International Employment Law in India | Rapid

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India, one of the preferred destinations for outsourcing top talent cost-effectively, can be challenging to navigate through ever-evolving complex Indian labour laws. Hence, the first step towards expanding a team in India is a deep understanding of the intricacies of Indian labour laws. 

Companies that manage employment tasks in-house may not be able to keep up with changing regulations and thus face penalties and legal disputes. For instance, they may not be aware of state-specific regulations and end up underpaying their employees. Another common example could be inaccuracies in recording employee work hours and miscalculations of overtime pay. 

A single mistake can lead to legal proceedings, compensation claims, damage to reputation and, most importantly, disruption of operations. Hence, having a clear understanding of Indian laws as an employer can save you from legal and financial consequences. 

Overview of Indian Labour Laws

Overview of Indian Labour Laws

Indian labour laws are a comprehensive framework with the core motive to protect the rights of workers, ensure fair employment practices and maintain harmonious employer-employee relations. 

This extensive system includes the following elements: 

  1. Employment contracts
  2. Remuneration & hours
  3. Leave & time off
  4. Workplace safety
  5. Non-discrimination
  6. Termination & redundancy
  7. Social security & benefits
  8. Trade unions
  9. Dispute resolution

Applicability of Labour Laws in India

Understanding the applicability and compliance requirements of Indian employment laws can save foreign companies from legal complications. The extent of compliance depends upon factors such as:

1. Nature of business: Companies must adhere to specific regulations or standards applicable to different industries. 

For instance, a foreign pharmaceutical company must comply with employment laws related to the pharmaceutical industry, such as those governing manufacturing practices, employee safety and compliance with drug regulations.

2. Presence in India: Whether through a legal entity or remote employees, a foreign company has to comply with Indian employment laws. Even without a physical presence, certain laws apply depending on the extent of the company's engagement in Indian operations.

For instance, a foreign e-commerce company with a branch office in India and a registered entity must comply with employment laws applicable to the region where the branch office is located, including minimum wages, working hours and employee benefits.

3. Number of employees: The number of employees hired by a foreign company in India also impacts compliance requirements. As the workforce grows, additional labour-related obligations are applicable, such as providing employee benefits, adhering to statutory requirements and ensuring fair employment practices. 

For instance, the Employees' State Insurance (ESI) Act applies to establishments with 10 or more employees only, where the employers must provide health insurance benefits, including medical, sickness, maternity and disability benefits to employees.

4. Duration of Operations: The duration of a foreign company's operations in India can impact the extent of compliance required. Whether it is a short-term project or a long-term establishment, appropriate compliance measures must be in place. 

For instance, if a foreign company undertakes a short-term project in India, such as a specific assignment or contract for a few weeks or months, the company will still have limited compliance in reference to wages, working hours and safety regulations to protect the rights of employees involved in the project.

Once the business assesses its applicability, it must decide whether to establish a legal entity or opt for alternative options. Generally, businesses with long-term operations tend to set up legal entities or establish a subsidiary. However, setting up a legal entity can be hectic. Hence, they either opt for a co-employment situation with a professional employer organisation (PEO) or outsource HR operations and management to an employer of record (EOR). 

Now that we have a basic idea of Indian labour laws, let us go and decode each element in depth. 

Core Employment Laws in India

Indian employment laws have 4 core elements: work contracts, employee rights, social security and benefits and termination.

Core Employment Laws in India

Employment Contracts and Terms

Employment contracts are legally binding agreements that outline the rights, obligations and expectations of both parties governing the employment relationship between an employer and an employee. It includes components such as:

  • Job title and description: Specify the job title and provide a detailed description of the employee's responsibilities and reporting structure. For instance, a contract may define a "Sales Manager" as someone responsible for overseeing a team, meeting sales targets and reporting to the Director of Sales.
  • Compensation and benefits: This can encompass details such as the base salary, performance-based bonuses, health insurance coverage, retirement plans and vacation allowances.
  • Working hours and leave policies: Define the standard working hours, break times and leave policies, including vacation, sick leave and maternity/paternity leave. For example, a contract might state that employees work 40 hours per week, with a one-hour lunch break and entitlement to 15 days of annual leave.
  • Confidentiality and intellectual property: This includes clauses that restrict employees from sharing proprietary information with third parties or using confidential knowledge for personal gain.
  • Termination and notice periods: Stipulate the conditions and procedures for terminating the employment relationship. It outlines the notice period required from both parties and any severance pay or compensation entitlements.

Employee Rights and Protections

Employee rights and protections are established to safeguard the well-being and interests of employees. Understanding and upholding these rights is essential for employers to create a positive work environment and comply with legal requirements.

1. Minimum wage regulations and requirements: Employers must adhere to minimum wage regulations set by the government. 

For example, as of September 2022, the minimum wage in Delhi is Rs. ₹14,842 per month for unskilled workers. 

2. Employees should have reasonable working hours and rest periods to maintain work-life balance. 

For instance, the standard working week in India is 48 hours, with a maximum of 9 hours per day. Any work beyond these limits is considered overtime and should be compensated accordingly.

3. Leave entitlements: Employees are entitled to various types of leave:

  • Annual leave allows employees to take time off for personal reasons or vacations. 
  • Sick leave covers absences due to illness. 
  • Maternity and paternity leave offer time off for the birth or adoption of a child. 
  • Casual leave allows for unforeseen absences. 

For example, employees are typically entitled to 12 to 15 days of annual leave and 12 weeks of maternity leave in India.

4. Workplace safety and health standards: Employers must offer a safe and healthy working environment. It includes implementing safety measures, providing training and ensuring proper equipment and facilities. 

For instance, companies must have fire safety measures in place and provide employees with personal protective equipment when necessary.

5. Prevention of discrimination and harassment: Employees should be treated fairly and without discrimination or harassment based on factors like gender, religion, caste or disability. Employers must have policies in place to address and prevent such issues. 

For example, it is illegal to discriminate against an employee based on their caste and companies must establish a zero-tolerance policy against workplace harassment.

6. Protection against unfair dismissal or termination: Employees have the right to protection against arbitrary or unfair dismissal. Employers must follow proper procedures, provide justifiable reasons and offer opportunities for redress. 

For instance, terminating an employee without valid reasons or not providing adequate notice can be deemed unfair.

Social Security and Benefits

When it comes to social security and benefits for your employees in India, there are several key schemes and provisions that you need to be aware of. 

There are 3 main social security schemes:

  • Employee Provident Fund (EPF): This scheme requires employers to contribute a portion of employees' salaries to a provident fund, serving as a retirement savings plan. For example, if your employee earns ₹50,000 per month, a certain percentage of their salary (usually 12%) would be contributed to their EPF account, ensuring long-term financial security.
  • Employee State Insurance (ESI): ESI provides health insurance coverage to employees and their dependents. It covers medical expenses, sickness benefits, maternity benefits and more. Let's say your employee falls ill and requires medical treatment. ESI would help cover their medical expenses, easing their financial burden during challenging times.
  • Payment of Gratuity: Under this scheme, employees who have completed a minimum of five years of continuous service are entitled to receive a gratuity payment upon retirement, resignation or termination. For instance, if an employee has served your company faithfully for 10 years and decides to retire, you would provide them with a gratuity payment as a token of appreciation.

Additionally, employers in India often offer various benefits and allowances to attract and retain talent, including medical allowances, travel allowances, housing allowances and more. 

Termination and Redundancy

Employers may terminate an employee's contract for various valid reasons, such as poor performance, misconduct, violation of company policies or redundancy due to organisational restructuring. 

When terminating an employee's contract or dealing with redundancy:

  1. Notice Period: Employers are typically required to provide a notice period. The length of the notice period may vary depending on factors such as the duration of employment and any applicable laws or employment agreements.
  1. Severance Pay: Severance pay or redundancy compensation may also be mandated in certain situations. For example, if a company is downsizing, it may be required to provide severance pay to help the employees financially during the transition period. The specific amount depends on factors such as the employee's length of service, salary and applicable laws or collective bargaining agreements.

Additionally, employers must follow specific legal procedures when terminating an employee's contract or implementing retrenchment due to redundancy.

Unique Aspects of Indian Employment Laws

In addition to the core labour regulations in India, there are specific aspects of Indian employment laws that set them apart. One notable feature is the presence of dual employment laws.

Dual Employment Laws In India

Dual employment is a situation where an individual is employed by more than one employer simultaneously. This can occur when individuals work part-time jobs, freelance or consult alongside their full-time employment or engage in multiple contractual arrangements.

Contractual Restrictions and Conflict of Interest Considerations: Employers should review employment contracts to identify any provisions that restrict employees from engaging in dual employment or specify conflict of interest guidelines. Such restrictions may be necessary to protect business interests and intellectual property or prevent competition.

Example: A software development company may have a clause in its employment contract prohibiting employees from taking up part-time coding projects for competing organisations.

Employers must ensure compliance with tax and social security obligations related to dual employment scenarios. This includes correctly deducting and remitting taxes, contributing to social security schemes and providing necessary documentation for both employers and employees.

Leveraging Employer of Record (EOR) Services 

Foreign companies can find it challenging to understand and comply with the nuances of Indian employment laws. EORs bridge this gap by providing comprehensive knowledge and assistance. 

Rapid, a trusted EOR service, helps tech founders expand teams in India without having to set up a legal entity. It helps foreign companies outsource employment in India by ensuring: 

  • Compliance with Indian employment laws: Rapid is designed specifically for India, ensuring that foreign tech companies stay compliant with Indian labour regulations. With its in-depth understanding of local laws, it reduces the risk of penalties, disputes and reputational damage.
  • Streamlined payroll and administrative processes: Rapid efficiently handles salary disbursements, deductions, tax obligations and compliance reporting while companies can focus on their core business activities.
  • Local expertise and support: With a team of local experts in Indian employment laws, Rapid provides comprehensive guidance and support. From onboarding to leave management, Rapid ensures smooth operations and enhances the employee experience.

By integrating Rapid's services, foreign tech founders gain a trusted partner that handles all HR operations and payroll management!

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