Nohid Nooreyezdan
AZB & Partners, Mumbai
nohid.nooreyezdan@azbpartners.com

Ajay Singh Solanki
AZB & Partners, Mumbai
ajay.solanki@azbpartners.com

Anushka Pemmaya
AZB & Partners, Mumbai
Anushka.pemmaya@azbpartners.com

Introduction

Every year, the topic of employment termination comes to the fore with one or another corporation turning to reductions in force for business, operational or other reasons. Recently, a large Indian company in the Information Technology sector and a prominent Indian bank were in the eye of the storm on this subject.

Employment termination is a critical aspect of the employer–employee relationship, and in India, it is governed by a complex web of statutes designed to ensure fairness, transparency, and protection for certain categories of employees. Terminating an employee’s employment without following the prescribed legal procedures can expose an employer to significant risks, including legal challenges and reputational damage.

This article provides an overview of the key legal provisions in India that govern employment termination. It delves into the procedural safeguards in place to prevent unfair dismissals, highlighting the distinctions in employment termination practices across different sectors, the special protections afforded to vulnerable groups such as women, disabled or sick employees and the importance of adherence to principles of natural justice in the termination process. Additionally, the article explores the concept of severance packages, which play a crucial role in mitigating disputes and fostering amicable separations. By understanding these legal frameworks and best practices, employers can navigate the complexities of employment termination while ensuring compliance with Indian labour and employment laws.

Legal framework for employment termination in India

In India, labour and employment is a subject matter on which both the central and state governments can legislate. Making matters more convoluted, some of the central laws such as the Industrial Disputes Act 1947 (IDA), the Industrial Employment (Standing Orders) Act 1946 (IESO) and the Factories Act 1948 (FA) also have state-specific rules legislated by the state governments.

Industrial Disputes Act 1947

The IDA is a pivotal legislation governing the relationship between employers and a category of employees christened as ‘workman’,^[1] especially in the context of termination of employment. The primary purpose of the IDA is to secure fair treatment for workers by laying down a framework for resolving disputes related to employment. One of the central aspects of the IDA is its protection against unfair dismissal, termination of employment (referred to as, ‘retrenchment’ under the IDA) and layoffs. Under the IDA, if an employer intends to retrench a workman who has been in employment for at least one year (defined as 240 days of work), the employer is required to follow a prescribed procedure, which includes providing prior notice (or salary in lieu of), compensating the workman with statutory severance pay and informing the labour authorities. Depending on the number of workmen employed by an employer in the manufacturing sector, the employer may also be required to seek government approval before retrenching workmen. This provision is aimed at preventing arbitrary dismissals ensuring that an employee is retrenched in a fair and reasoned manner. The protections of the IDA also extend to tenured employees, with the ‘last in, first out’ rule having to be followed unless there are valid grounds and written reasons for retaining junior employees, such as their specialised skills or critical roles. This rule ensures fairness and equity when undertaking a reduction in force by protecting senior workmen.

The Indian courts have ruled in a plethora of judgments stating that failing to follow the statutory process of retrenchment renders the retrenchment illegal. In the case of a successful employee claim, courts may pass an order for reinstatement of the workman along with the payment of back-wages or in some cases, payment of compensation.

State specific statutes

The state specific shops and commercial establishments statutes are state-specific legislations that govern the terms and conditions of employment in commercial establishments, including offices, retail outlets, restaurants and more. Most of these state specific statutes also contain provisions on termination of employment. This makes matters a little more complicated as India has 28 States and eight Union Territories. For instance, in some states, employers are required to provide notice only if the employee has completed at least six months of employment; however, in other states, there is no such mandate, and a notice of termination is required to be given regardless of the period of employment. An employer, in some states such as Karnataka, Uttar Pradesh must have reasonable cause to terminate employment whilst others do not provide for the same. Some of these state-specific laws are not applicable to employees working in positions of management subject to a cap on the numbers who are so excluded.

Some states have other laws such as the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act 1971 (MRTU and PULP) in Maharashtra and the Tamil Nadu Recognition of Trade Unions Act 1927 in Tamil Nadu, enacted with the sole objective of recognition of trade unions, to ensure fair and equitable treatment of workers, to provide a mechanism for resolving disputes and to ensure that workers have a democratic environment within the organisation. These statutes also prescribe the procedure for formation and recognition of trade unions.

Industrial standing orders

Standing orders are a set of rules that define the terms and conditions of employment, including the process for termination, applicable to industrial establishments. Under the IESO, employers are required to frame a set of standing orders that clearly lay down the rules concerning the conduct of employees, including grounds for dismissal, suspension and termination. These standing orders must be certified/approved by the appropriate authority and are binding on both the employer and employees. They are designed to establish a clear and standardised process for termination, ensuring that any action taken against an employee is reasonable and that due process is followed. In the first instance, IESO is applicable to workmen employed in organisations wherein 50 or 100 employees are employed (based on the state in which the organisation is present). In some states, the applicability of IESO has also been extended to commercial establishments, through specific notifications/circulars or through references in the state-specific shops and establishment legislations.

Employment contract

In addition to the provisions set forth in the relevant laws, the terms of the employment contract play a crucial role in the termination of employment. If the notice period stipulated in the contract exceeds the duration prescribed by applicable law, the contractually agreed-upon notice period will prevail over the statutory period. In the case of termination of employees at managerial level, certain state-specific shops and commercial establishment statutes, as well as the IDA, may not be applicable, and, as such, their employment will be governed exclusively by the terms of the employment contract.

Reasons for termination

The reason for termination of employment can be broadly categorised into the following categories. Indian law prescribes different procedure required to be followed in each of these cases with certain similarities.

Performance

If termination of employment is based on poor performance, it is crucial to demonstrate that the employee has been made aware of the organisation’s expectations regarding conduct and work responsibilities. The employer must have informed the employee about their failure to meet these expectations and provided an opportunity for improvement, typically through a performance improvement plan and their failure to improve which is documented could be cause for termination. Although poor performance can be considered a reasonable cause for termination, it cannot be classified as termination for misconduct unless the poor performance is accompanied by other factors such as insubordination or indiscipline. Accordingly, termination of employment for performance issues must be carried out by paying ‘workman’ category employees statutory severance and following the procedure for retrenchment under the IDA (as specified above).

Redundancy (RIF)

In case of a redundancy (RIF) due to business restructuring, change of control etc, an employer would be required to consider the provisions under the IDA pertaining to retrenchment as mentioned above. In RIF cases, courts typically expect the employer to justify how certain specific positions were identified as redundant including whether the employer made an effort to offer positions to such employees in other departments of the organisation or whether the employer made an effort to reskill such employees etc. As per the IDA, a seniority list needs to be prepared and the last in first rule is to be followed in RIF cases (any exceptions to this rule should be ideally documented by the employer).

Misconduct

If an employee’s conduct is deemed misconduct under company policies or applicable law, the employer may terminate the employee without notice or pay in lieu of notice, and the retrenchment process will not apply. However, to terminate for misconduct, the employer must conduct a disciplinary inquiry following the principles of natural justice. The typical process includes issuing a charge-sheet, providing a notice of inquiry with details of the committee and allowing the employee the opportunity to respond. If the employee fails to attend without valid reason, the inquiry may proceed ex-parte. During the inquiry, both parties may examine witnesses. After the inquiry, the officer prepares a report with findings, and if the misconduct is proven, the employer can decide on an appropriate punishment, ensuring it is proportional to the act. If the employer has a specific disciplinary process, it must be followed.

Loss of confidence

In cases where there is clear and unambiguous evidence of misconduct, and the employee holds a position of trust, resulting in a loss of confidence by the employer, the employer may choose to forgo the inquiry process and issue an immediate termination notice based on the loss of confidence. This is permissible if the employer is confident in its ability to present a strong case and justify its decision before a court or tribunal. Courts have ruled that the claim of loss of confidence depends on an evaluation of the facts and circumstances, including the nature of the employee’s duties, the trust placed in the employee by the employer and any fiduciary relationship that may exist between them in the course of the employee’s work.

Termination practices across sectors

Manufacturing

The manufacturing sector is governed by stringent protections under the Factories Act 1948 and the IDA, which prohibit arbitrary termination and mandate due process. Workers in this sector benefit from robust safeguards, including prior government approval for retrenchments (currently where 100 or more (300 in some states) workmen are employed) and mandatory severance compensation.

Traditionally, the manufacturing sector has seen a fair amount of trade union activity. Any large-scale reduction in force in this sector would certainly have to go through the angst of dealing with strong trade unions opposing such employer actions.

IT/ITes

Employees in IT/ITes sectors are regulated by state-specific shops and establishments legislations, the IDA and their contractual terms of employment. Although the IDA applies to workmen in this sector, the approval procedure prior to retrenchment that apply to the manufacturing sector does not apply to this sector.

Unions in manufacturing and allied industries frequently contest dismissals through strikes, legal challenges and collective bargaining, creating procedural hurdles absent in the IT sector, where union influence remains nascent despite recent labour department interventions. That said, the IT sector, while historically lacking strong union representation, has faced scrutiny for mass RIFs of late.

Banking and Insurance

The employees in the banking and insurance sectors are regulated by the state specific shops and commercial establishment legislation, the IDA and their contractual terms. Additional protections are afforded to employees in these sectors under the Industrial Disputes (Banking and Insurance Companies) Act 1949 and the Insurance Regulatory and Development Authority Act 1999 which ensures fair treatment and dispute resolutions.

Gig economy

Independent consultants and gig workers are subject to the least protection under labour laws, as their arrangements typically exclude them from receiving the statutory entitlements and tenure-based benefits that are generally granted to employees or contract workers. Unlike employees, who are entitled to severance pay, notice periods and other employment-related benefits payable on termination, based on their length of service, gig workers and independent consultants operate under more flexible and less regulated terms of engagement. Their engagements are often structured as temporary or project-based, and as a result, they do not qualify for the same legal safeguards that apply to full-time or contract employees, leaving them more vulnerable in cases of termination or non-renewal of contracts. However, the winds of change have arrived, and the labour codes will afford protections and preserve the rights of gig and platform workers. Under the Code on Social Security 2020 (CSS), gig workers are entitled to benefits such as social security, insurance and health benefits. The CSS also ensures that gig workers have access to grievance redressal mechanism and provides for fair wages and working condition for gig workers.

Protected categories of employees

Indian labour laws provide special protection to certain vulnerable categories of employees, in addition to the workman category, to safeguard them from unjust termination.

The Maternity Benefit Act 1961 (MBA), prohibits the dismissal of female employees during their maternity leave and ensures that they receive their full benefits during this period, reinforcing their job security or financial security. If the employment of pregnant employees (who have still not proceeded on maternity leave) is being terminated, statute requires the employer to pay the employee the amounts that she would have been entitled to under the MBA, had her employment not been terminated, ie maternity benefits and medical bonuses.

The Right of Persons with Disabilities Act 2016 (RPDA) protects employees with disabilities by mandating non-discrimination in employment related decisions, including termination. The RPDA imposes an obligation on employers to assess an employee’s ability to perform their role based on merit and reasonable accommodation rather than their disability status alone. These provisions reflect a broader commitment to fostering workplace inclusivity and ensuring equitable treatment in alignment with international labour standards such as the ILO Discrimination (Employment and Occupation) Convention 1958.

The Employees State Insurance Act 1948 (‘ESI Act’) safeguards employees who are sick or disabled and receiving benefits under the ESI Act during their illness or disability. The ESI Act prevents employers from dismissing employees while they are on benefits, such as during sickness or maternity leave, to ensure that their entitlements are not lost due to termination.

Way forward: the Labour Codes

In a significant development, the Indian Government has consolidated 29 central labour and employment statutes into four Labour Codes. The Labour Codes have been through all the legislative procedures of enactment back in 2019 and 2020 and are now law though they have not yet been notified as being in effect by the Government. The Government has been waiting for the 28 states to formulate their rules for effective implementation of the procedural aspects of the Labour Codes. The (Indian) Ministry of Labour and Employment has issued a press release, stating that all states and union territories of India are expected to frame their draft rules for the labour codes by 31 March 2025. It is expected that the Labour Codes will be brought into effect once all states have framed their rules and perhaps in a phased manner.

The most relevant codes which may impact provisions on termination of employment are the Industrial Relations Code 2020 (IRC) and the Code on Wages 2019 (CoW). The definition of ‘workman’ has been slightly amended under the IRC. The term ‘workman’ has been replaced by a more gender neutral term ‘worker’ and the wage threshold for determining whether a person occupying a supervisory role has been increased from INR 10,000 to INR 18,000 which could be revised further. A ‘worker’ under the IRC also specifically includes sales promotion employees and ‘unorganised’ workers.^[2]

The IRC, focuses on industrial relations and covers the provisions of the IDA, setting out the rules governing retrenchment and layoffs. The IRC raises the threshold for requiring government approval for retrenchment in the manufacturing sector from 100 workers to 300 workers. This amendment was made to provide more operational flexibility for smaller companies, which were previously burdened with extensive compliance requirements under the IDA. However, this change has been critiqued by labour unions who argue that it dilutes the protection for employees in smaller organisations. Whilst the retrenchment procedure has broadly remained the same under the IRC, there is a new concept of a contribution by the employer to a ‘reskilling fund’ that has been introduced.

The CoW ensures that employees receive their dues on time both upon termination and on resignation from employment. As per the CoW, an employee who is terminated and an employee who resigns from employment are entitled to receive their wages (including statutory severance if applicable) within two working days from the last working day. Unlike the current Payment of Wages Act 1936 (PoW), this requirement was only prescribed in case of termination of employment and not resignation. Additionally, the INR 24,000 threshold prescribed for applicability under the PoW has been removed and the CoW is applicable to all employees, irrespective of their salary.

Risk mitigation measures

Category of employee

It is pertinent to determine the category of employee whose employment is being terminated (workman, non-workman or protected category) as the law affords varying levels of protection to different categories. Additionally, while managerial-level employees may have limited statutory protections, employers must exercise caution during terminations due to the sensitive nature of the confidential and proprietary information to which these employees have access.

Overlap of reasons

A common error made by employers is conflating different grounds for termination, such as poor performance, misconduct or loss of confidence. It is essential to clearly identify the specific reason for termination and follow the appropriate procedure for each case, in addition to ensuring that the required statutory payments are made to the employee in each distinct situation.

Amicable separation

Severance packages, comprising statutory entitlements such as notice pay, retrenchment compensation and leave encashment, are increasingly supplemented by ex gratia payments as a measure of goodwill. Organisations, particularly in sectors such as the IT and financial sectors, now extend discretionary ex gratia sums to acknowledge employee contributions and secure comprehensive release agreements. This practice fosters amicable separations and mitigates litigation risks. Such packages provide mutual closure while reinforcing the employer’s commitment to equitable treatment, even in cessation of employment.

Conclusion

Termination of employment in India has various legal nuances attached to it which employers must be fully aware of before taking the decision to part ways with an employee. Courts in India typically require employers to provide adequate proof supporting reasons for termination of employment. This makes it imperative for employers to be cautious in their approach while handling these matters especially when it relates to certain protected categories of employees.