20 Questions About Indian Employment Law for Foreign HR

Why Indian Employment Law Confuses Foreign HR Teams

Employment law in India operates on a fundamentally different model from most Western jurisdictions. It is a concurrent subject under the Indian Constitution, meaning both the central government and individual state governments can legislate on labor matters — and when they conflict, it creates a patchwork of rules that varies by state, industry, and employee classification.

Until recently, India had 29 central labor laws (plus hundreds of state-level variations). The government has consolidated these into four Labour Codes: the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety, Health and Working Conditions Code (2020). The Codes were notified in November 2025, but implementation is partial — central and state-level rules are still being finalised, and many operational provisions are not yet in force uniformly across states.

For foreign companies establishing a subsidiary or branch office in India, getting employment law right is not optional. The penalties for non-compliance range from fines to imprisonment for company officers, and the reputational damage from labor disputes can be severe.

Hiring and Onboarding

1. Do we need a local entity to hire employees in India?

Yes, to directly employ people in India, you need a legal entity — either a private limited company, a limited liability partnership, a branch office, or a liaison office. The entity must be registered with the local labor authorities, PF commissioner, ESI corporation, and professional tax authority before hiring the first employee.

The alternative is to engage an Employer of Record (EOR) — a third-party firm that legally employs workers on your behalf through their own Indian entity. This avoids the need for your own entity but comes with limitations: the EOR technically owns the employment relationship, which creates IP assignment risks and limits your control over employee terms.

For companies planning to hire more than 10-15 employees or intending to be in India long-term, setting up a foreign subsidiary is almost always the better option.

2. What is the difference between an employee and a contractor in India?

This is one of the highest-risk areas for foreign companies. India's labor authorities look at the substance of the relationship, not the label:

• Employee: Works under the direction and control of the company, uses company-provided tools and workspace, works fixed hours, receives regular salary, and is economically dependent on the company.
• Independent Contractor: Works independently, uses own tools, sets own hours, can work for multiple clients, bears own risk of profit or loss, and is engaged for a specific project or deliverable.

Misclassification is aggressively pursued by Indian labor authorities. If a contractor is reclassified as an employee, the company becomes retroactively liable for PF contributions (12% of basic wages), ESI contributions (3.25% of gross wages), gratuity, leave benefits, and minimum wage compliance — plus penalties and interest for the entire period of engagement.

3. What registrations are needed before hiring the first employee?

Before hiring your first employee, the company must complete the following registrations:

• Employees' Provident Fund (EPF): Mandatory once you employ 20 or more persons (though many companies register voluntarily from day one). Register on the EPFO Unified Portal.
• Employees' State Insurance (ESI): Mandatory once you employ 10 or more persons (1 or more in hazardous industries under the new labour codes). Register on the ESIC portal. Applicable to employees earning up to INR 21,000 per month.
• Professional Tax: State-specific registration. Required in states like Maharashtra, Karnataka, West Bengal, Tamil Nadu, and others. Maximum professional tax is INR 2,500 per year.
• Shops and Establishment Act: Register with the local municipal authority within 30 days of commencing business. Requirements vary by state.
• Labour Welfare Fund: Required in some states (Maharashtra, Karnataka, Tamil Nadu). Contribution amounts and frequencies vary by state.

4. Is there a minimum wage in India, and how does it work?

Yes, India has minimum wages, but there is no single national minimum wage. Under the Code on Wages, the central government sets a "floor wage" and state governments set their own minimum wages, which cannot be lower than the floor wage. Minimum wages vary by:

• State: Delhi has one of the highest minimum wages (INR 18,456/month for unskilled workers as of October 2025), while states like Rajasthan are significantly lower (around INR 7,410/month).
• Skill Level: Wages are categorized as unskilled, semi-skilled, skilled, and highly skilled. In Delhi, highly skilled workers have a minimum wage of INR 23,356/month.
• Industry/Sector: Some states set different minimum wages for different industries (e.g., IT, construction, manufacturing).
• Zone: Large states like Karnataka and Maharashtra have internal zones reflecting metro versus tier-2 city cost differences.

For foreign companies hiring software engineers or professional staff in cities like Bangalore, Mumbai, or Gurgaon, market rates are well above minimum wages. But for support staff (housekeeping, security, drivers, office assistants), minimum wage compliance is a real and regularly audited obligation.

Compensation and Benefits

5. What is the salary structure in India and why does it matter?

Indian salary structures are unlike those in most Western countries. A typical Indian salary is broken into multiple components:

• Basic Salary: The core component. Under the new labour codes, basic salary must be at least 50% of total remuneration (CTC). If it is less, the excess of excluded components must be added back to basic for statutory benefit calculations.
• House Rent Allowance (HRA): Tax-exempt up to specified limits based on the city of residence.
• Special Allowance: A catch-all component for the remaining amount.
• Employer PF Contribution: 12% of basic salary, contributed by the employer.
• Employer ESI Contribution: 3.25% of gross wages (for employees earning up to INR 21,000/month).
• Gratuity Provision: 4.81% of basic salary (accounting provision for gratuity liability).

The 50% basic wage rule under the new labour codes is critical. Many companies historically kept basic salary at 30-40% of CTC to reduce PF and gratuity liabilities. This is no longer compliant. Companies must restructure salaries to ensure basic wages constitute at least 50% of total remuneration.

6. What is Provident Fund (PF) and how much must we contribute?

The Employees' Provident Fund is India's primary retirement savings scheme. Both employer and employee contribute:

The statutory ceiling for PF is INR 15,000/month (basic wages). Contributions on wages above INR 15,000 are voluntary. Many foreign companies contribute on the full basic salary as a retention tool.

PF contributions must be deposited by the 15th of the following month. Late deposits attract interest at 12% per annum and damages ranging from 5% to 25% of the arrears depending on the delay period.

7. What is ESI and when does it apply?

Employees' State Insurance (ESI) is India's social health insurance scheme. It provides medical care, sickness benefits, maternity benefits, and disability coverage.

• Applicability: Companies with 10 or more employees (1 or more in hazardous industries under the new codes) must register with ESIC.
• Employee Eligibility: Employees earning up to INR 21,000/month (gross wages).
• Employer Contribution: 3.25% of gross wages.
• Employee Contribution: 0.75% of gross wages (deducted from salary).

For most foreign companies hiring professional staff at market rates (INR 50,000+/month), ESI does not apply to those employees individually (they exceed the INR 21,000 threshold). But the company must still register if it has 10+ employees, as it may have support staff or junior hires who fall within the threshold.

8. How does gratuity work under the new labour codes?

Gratuity is a statutory retirement benefit paid by the employer when an employee leaves after completing a qualifying period of service. Under the new Labour Codes (notified 21 November 2025, with implementation partial as rules are being finalised):

• Regular Employees: Eligible after five years of continuous service.
• Fixed-Term Employees: Eligible after one year of continuous service (reduced from five years under the old law). This is a major change that significantly increases employer liability for contract workers.
• Calculation: 15 days' wages for every completed year of service (or part thereof exceeding six months). "Wages" means basic salary plus dearness allowance.
• Maximum Limit: INR 25,00,000 (increased from INR 20,00,000 under the old law).

For a mid-level employee earning INR 1,00,000/month basic salary who leaves after 10 years, the gratuity payable would be approximately INR 5,76,923 (INR 1,00,000 x 15/26 x 10).

Working Conditions

9. What are the standard working hours in India?

Under the Occupational Safety, Health and Working Conditions Code:

• Maximum daily hours: 8 hours (can be extended to 12 hours in certain circumstances with compensatory rest)
• Maximum weekly hours: 48 hours
• Overtime: Must be paid at twice the ordinary rate of wages. Maximum overtime is limited to ensure total working hours do not exceed the prescribed limits.
• Spread Over: The total spread of working hours (including breaks) should not exceed 10.5 hours in a day.

Most foreign companies in India operate on a 9-hour day (including a 1-hour lunch break) and a 5-day week, totaling 40 working hours. This is within the statutory limits. However, the company must maintain proper attendance records and overtime registers as mandated by law.

10. What are the mandatory leave entitlements?

Indian employees are entitled to multiple types of leave:

• Earned Leave / Privilege Leave: 15 days per year (one day for every 20 days worked) under the Factories Act. Many states' Shops and Establishment Acts provide 12-21 days depending on the state.
• Sick Leave / Casual Leave: Varies by state — typically 7-12 days per year for sick leave and 7-12 days for casual leave.
• National and Festival Holidays: 3 national holidays (Republic Day, Independence Day, Gandhi Jayanti) are mandatory. Total paid holidays range from 5-17 per year depending on the state and applicable legislation.
• Maternity Leave: 26 weeks for the first two children (and 12 weeks from the third child onwards) under the Maternity Benefit Act. This applies to all establishments with 10 or more employees.
• Paternity Leave: Not mandated by central legislation but commonly offered by foreign companies (typically 5-15 days).

Leave accumulation and encashment rules vary by state. Companies must comply with the leave rules of the state where the employee is located, not where the company is headquartered.

Termination and Separation

11. Can we terminate an employee at will in India?

No. India does not follow the "at-will employment" doctrine that exists in the United States. Termination must be for a valid reason and follow due process:

• Managerial/Supervisory Employees: Can be terminated per the terms of their employment contract, typically with 30-90 days' notice or pay in lieu. However, even contract-based termination can be challenged if the employee alleges discrimination, victimization, or unfair labor practice.
• Workmen (non-managerial employees): Enjoy significantly stronger protection. Termination for misconduct requires a domestic inquiry with opportunity to be heard. Retrenchment (termination due to redundancy) requires 30 days' notice and retrenchment compensation of 15 days' wages per year of service.

The practical advice for foreign companies: always document performance issues thoroughly, follow a progressive discipline process (verbal warning, written warning, performance improvement plan), and consult with Indian legal counsel before terminating any employee.

12. What is the process for terminating an employee for poor performance?

There is no statutory "poor performance termination" process — this falls under contract-based termination for managerial employees and can be classified as retrenchment for workmen. Best practices:

1. Document Performance Issues: Maintain written records of performance reviews, targets set, targets missed, and feedback given. Start documentation at least 3-6 months before considering termination.
2. Issue Written Warnings: Two written warnings with clear expectations and timelines for improvement. Keep signed acknowledgment copies.
3. Performance Improvement Plan (PIP): A formal 30-90 day PIP with measurable goals. If the employee fails to meet PIP targets, this provides documented grounds for termination.
4. Separation Meeting: Conduct a formal separation meeting with HR present. Provide the notice period (or pay in lieu) and a detailed settlement letter covering all dues: salary, bonus, leave encashment, gratuity (if applicable), PF settlement, and notice pay.
5. Full and Final Settlement: Complete the full and final settlement within 30 days of the last working day. Issue Form 16 and relieving letter.

13. What is retrenchment and when does it apply?

Retrenchment under Indian law means the termination of service of a workman by the employer for any reason other than disciplinary action, voluntary retirement, non-renewal of contract, or retirement on superannuation. It is the closest Indian equivalent to a "layoff" or "redundancy" in Western jurisdictions.

Requirements for valid retrenchment:

• Employee must have completed at least one year of continuous service (240 days under the old law)
• One month's notice in writing (or wages in lieu of notice)
• Retrenchment compensation at 15 days' average pay for every completed year of service (or part thereof exceeding six months)
• Notice to the appropriate government authority
• "Last in, first out" principle must be followed within each category of workmen

14. What severance pay is mandatory in India?

India does not have a concept of "severance pay" as understood in the US or UK. Instead, separated employees are entitled to a combination of statutory payments:

Many foreign companies offer additional ex-gratia severance (typically 1-3 months' salary) as a goodwill gesture and to secure a clean separation agreement. This is not legally required but is common practice, especially for senior employees.

The New Labour Codes

15. What changed with the new labour codes in November 2025?

The four Labour Codes — Code on Wages (2019), Industrial Relations Code (2020), Code on Social Security (2020), and Occupational Safety, Health and Working Conditions Code (2020) — were notified on 21 November 2025, though implementation remains partial as central and state rules continue to be finalised. Key changes affecting foreign companies:

• Wage Definition: Basic wages must constitute at least 50% of total remuneration. Companies with lower basic components must restructure salaries, increasing PF and gratuity costs.
• Fixed-Term Employment: Fixed-term employees get full benefits (PF, ESI, bonus) and gratuity after one year (previously five). This fundamentally changes the economics of contract staffing.
• Gig and Platform Workers: Social security coverage now extends to gig workers. Aggregators must contribute 1-2% of annual turnover.
• ESIC Coverage Expansion: ESIC must be provided for even one employee in hazardous occupations (previously 10+).
• Retrenchment Threshold: The threshold for requiring government permission for retrenchment may increase from 100 to 300 workers (state-dependent).
• Annual Health Checkups: Mandatory for employees working in factories and hazardous environments.

16. How does the 50% basic wage rule affect payroll costs?

Under the Code on Wages, if allowances (HRA, special allowance, conveyance, etc.) exceed 50% of total remuneration, the excess must be treated as wages for the purpose of calculating statutory contributions. This means:

• PF impact: If a company was previously keeping basic at 30% of CTC, and now must increase it to 50%, PF contributions (12% employer + 12% employee) increase proportionally. For an employee earning INR 12,00,000 CTC, PF cost increases by approximately INR 28,800 per year.
• Gratuity impact: Gratuity is calculated on basic + DA. Higher basic means higher gratuity liability for long-serving employees.
• Take-home impact: Employees see a reduction in take-home pay because the employee PF deduction increases. Companies may need to increase CTC to maintain take-home parity.

Foreign companies should work with their payroll provider or tax advisor to model the impact of salary restructuring before implementation.

Compliance and Risk

17. What is the POSH Act and does it apply to foreign companies?

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 — commonly known as the POSH Act — mandates that every employer with 10 or more employees must:

• Constitute an Internal Committee (IC) to receive and redress complaints of sexual harassment
• Conduct annual awareness training for all employees
• File an annual POSH compliance report with the District Officer
• Display information about the IC at a conspicuous place in the workplace

The POSH Act applies fully to foreign companies operating in India. Indian courts have clarified that the "workplace" includes virtual and digital spaces — meaning a foreign company can be held liable for online harassment if the aggrieved employee is based in India, even if the respondent is in another country.

Penalties for non-compliance include fines up to INR 50,000 for the first offence, INR 3,00,000 for subsequent offences, and potential cancellation of the business license for repeated violations.

18. What data protection obligations apply to employee data?

The Digital Personal Data Protection Act, 2023 (DPDP Act) creates comprehensive requirements for processing employee personal data:

• Consent: Employers must obtain valid consent for processing personal data that goes beyond what is necessary for the employment relationship. Employment necessity is a recognized ground, but data collection must be proportionate.
• Data Localization: Employee data can be transferred outside India, but certain categories of data may be restricted based on future government notifications. As of March 2026, no specific restrictions have been notified for employee data.
• Data Principal Rights: Employees have the right to access their data, request correction, and withdraw consent. Companies must establish a mechanism for employees to exercise these rights.
• Breach Notification: Data breaches must be reported to the Data Protection Board of India within the prescribed timeframe.

Foreign companies that transfer Indian employee data to their global HRIS systems must ensure their data processing agreements and privacy notices comply with the DPDP Act.

19. What are the penalties for employment law violations in India?

Penalties vary by statute but can be significant:

The most dangerous exposure for foreign companies is PF non-compliance. The EPFO regularly conducts audits of establishments and can impose damages and prosecute company officers personally. Directors can face imprisonment — this is not just a corporate penalty.

20. What compliance audits should a foreign company expect?

Foreign companies operating in India should be prepared for the following regulatory audits:

• PF Audit: The EPFO conducts regular compliance audits, typically every 2-3 years. They verify that all eligible employees are enrolled, contributions are correctly calculated and deposited on time, and that no employees have been misclassified as contractors to avoid PF obligations.
• ESI Audit: Similar to PF audits, ESIC inspectors verify enrollment and contribution compliance. They also check if any eligible employees have been excluded.
• Labour Inspector Visits: State labor inspectors can visit at any time to verify compliance with minimum wages, working hours, overtime payments, and record-keeping requirements. Under the new codes, the government is moving toward web-based and randomized inspections.
• Income Tax / TDS Audit: The Income Tax Department may conduct a TDS survey to verify proper deduction and deposit of tax at source on employee salaries.
• POSH Compliance: While not a formal "audit," the District Officer can require the company to submit its annual POSH report and verify IC constitution and training compliance.
• GST Audit: If the company provides services that involve employee deployment (staffing), GST authorities may audit the classification of supply and applicability of reverse charge.

The best preparation is to maintain a compliance file for each audit type, with all registers, returns, and records organized and ready for inspection at any time.

Foreign companies should also be aware that India's labor enforcement landscape is becoming increasingly digitized. The Shram Suvidha Portal enables online registration, return filing, and inspection scheduling. The government has introduced a risk-based inspection system that uses algorithms to identify high-risk establishments for targeted audits. Companies with a history of compliance issues, employee complaints, or late filings are more likely to be selected for inspection.

Practically, every foreign company operating in India should maintain the following registers and records at all times: Muster Roll (attendance register), Wages Register, Overtime Register, Deductions Register, Fines Register (if applicable), Leave Register, PF contributions ledger, ESI contributions ledger, POSH complaints register, and an accident register (for factories). These are legally required documents that must be produced on demand during any labor inspection.

Key Takeaways

• India does not follow at-will employment. Termination requires valid cause, documented process, and statutory payments — plan for 3-6 months to properly exit an underperforming employee.
• The new Labour Codes (notified November 2025, implementation phased) require basic wages to be at least 50% of CTC. Companies must restructure salaries, which increases PF and gratuity costs.
• Fixed-term employees now qualify for gratuity after one year (down from five), dramatically changing the economics of contract staffing.
• PF non-compliance is the highest-risk area — the EPFO can impose damages of 5-25% on arrears and prosecute company officers personally, including imprisonment.
• Employment law varies significantly by state. Companies must comply with the labor laws of every state where they have employees, not just their registered office state.
• Engage an experienced compliance service provider before hiring your first employee — retroactive compliance is far more expensive than proactive setup.