In India, labor laws are managed at both national and state levels. Central laws like the Industrial Employment Act and the Industrial Disputes Act govern job terminations. Each state also has its own Shops and Establishments Act, which sets rules for businesses where work is carried out.

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Termination Rules for Employees.

No matter why employees are being dismissed, every organization must follow specific central and state rules. Here are five important rules to follow before terminating employees.

  1. Terminating employees in most sectors typically requires a notice period of 30 to 90 days. However, when terminating over 100 employees in manufacturing, mining, or plantation units, government approval is necessary. In other sectors, termination of over 100 employees only requires a government notification.
  2. In India, if you're an employee, your boss can fire you for some serious stuff like not following the rules, lying, stealing, or breaking things at work. They can also let you go if you take too many days off without asking, show up late all the time, cause trouble at work, or just don't do your job properly.
  3. When places of work have to let people go, they usually follow a "last in, first out" rule. That means the person who was hired most recently is the first one to get the boot. But here's the catch: if they need to hire again for the same job or something similar, they're supposed to give the person they let go first dibs on the new gig.
  4. Firing an employee, who is pregnant or seeking maternity leave, for convenience can lead to non-compliance with the Maternity Benefit Act of 2017 in India.
  5. In most states in India, employees are entitled to 10-15 days of paid leave each year. This includes up to 10 days for sick leave and another 10 days for casual leave. Taking leave under these conditions cannot lead to termination.

State Labor Legislation Governing Termination

As mentioned before, any termination must follow federal and state laws, which are more important than what's written in contracts. So, contract terms must match the law. State laws, tied to the Shops and Establishment Act, are crucial, especially when there's no clear firing process or a disagreement about how to interpret those rules.

Next, we look at how firing is regulated in major business hubs across India, like Delhi, Maharashtra, Karnataka, and Tamil Nadu. These examples show the typical rules and trends in labor laws across different Indian states.

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  • Delhi Union Territory: According to the Delhi Shops and Establishments Act of 1954, employers must give employees who have worked for more than three months either 30 days' notice before termination or a payment equal to 30 days' salary. If the termination is due to misconduct, notice isn't necessary, but the employee should have a chance to explain their side.
  • Maharashtra: Under the Bombay Shops and Establishments Act of 1948, if an employee has worked for more than a year, the employer must give 30 days' written notice before termination. For employees with more than three months but less than a year of service, at least 14 days' notice is required. No notice is needed if termination is due to misconduct.
  • Karnataka and Tamil Nadu: In Karnataka under the Shops and Establishments Act of 1961, and in Tamil Nadu under the Shops and Establishments Act of 1947, employees with more than six months of service can only be terminated for a "reasonable cause." Employers must provide one month's notice before termination. If termination is due to misconduct, no notice or payment in lieu of notice is required.

Severance Pay in India.

Employees receive severance pay when they retire, are laid off, or when their contract ends. Employers should check the specific laws that apply to their industry, location, and type of business.

Under the Payment of Gratuity Act, 1972, employees are entitled to gratuity payment after working continuously for five years.

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Employee termination checklist

Here's a simple list of steps you need to take when you have to let someone go from your company:

  1. Check the company’s HR rules: Before firing someone from their job, you should check the company's HR rules and policies. Each company has its own way of handling different situations.
  2. Refer to Employee Agreement: The employee agreement includes details about how much notice must be given before termination, any severance pay, compensation, and other things that must be given to the employee. This agreement is usually signed when the employee starts working, and it's important because it can be used in court if there are any legal issues later on.
  3. Serving a Notice: Giving notice is an important step when terminating an employee. The notice should be given 30 to 90 days before the termination date. It must be in writing and clearly explain why the employee is being let go.
  4. Settle the Severance Pay: Severance pay is given to employees when they retire, get laid off, or finish their contracts.
  5. Employees who have worked for a year or more get one month’s salary as severance pay.
  6. In protected sectors with mass terminations, employees are entitled to three months of wages.
  7. According to the Payment of Gratuity Act, employees receive gratuity after five years of continuous service.
  8. Under the section 25(F) of Industrial Disputes Act of 1972, employees who are involuntarily dismissed (retrenched) receive severance pay equal to 15 days' wages for each year of completed service.
  9. Exit Interview: Exit interviews help organizations gather feedback and assess aspects like work culture, environment, and ethics. They also pinpoint areas where the organization can improve to enhance the employee experience in the office.

Implications for Employers:

The reasons for ending a job should be fair and clear. If not, employers might face legal trouble, big fines, and damage to their reputation.

Following the rules can help avoid arguments and build trust with workers. Human Resources and other officials should stick to state and national labor laws to prevent legal problems.

Ending a worker’s job brings up many questions about their future and the company. A single unfair termination can lead to legal trouble and make other workers lose trust. Employers should appreciate their workers' efforts instead of just firing them.

There should be a clear process for ending jobs to make sure it’s fair and to prevent misuse of power. The employer should have good reasons and proper documents to back up the decision to avoid problems.

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Legal Safeguards of Employees:

If you've been fired from your job, you have the legal right to challenge the decision with the appropriate authorities. You can take your case to court for any of these reasons:

  1. The employer fired the employee without giving a clear reason.
  2. The employee hasn't been proven guilty of wrongdoing and claims they didn't do anything wrong.
  3. The employee thinks they got fired for no good reason.

When an employee wants to address certain problems at work, like those mentioned, they need to first make their case and get approval from local labor authorities. After approval, the issue can be handled by conciliation officers, industrial tribunals, or labor courts in their area.

Why Unclear Termination Procedures Are Problematic?

If there isn't a clear way to end a job, it can lead to arguments between the boss and the worker.

  1. Unjust Employee Dismissals: Sometimes, workers might feel that their boss(employer) is being unfair when ending their job. This can make workers feel unhappy and lose trust in their employers.
  2. Violation of Legal Regulations: If there are no clear rules for ending jobs, it can lead to breaking the law, causing unfair job losses, and getting the employer in trouble with the law.
  3. The Anxiety of Employment Uncertainty: If there are no clear rules for ending jobs, workers might feel unsure about their job security. This can make the workplace unhealthy and lower how well the company works.
  4. The Surge in Workplace Disputes: Workers might take legal action if they think their job was ended unfairly. This can hurt the company’s reputation and make workers who are still employed unhappy.
  5. The Impact of Employee Distrust: Without clear rules for ending jobs, workers might start to distrust their boss. This can lower productivity and even lead to strikes because of the lack of trust.

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FAQs:

1. Do you need a reason to terminate an employee in India?

Employers in India must give a clear reason when terminating employees. This reason could be related to performance or behavior, giving employees a chance to explain themselves.

In cases like layoffs due to business changes, reasons can also be beyond the employee's control. Before terminating anyone, employers should have evidence to back up their decision and provide a written termination letter explaining why.

2. How is severance pay calculated in India?

Severance pay calculation varies based on factors like the length of service, terms of the employment contract, and company policy.

Typically, it is calculated based on a fixed number of days' salary for each year of service, as outlined in the relevant labor laws or the employment contract.

3. Are there any tax implications for severance pay in India?

Yes, severance pay is subject to income tax in India. The tax treatment depends on whether the severance pay is considered as 'compensation for loss of employment' or as a retirement benefit under Indian tax laws.

Employers are required to deduct taxes at source (TDS) before making severance payments to employees.

4. What is the procedure to terminate an employee?

Terminating an employee usually requires giving a written notice stating the reasons for termination, following the agreed notice period, and complying with relevant labor laws, potentially including severance pay.

5. Do we get a salary after termination?

After termination, employees are entitled to several payments, including salary for the notice period (whether served or not if the employer fails to provide notice), severance pay for workers (equivalent to 15 days of average pay for each completed year of service, with any period exceeding 6 months counted as an additional year), gratuity as per the Payment of Gratuity Act, 1972 for those with five years of continuous service, and any outstanding wages, bonuses, or benefits up to the termination date must be settled.

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References:

  1. Industrial Employment (Standing Orders) Act, 1946
  2. THE INDUSTRIAL DISPUTES ACT, 1947
  3. The Maternity Benefit (Amendment) Act, 2017
  4. The Delhi Shops and Establishments Act, 1954
  5. The Bombay Shops and Establishments Act, 1948
  6. THE KARNATAKA SHOPS AND COMMERCIAL ESTABLISHMENTS ACT,1961
  7. THE TAMILNADU SHOPS AND ESTABLISHMENTS ACT, 1947
  8. Payment of Gratuity Act, 1972
  9. Section 25F in The Industrial Disputes Act, 1947
Ruthvik Nayaka's profile

Written by Ruthvik Nayaka

LinkedIn

Ruthvik Nayaka is a final year law student, his interests lies in areas including, but not limited to Corporate Law and taxation law. He is also the EN-ROADS Climate Ambassador. He facilities climate-workshop, climate action simulation game and group meetings.

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