty of wilful insubordination or disobedience; theft, fraud, or dishonesty; willful damage to or loss of employer’s goods; partaking of bribes or any illegal gratification; absence without leave for more than 10 days; habitual late attendance; disorderly behavior during working hours; or habitual negligence of work.
- Ordinary termination – This requires a 30 days’ notice. The employer will have to notify the relevant government authority of a termination event, and courts may demand a fair hearing for the employee. As a result, these types of terminations can become protracted.
- Severance payment due – This is in the case of ordinary terminations. It is only owed in terminations where the employee has been with the company for at least two years and the reason for termination is redundancy. The severance package is calculated on a case-by-case basis, depending on the duration of employment, performance, and salary level.
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.
Editor’s Note: This article is amended from the issue of India Briefing Magazine titled “Hiring, Terminating and Retaining Employees in India” where we highlight the most common legal issues that arise from India’s employment process, summarize the procedures for terminating an employee, and detail some of the most important factors for attracting talent.
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