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Termination of Employment Contracts in India

1. Grounds for Termination

An employee may be terminated due to several factors including:

  • Breach of employment contract
  • Closure of business due to change of market situations
  • Organizational restructuring
  • Employee’s inability to fulfill material obligations
  • Misconduct
  • Inefficiency/ poor performance
  • Loss of confidence by management
  • Abandonment of employment
  • Continuous absenteeism
  • Any other breach of employer policy.

2. Collective Dismissals

“Collective Dismissals” of employees is permitted under Indian labour legislations, subject to certain conditions. In the case of employees who come under the definition of workmen under the ID Act, such terminations may be either layoffs or retrenchment. Layoff is permitted only where the employer is suffering from financial losses or other reasons which are beyond the reasonable control of the employer. The employer must make an application before the Labour Department for a layoff, following which the Labour Department will provide an opportunity for the employees to be heard. If the application is successful, the Labour Department will confirm the layoff. If possible, employees subject to layoff should be informed of the nature of the layoff and the foreseeable duration of the layoff, whether short-term or indefinite. In determining which employees will be subject to layoff, the employer may take into account, among other things, operation and requirements, the skill, productivity, ability, and past performance of those involved, and also, when feasible, the employee’s length of service. In the case of collective dismissal, the employer would be required to provide notice period and retrenchment compensation in accordance with the provisions of the ID Act.

In the case of both layoff and mass retrenchment, the employer is required to follow the “last in, first out” principle, which means that the shortest-serving employees will be the first to be dismissed. In the case of all other employees, there is no express statutory provision which prohibits collective dismissal of employment.

3. Individual Dismissals

Under Indian labour legislations, providing prior notice of termination of employment is mandatory in the case of employees who come under the definition of ‘workmen’ under the ID Act. The notice period for dismissal of employees is either one (1) month or three (3) months, or equivalent wages in lieu thereof, depending on the total number of employees. However, no notice period or payment of compensation is required in the case of employees dismissed for misconduct, provided the employer conducts an internal inquiry prior to such dismissal.

4. Is severance pay required?

Yes, severance payment is required to be paid by the employer. Severance pay procedure is different in each of the circumstances noted below:

Voluntary resignation: If the employee voluntarily resigns (as in the cases of retirement/resignation/absconding/failure to report to work without notice for three (3) consecutive days, then the resignation has to be accepted by the employer. Upon the acceptance of the resignation by the employer, the employee has to serve a notice period as specified in the employment contract, unless the same is waived by the employer.

Termination initiated by employer: For the termination initiated by the employer for misconduct by the employee, the scope of misconduct should be set out in the employment handbook, policies or employment contract.

An employee is entitled to payment of gratuity on termination of his employment, provided he has rendered continuous service for not less than 5 (five) years (except in the case of death or disability), under certain circumstances.
The gratuity payable to an employee is calculated as 15 (fifteen) days’ wages payable multiplied by the number of years of service (with part of a year in excess of 6 (six) months counted as 1 (one) year). The maximum amount of gratuity that an employee is entitled to under the PGA Act is INR 10, 00, 000 (Rupees Ten Lakhs only). However, there is no restriction on any employer to pay over and above the statutory limit.

5. Separation Agreements

1. Is a Separation Agreement required or considered best practice?

While a Separation Agreement is not mandatory, it is increasingly considered as a necessity from a best practice perspective as the separation agreement addresses the scenario where both parties are releasing each other of all present and future liabilities with reference to the employment relationship and the conditions of confidentiality for the proposed course of action.

2. What are the standard provisions of a Separation Agreement?

There will be some standard legal provisions and some key provisions in a Separation Agreement. It is important for the Agreement to review the identity of the involved parties, the fact of the termination, the reason for severance, the terms of any severance, the release of claims, non-solicitation, return of employer’s equipment, the right of the employee to consult an attorney, confidentiality requirements regarding the terms, and some common clauses like the applicable law and enforceability of the agreement. The two key provisions are the severance pay, if any, and the release of claims.

The terms of severance would include the amount (if any), the time of payment, and a statement that applicable tax withholding will be deducted. If certain benefits are being given in addition to or in lieu of a cash severance payment, the terms and conditions of these benefits need to be specified in the Separation Agreement.

3. Does the age of the employee make a difference?

No. Indian labour legislation does not include restrictions on the age of the employee. However, the Separation Agreement is governed by the Contract Act. Under the Contract Act, the employee should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 (eighteen) years in normal case and 21 years if guardian is appointed by the Court.

4. Are there additional provisions to consider?

Yes, Separation Agreements can be customized based on the circumstances of each situation.

5. Remedies for employee seeking to challenge wrongful termination

The remedies available for employee seeking to challenge wrongful termination are enlisted below:

  • Reinstatement of employment
  • Back pay
  • Loss of wages
  • Out of pocket expenses including but not limited to attorney’s fees
  • Loss of benefits
For more information on these articles or any other issues involving labour and employment matters in India, please contact Avik Biswas, Partner at IndusLaw (www.induslaw.com) at avik.biswas@induslaw.com
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