INDIAN LABOR LAWS AND

BEST PRACTICES

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1. Overview of labor laws in India2. Compliances under labor laws3. Hiring aspects and employment documentation4. Termination of employment & RIFs5. Confidentiality & Assignment of Intellectual Property6. Enforceability of non-competition and non-solicitation clauses7. Compensation structuring, employee stock options & tax considerations8. Recent regulatory developments - immigration laws and social security

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SYNOPSIS

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OVERVIEW OF LABOR LAWS IN INDIA

• List III Concurrent List of Seventh Schedule of Constitution of India

• In certain cases, enactments passed by the Centre but implemented by the States

• Labor laws are traditional and archaic; more than 100 central + state laws

• Over 90% of the workforce are unorganised labor; more than 12.6 million child laborers

• Labor market has undergone tremendous changes, however the labor laws have not kept pace with industry requirements

• Unemployment rate expected to be 30% in 2020

• It is estimated that 16% of the employees in the organised sector are actually redundant

• Poor implementation of several labor laws

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OVERVIEW

It is unfortunate that while labor laws in India were designed to be employee-friendly, they have ended up becoming anti-employment

I. Laws Relating to Conditions of Employment• Industrial Employment (Standing Orders) Act, 1946• Contract Labour (Regulation and Abolition) Act, 1970• The Factories Act, 1948• Maternity Benefit Act, 1961• Child Labour (Prohibition and Regulation) Act, 1986• Inter-State Migrant Workmen (Regulation of Employment and Conditions

of Service) Act, 1979• Sales Promotion Employees (Conditions of Service) Act, 1976• State specific shops and establishments act

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IMPORTANT LABOR LAWS

IMPORTANT LABOR LAWS (Contd.)

II. Laws Relating to Compensation*• Minimum Wages Act, 1948• Payment of Wages Act, 1936• Payment of Bonus Act, 1965• Workmen’s Compensation Act, 1923• Equal Remuneration Act, 1976

* The Income Tax Act, 1961 also provides for certain perquisites for employees

III. Laws Relating to Social Security• Payment of Gratuity Act, 1972• Employee State Insurance Act, 1948 • Employees Provident Funds and Miscellaneous Provisions Act, 1952

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IMPORTANT LABOR LAWS (Contd.)

IV. Laws Relating to Liabilities and Disputes• Employers’ Liability Act, 1938• The Industrial Disputes Act, 1947• Industrial Disputes (Banking and Insurance Companies) Act, 1949

V. Laws Relation to Discrimination / Harassment• Constitution of India, 1950• Equal Remuneration Act, 1976• Indecent Representation of Women (Prohibition) Act, 1986• Maternity Benefit Act, 1961• Indian Penal Code, 1860• Protection of Women against Sexual Harassment at the Workplace Bill, 2007*• Protection of Civil Rights Act, 1955

*To be legislated7

IMPORTANT LABOR LAWS (Contd.)

VI. Miscellaneous Laws• Trade Unions Act, 1926• Apprentices Act, 1961• Employment Exchanges (Compulsory Notification of Vacancies) Act,

1959• Labour Laws (Exemption from Furnishing Returns and Maintaining

Registers by Certain Establishments) Act, 1988• Motor Transport Workers Act, 1961

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HIRING ASPECTS AND EMPLOYMENT DOCUMENTATION

PROCEDURE FOR HIRING EMPLOYEES

• Employment application form

• Offer letter

• Appointment letter

• Employment agreement

• Confidentiality and IP assignment agreement

• Training bonds

• HR policies / employee handbook

• Relieving letters / release letters / separation agreements

• Employment vs. consultant / independent contractor

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EMPLOYMENT AGREEMENT: ESSENTIAL PROVISIONS

• Employment and term• Responsibilities and duties• Remuneration and taxes• Confidential information• Non-competition and non-solicitation• Intellectual property• Termination• Company’s property – employee’s duty to return• Company policies• Notices• Dispute resolution

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HR POLICIES (MANDATORY)

• Sexual Harassment• Guidelines laid down by the Supreme Court in the case of Vishakha

vs. State of Rajasthan (1997)• Complaints Committee

• Insider Trading Policy• All listed companies and organisations associated with securities

markets are required to frame a code of internal procedures and conduct on the basis of the Model Code of Conduct for Prevention of Insider Trading under the SEBI (Prohibition of Insider Trading) Regulations, 1992

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HR POLICIES (OPTIONAL)

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• Foreign and outstation trips• Grievances• Health & safety• Use of social media sites• Induction• Information security • Intellectual property• Public holidays• Reimbursements• Retirement • Sabbatical• Sickness absence • Smoking • Time off work• Travel• Use of company property

• Alcohol & drugs• Benefit packages• Billing and collection• Bullying • Business expenses• Business gifts • Communication • Computers • Confidentiality of information • Directorship• Discipline• E-mail• Internet usage• Environment• Equal opportunities • Ethics and code of conduct

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COMPLIANCES UNDER LABOR LAWS

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COMPLIANCES UNDER LABOR LAWS

• Registration & enrollment: Certificate of registration

• Registers and records: Register of employment, register of wages, register of fines, register for Inspector visit, register of leaves, register of refusal of leave etc.

• Returns: Annual/ quarterly/ monthly

• Display: Standing Orders, statements, registration certificates etc. at entrance/ common areas of the establishment

• Sign Board: Name of the establishment to be displayed in local language

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TERMINATION OF EMPLOYMENT AND REDUCTION IN FORCE

TERMINATION OF EMPLOYMENT

By Employer• For cause/ reason• For misconduct upon following an internal inquiry based on the

principles of natural justice

• By Employee• Voluntary resignation by the employee/ Acceptance of resignation• Retirement

• Expiry of a fixed-term contract

INDIA HAS NOT ADOPTED AN ‘AT-WILL’ EMPLOYMENT SYSTEM

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TERMINATION OF EMPLOYMENT

• Laws regarding employment termination– Cause / Misconduct– Notice / Severance

• Exit Interview Form• Termination Certificate• Separation & Release Agreement

– typically used for senior level employees– specifies the terms and conditions of termination– includes clauses on severance, non-disclosure, confidentiality, non-compete

and non-disparagement etc.– provides to the exiting employee a monetary bonus or settlement in addition

to compensation payable under law– such agreements still to be tested in Indian courts

• Relieving Letter/ Experience Letter

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LAWS WITH RESPECT TO TERMINATION

• Retrenchment under Section 25-F of the Industrial Disputes Act, 1947 (notice to

indicate cause, severance payment and notifying the appropriate authorities)

• Termination provisions under state-specific SEA

• Termination provisions under Standing Orders

• Contractual provisions and HR policies

• “Retrenchment” under Section 25-N of the Industrial Disputes Act, 1947 - prior government permission required for retrenchment in certain industrial establishments.

• Related aspects:– Exit interview

– Termination certificate / relieving letter

– Release letter

– Post-termination non-compete clause not enforceable in India

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‘REASONABLE CAUSE’

• ‘At-will' employment not recognized in India

• ‘Reasonable cause' to be established prior to terminating an employee's

employment

• Termination due to non-performance

Exception: Employees in a managerial position to whom the labour law

provisions may not apply.

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TERMINATION DUE TO MISCONDUCT

• What constitutes misconduct:– Wilful insubordination/disobedience – Theft, fraud or dishonesty with respect to the employer’s business– Wilful damage/loss of employer’s property– Habitual late attendance– Habitual negligence of work– Striking work or inciting other to strike work in contravention of law

• Notice under Industrial Disputes Act, 1947 and state-specific shops and establishments acts not required where termination is due to misconduct

• No retrenchment compensation required to be paid to employee• Employer must conduct an internal inquiry to establish misconduct• Internal inquiry to be based on basic principles of natural justice

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EMPLOYER’S PAYMENT OBLIGATIONS IN THE EVENT OF TERMINATION

• Salary payment upto date of termination (including overtime payments, if any)

• Payment in lieu of notice period

• Retrenchment compensation under the Industrial Disputes Act, 1947

• Service compensation, if any, under state laws

• Gratuity

• Payment for accrued but unused leave days

• Any other contractual obligations

Some of the above payment obligations do not arise in the event the employee voluntarily resigns from service.

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RESOLVING EMPLOYMENT DISPUTES

• Governing law and jurisdiction• Dispute resolution authorities under Industrial Disputes Act, 1947

– Works Committee – Boards of conciliation – Courts of Inquiry – Labour courts – Tribunals, National Tribunals

• Voluntary reference to arbitration under section 10-A of the Industrial Disputes Act, 1947

• Arbitration under the Arbitration and Conciliation Act, 1996

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CONFIDENTIALITY & ASSIGNMENT OF INTELLECTUAL PROPERTY

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NON-DISCLOSURE OF PROPRIETARY INFORMATION AND TRADE SECRETS

• Detailed definition of confidential information

• Non-disclosure obligations during the term of employment and after employment termination

• Disclosure only on a “need-to-know” basis

• Restrictions on sharing passwords / log-in details

• Exceptions for disclosure to government and regulators

INVENTIONS AND INTELLECTUAL PROPERTY DEVELOPED BY

EMPLOYEES

• Indian IP laws are in compliance with TRIPs

• Copyright: Ownership belongs to employer

• Patents: Need to be specifically assigned by employee

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ENFORCEABILITY OF NON-COMPETITION AND NON-SOLICITATION

CLAUSES

NON-COMPETITION AND NON-SOLICITATION

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• Non-compete clause enforceable during term of employment

• Non-compete clause NOT enforceable after employment termination – restraint of trade void under law of contracts

• Garden leave only during employment term

• Non-solicit clause generally enforceable

• Non-poaching agreements generally enforceable against the parties

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COMPENSATION STRUCTURING

SALARY COMPONENTS

• Basic salary (different from “base salary”)• House Rent Allowance• Leave Travel Allowance• Conveyance Allowance• Child Education Allowance• City Compensatory Allowance• Special Allowance• Provident Fund and Employee State Insurance contributions• Bonus• Gratuity

…Certain limits / ceilings under tax laws

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EMPLOYEE STOCK OPTIONS

• Common in certain progressive sectors such as information technology and services

• ESOPs and sweat equity more popular as compared to share purchase plans, RSUs and phantom stock

• Perquisite tax at the time of exercise of options / issuance of shares• Appointment of Indian merchant banker to determine fair market value• Regulatory compliances under Indian exchange control law

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RECENT REGULATORY DEVELOPMENTS

RECENT REGULATORY DEVELOPMENTS

• Payment of Gratuity Act, 1972: Gratuity limit increased from INR 350,000 to INR 1,000,000

• Employees’ State Insurance Act, 1948: Enhancement of wage ceiling (salary limit) from INR 10,000 to INR 15,000 per month

• Employees Provident Fund and Miscellaneous Provisions Act, 1952: Extended to IT establishments.

• Maternity Benefit Act, 1961: Maternity bonus increased from INR 250 to INR 1,000

• Payment of Wages Act, 1936: Enhancement of wage ceiling (salary limit) increased from INR 1,600 to INR 6,500 per month

• Payment of Bonus Act, 1965: Enhancement of wage ceiling (salary limit) limit increased from INR 3,500 to INR 10,000 per month

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RECENT REGULATORY DEVELOPMENTS

• Immigrations Laws (employment visa / work permits)– Clarity on the nature of activities that can be performed under employment visa and

business visa– Eligibility criteria includes high level of skill and qualification, minimum salary of

US$25,000 per year

• Social security (provident fund contributions for expatriates)– Expats (International Workers) required to contribute to Indian social security system– The amount can be withdrawn after 58 years of age– Relaxations under Social Security Agreement between India and expat’s home country

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