Employment Act and Labor Laws in India

In India, there are several employment-related laws and legislations which companies have to follow. These laws aim to protect the interests of both employers and employees. Therefore, adhering to these regulations is necessary, as any deviation will lead to compliance issues and massive penalties.

The Indian Constitution grants the Central and state governments the powers to enact laws to protect the employees and foster a professional work environment. Based on the industry, nature of the work, number of employees in the company, location, and more, there are various legislations like the Industrial Disputes Act 1947 (ID Act), Factories Act 1948 (Factories Act), and Shops and Establishment Acts in relevant states (S&E Act).

This article covers various aspects of the Indian labor law and its provisions.

Who is Covered by the Employment Act?

The distinction between individuals classified as 'workmen' and those in management/supervisory/administrative jobs ('non-workmen') is one of the major concepts of labor regulations in India. Most regulations cover only those employees who qualify as workmen under Indian law.

As defined under Section 2(s) of the Industrial Disputes (ID) Act, a workman is a person who performs any manual, unskilled, skilled, technical, operational, clerical, or supervisory work. The definition excludes the following individuals:

  • ~those who work primarily in a managerial or administrative capacity
  • ~those who work in a supervisory capacity and earn more than INR 10,000 (USD 140) per month
  • ~those who perform primarily managerial functions

Non-workers' terms of service are usually governed by state-specific Shops and Establishments Act (S&E Act), the terms and conditions of their employment contracts, and an organization's internal regulations. Non-workmen are not eligible to seek protection under the ID Act, according to several judicial rulings.

Employment Contract

While the Indian labor law does not mandate an employment contract in writing, it is common for both parties to agree on and sign all terms and conditions of employment. However, a few states have particular legislation requiring a formal contract to create an employer-employee relationship. All employment contracts should be in writing, whether as a basic appointment letter or a fully detailed contract, stating the terms and conditions for certainty and enforcement of both parties.

Fixed-term Contracts

As of now, fixed-term employment contracts are legal in a few sectors. However, the Indian government plans to legalize fixed-term contracts in all sectors.

Trial Period

A probation period lasting 3 to 6 months is common in India, particularly in the technology and services sectors. During the probationary phase, the employer normally has the right to fire an employee without giving them any notice (subject to certain conditions). Therefore, the terms of an employee's probation period should be well-documented in their employment agreement.

Notice Period

Workers with at least a year of continuous employment are entitled to a month's notice period. Furthermore, the employer would be obligated to pay the worker 'retrenchment compensation', calculated at the rate of 15 days' salary for each year of service completed. Since India does not recognize the employment-at-will doctrine, judicial precedents have found that terminating employment without prior notice would result in an 'unconscionable bargain' and be deemed illegal.

Key Provisions of the Act

Employees are entitled to several benefits under the Employment Act, including annual paid leave, sick leave, maternity benefits, paid public holidays, etc. Employers must ensure that they meet all of the Act's standards and that the contract conditions reflect this.

Businesses must comply with the following requirements of the Act in particular:

Minimum Age

Hiring minors under 14 years of age, except for limited family-based work (in a non-hazardous occupation and only after school hours), is punishable by two years in prison. The law also prohibits adolescents between 14 and 18 years of age from working in any dangerous occupation. The Child Labour (Prohibition and Regulation) Amendment Bill, 2012, allows for sanctions against the parents of minor children employed.

Minimum Wage

India has a national minimum salary of around INR 176 (US$2.80) per day, which works out to INR 4,576 (US$62) per month. However, it is important to note that the minimum wage and salary structure varies by state, area within the state, development level (zone), industry, vocation, and skill level. This gives foreign investors a variety of options when setting up their business.

Hours of Work

According to the Factories Act of 1948, no adult (an individual of more than 18 years of age) can work more than 48 hours per week and 9 hours per day. In addition, the spread should not exceed 10-1/2 hours, according to Section 51 of the Act.

Rest Days

After five hours of work, a worker must take a half-hour (30-minute) break. In practice, an eight-hour day usually includes a one-hour lunch break.

Public Holidays

Each year, employees are entitled to 11 paid public holidays. If stipulated in the agreement, the employer can substitute another day for the public holiday. 

If a public holiday overlaps on a rest day, the following working day will be a paid holiday. However, the employer has to credit the entire day's wage if an employee works on a holiday.

Maternity & Parental Benefits

The Maternity Benefits (Amendment) Act of 2017 applies to all stores and businesses with more than ten employees. The Act entitles women to 26 weeks of paid leave for the first two children. For the subsequent children, the paid leave reduces to 12 weeks. In addition, organizations with more than 50 employees must provide crèche services.

Overtime

As per Section 33 of the Minimum Wages Act of 1948, overtime wages are twice the regular rate. It states that the employee can work for up to 9 hours on any one day during a 12-hour shift. The hours after the stipulated working time count as overtime.

Retirement

In private work, specifying a retirement age is not required. Employers typically stipulate a retirement age of 55 to 60 years. 

Employers usually set the retirement age at 60 years or higher in certain industrial establishments where the Industrial Establishment (Standing Orders) Act, 1946 applies.

Termination

There is no uniform procedure for terminating an employee in India due to the nature of the labor code in India. The employment may be terminated under the conditions of the particular labor contract between the employee and the employer. Similarly, the terms may be governed by the labor regulations in the country.

Employers should be aware that the Indian labor law supersedes the requirements of labor contracts. When there is no labor contract or when the labor contract does not specify a manner of termination, the situation falls under the authority of the state's labor laws.

Penalties

Employers who violate the Minimum Wages Act 1948, relating to minimum wages, working hours, and other issues, are considered offenses under the Central Act. The penalty for doing so is five years in prison and a fine of Rs. 10,000, under Section Act 22.

Compliance strategies for Employers

To comply with the hiring aspects of Indian labor law, follow the given strategies:

Revise wages consistently

Employers should assess their compensation structure regularly to ensure that it remains competitive in the local labor market. In addition, all companies in the organized sector must offer 'the basic cost of living' to employee groups defined in the Minimum Wages Act of 1948. 

The federal government can also set a minimum statutory wage for millions of workers under the Code on Wages Bill, 2019. The Equal Remuneration Act of 1976 prohibits wage discrimination between men and women, whereas the Payment of Wages Act of 1936 requires that wages be paid on time.

Ensure a safer work environment

The Indian government has prioritized women's safety in the workplace when enacting legislation. Firms with more than ten workers must establish an Internal Complaints Committee in line with the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013.

All complaints should be aggressively pursued, documented, and resolved as soon as possible. In addition, companies must establish appropriate HR policies to ensure the safety of the workers.

Develop an adaptive work culture

In India, job seekers are shifting away from traditional work paradigms, such as a "9 to 5" schedule, towards a more holistic view of professionalism. As a result, work-life balance is also gradually being included in the corporate culture. 

HR departments are responsible for establishing organizational principles and fostering a balance between employee satisfaction and productivity. To improve employee retention and loyalty, most Indian multinational firms incorporate flexi-time or work-from-home options into employment contracts.

How Can Multiplier Help Businesses Stay Compliant?

Expanding a business means navigating numerous challenges. From establishing an entity to hiring employees, every task requires vast knowledge and expertise. Additionally, it is essential to remain compliant with domestic and international laws and regulations while operating in multiple countries.

Partnering with Multiplier will help you ensure full compliance with all the laws while establishing your business in any country. We help you draft contracts, manage the hiring and payroll of employees, and much more. As a reliable PEO, we help you expand to numerous countries and manage global teams seamlessly.

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