Recruiting in India: Key Considerations for Foreign Companies

When expanding hiring efforts to a new market like India, understanding the workforce landscape and employment regulations is paramount. This article explores key insights for recruiting in India and offers cost-effective strategies for international firms. Optimize your recruitment process in India with these essential tips.

Hiring new employees in India involves significant financial considerations. The primary concern is labor costs, which can be complex due to compensation package structures. Beyond calculating individual employee expenses, there are additional costs associated with the recruitment process. These may include registration fees for establishing an Indian entity, legal and accounting services for compliance with Indian employment and taxation laws, time spent by HR recruiters and managers on hiring tasks, fees for hiring agencies if outsourcing, expenses related to hosting or attending hiring events, job advertising costs, travel expenses for recruiters visiting India, potential relocation costs for new hires, and expenses for conducting background checks through a third-party provider.

Before embarking on hiring activities in a new country, it is crucial to grasp the overall workforce dynamics and the relevant employment regulations and compliance requirements. Below we discuss some essential details when considering recruitment in India and alternate strategies to optimize recruitment costs for foreign firms.

Labor law in India

According to the Indian Constitution, both Central and state governments have the authority to enact appropriate legislation for the regulation and protection of employee interests and to foster employment opportunities. Various legislation, such as the Industrial Disputes Act 1947, Factories Act 1948, and the Shops and Establishment Acts of specific states, have been enacted based on factors like industry type, nature of work, the number of employees, location, and employee remuneration.

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To streamline labor laws and improve the business environment in India, the Government of India has introduced four labor codes, consolidating around 29 labor laws. While these codes have received parliamentary approval and presidential assent, they await implementation through an official notification from the central government. Until that notification is issued, the existing labor laws will remain in effect.

Workforce in India

In India, employers have access to a well-educated talent pool, offering a range of skilled individuals to consider for their company. Some of the key and burgeoning industries in India encompass industrial production, technology, information technology (IT), business services outsourcing, retail, financial services, healthcare, and tourism. Moreover, talent availability across Tier-2 cities in India are also allowing multinational companies, both services and manufacturing firms, to set up in more cost-effective destinations.

READ: India’s Global Capability Centers Market Estimated to Reach US$110 Billion by 2030

Per the All-India Survey on Higher Education (AISHE) 2020-2021, enrolment in higher education has increased to 41.4 million, growing 7.5 percent from 2019-20 and 21 percent from 2014-15.

Foreign recruiters should note that the states of Uttar Pradesh, Maharashtra, Tamil Nadu, Madhya Pradesh, Karnataka, and Rajasthan are the top six in India in terms of the number of students enrolled, reflecting the talent base. Meanwhile, the top eight districts with the highest number of colleges are Bangalore Urban, Karnataka (1058), Jaipur, Rajasthan (671), Hyderabad, Telangana (488), Pune, Maharashtra (466), Prayagraj, Uttar Pradesh (374), Rangareddy, Telangana (345), Bhopal, Madhya Pradesh (327), and Nagpur, Maharashtra (318).

India’s gross enrollment ratio (GER), which measures the general level of participation at primary, upper primary, and higher secondary levels of school education, improved from 53.8 percent in 2021-21 to 57.6 percent in 2021-22. 

Remote work culture

With more than 1.3 billion people living in India, the country is one of the top hubs for remote workers. India has a rapidly growing population and a high literacy rate. India is the world’s second-largest English-speaking country, following the United States, with around 128 million English speakers.

READ: Emerging Talent Trends Shaping India’s Dynamic Job Market in 2023.

Eligibility to hire in India

There are two primary avenues: establishing the company as an employer or partnering with an Employer of Record (EOR), often referred to as a professional employment organization (PEO).

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By choosing to work with an EOR, a company gains immediate access to all the necessary infrastructure for hiring employees in India. EORs are well-versed in Indian employment laws and can assist in structuring competitive salary and benefits packages. This approach also mitigates the risk of non-compliance.

The alternative option is for the company to set up its own branch or subsidiary in India, taking charge of hiring and other HR responsibilities internally. To establish a subsidiary in India, one must start by researching industry-specific regulations. Most international companies opting for a subsidiary structure in India typically choose between a private or public limited liability company.

To initiate the subsidiary setup and commence hiring in India, the following prerequisites are essential:

• Director Identification Number (DIN)
• Digital Signature Certificate (DSC)
• Business name approved by the Registrar of Companies
• Memorandum and Articles of Association
• Incorporation application
• Certificate to commence operations
• Company seal
• Permanent Account Number (PAN)
• Employees’ Provident Fund Organization filing
• Value-added tax (VAT) registration
• Medical insurance application

Additionally, depending on the industry or location, special permits or permissions may be required. It is crucial for companies to allocate sufficient time to ensure all prerequisites are met before initiating the recruitment process.

Drafting the employment contract

Foreign-owned businesses hiring employees in India are advised to pay attention to the Industrial Disputes Act and the Shops and Establishments Act. The latter Act administers the hours of work, payment of wages, leave, holidays, terms of service, and other conditions. Apart from labor laws, there are industrial laws, the Companies Act, and the Contract Act, 1872 that govern employment conditions in India. There are other wages and remuneration Acts too, that regulate the salaries, bonuses and equal pay between the genders.

When hiring employees, standard practice is to have an employment contract between employer and employee. While employment contracts in India may take written or oral forms, it is strongly recommended to opt for a written agreement to prevent any potential misunderstandings and disputes. The best way to get this done is to draft it together with a local expert to ensure the contract is valid and it complies with the Indian labor law.

A comprehensive employment contract should include the following key elements:

• Job description and responsibilities: Clearly defining the employee’s role, job title, job description, and the scope of their responsibilities to ensure a mutual understanding of duties and expectations.
• Employment period: Specifying the employment duration, whether it’s a fixed-term contract, permanent employment, or a probationary period. For fixed-term contracts, indicating the start and end dates.
• Compensation and benefits: Stating the employee’s salary or wage, payment frequency, and listing any additional benefits such as medical insurance, provident fund contributions, bonuses, or allowances.
• Working hours: Outlining the employee’s regular working hours, which includes details about the number of hours per day, days per week, and the standard work schedule.

Salary and remuneration

Employers should ensure their wage structures remain competitive within the local labor market but also adhere to the prevailing legal regulations. The Minimum Wages Act of 1948 mandates that all employers in the organized sector provide wages that cover the ‘basic cost of living’ for employee categories specified within the act. The Code on Wages, 2019 grants the central government the authority to establish minimum statutory wages for millions of workers. The Equal Remuneration Act of 1976 requires non-discrimination in wage payments between men and women, while the Payment of Wages Act of 1936 enforces the timely disbursement of wages to employees. Payment of wages below the minimum wage thresholds is considered forced labor, which is prohibited under the Bonded Labor System (Abolition) Act of 1976.

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Companies should ensure that their employment contracts consider these legal requirements when defining the terms and conditions for employee remuneration.

Negotiating compensation packages in India is a complex process due to the various allowances provided on top of basic pay. These allowances can sometimes comprise a substantial portion of an employee’s total compensation, with the basic salary making up 40 percent of the gross pay. Some of these allowances include performance-based bonuses, children’s education and hostel allowances, house rent allowance (HRA), vehicle and phone allowances, leave travel allowances (LTA/LTC), and special allowances.

While some of these allowances are taxable, others are tax-exempt up to certain limits. Determining the appropriate elements to include in an employee’s compensation package can be complex, making outsourcing HR for Indian employees an attractive option for international employers. Employees often seek a specific salary and a compensation package structured in a tax-efficient manner.

It’s important to note that India doesn’t have a national minimum wage but empowers local governments to set minimum wage rates. These rates vary according to location, industry, employment nature, and the employee’s age.

READ: How to Structure a Salary in India: Key Components

Taxes and social security contributions

Income tax

India has two parallel income tax regimes. The newer regime streamlines the personal income tax structure by eliminating 70 tax exemptions while offering flat tax rates. This new system operates alongside the previous one, and employees are allowed to choose the system that best suits their needs. Both tax systems are progressive, meaning tax rates vary based on an individual’s income. Individuals earning below a specific threshold are exempt from paying income tax. Those who intend to opt for the old tax system for the current fiscal year (FY) 2023-24 must complete their tax-saving activities by March 31, 2024, or earlier.

Social security

India has a social security program managed by the Employees’ Provident Fund Organization (EPFO). Under this program, both employers and employees make contributions to the Employees Provident Fund (EPF), a retirement savings scheme. Employees predominantly contribute to this fund, while employers are responsible for contributions to other types of social insurances available in India.

Employer contributions

• Provident Fund

The Provident Fund is a retirement savings scheme mandated by the Indian government, requiring both the employer and employee to make monthly contributions. These contributions amount to 12% of the employee’s basic salary, dearness allowance, and retaining allowance. However, when a company has fewer than 20 employees or meets specific conditions, the maximum contribution rate is reduced to 10 percent for both parties. Upon retirement, the employee is entitled to receive a lump sum amount, comprising both the employee and employer’s contributions, along with accrued interest.

• State insurance

Employers with a minimum of 10 employees, or 20 employees in some states, are required to make contributions to the Employees’ State Insurance fund. For employees whose monthly wages do not exceed INR 21,000 (equivalent to US$285), the employer’s contribution amounts to 3.25 percent of the employee’s monthly salary, while the employee is responsible for contributing 0.75 percent.

• Payment of gratuity

Gratuity is a form of benefit in India provided to employees who are retiring or leaving a company after an extended period of service. It applies to businesses that have maintained a workforce of at least 10 employees over the preceding 12 months.

To qualify for gratuity, an employee typically needs to have completed a minimum of 5 full years of service with the employer, unless they are unable to work due to an accident or illness.

The gratuity amount is calculated as 15 days’ worth of wages for each year of service, with the number of years rounded to the nearest whole number. For instance, if an employee has served for five years and seven months, it would be considered as six years of service for gratuity calculation purposes.

• Annual bonuses

In India, employers are legally obligated to provide bonuses to eligible employees, as per the Payment of Bonus Act of 1965. This requirement applies to companies with a minimum of 20 employees or factories with at least 10 employees. The Act stipulates that the bonus must be disbursed within the same financial year.

The bonus amount should be a minimum of 8.33 percent but not exceeding 20 percent of the employee’s salary or wage, or INR 100, whichever is higher. This bonus must be included as part of the employee’s compensation package.

Under Section 16 of the same Act, for the initial five years, companies are not obligated to pay bonuses if they have not generated profits in that financial year. However, after the initial five years, the company is required to provide the bonus, regardless of its annual profitability.

Failure to adhere to this legislation could result in penalties, including imprisonment or a fine of up to INR 1,000 (equivalent to US$13.84).

Maternity and paternity leave

The Maternity Benefits (Amendment) Act, 2017 applies to businesses with over 10 employees, offering 26 weeks of paid maternity leave for the first two children and 12 weeks for subsequent children. Companies with more than 50 employees must also provide crèche services. Foreign companies like Microsoft and IKEA have proactively introduced mutually agreed-upon paternity leave policies, which have been well-received by the Indian workforce and recognized as positive HR initiatives.

Prevention of sexual harassment in the workplace

The Indian government has prioritized women’s workplace safety through legislation. It mandates that organizations with over 10 employees establish an Internal Complaints Committee in compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013 (also called PoSH Act). All complaints must be promptly addressed and resolved.

To ensure employee safety, companies must develop and communicate clear HR policies. HR personnel should conduct workshops and sensitization programs to foster a workplace culture that promotes fairness and safety for all employees.

State governments in India have reporting obligations to ensure companies are compliant under the PoSH Act.

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