international employment law firm alliance L&E Global
India | IndusLaw
02. Employment Contracts
Employment Law Overview India
Cross-Border Remote Work FAQs India
Employees vs Independent Contractors India
Starting a business in India

02. Employment Contracts

Minimum requirements

While the current labour laws in India do not strictly require that an employment contract be in writing, it is predominant market practice (with very rare exceptions) to have all terms and conditions of employment agreed and signed by both parties. A few States however, have specific legislation that necessitate a written contract in order to establish an employer-employee relationship. From the perspective of certainty and enforceability, it is strongly recommended that all employment contracts be in writing, whether as a simple appointment letter or a fully detailed contract, setting out relevant terms and conditions agreed to between the employer and employee. Employment contracts are governed by the Contract Act; accordingly, provisions stipulated therein with respect to parties being competent to contract, consideration, and validity, would be applicable to employment contracts as well.

Employment contracts in India are generally considered to be ‘unlimited term’ contracts, (i.e. contracts that are valid until termination or superannuation, unless specifically identified as a ‘fixed term’ contract). Some of the common provisions included in an employment contract are: i) location, description and title of the job; ii) date of commencement, duration (whether fixed term or unlimited term) and type (whether part-time or full-time) of the job; iii) details of any probationary period; iv) leave entitlement; v) salary details and other benefits; vi) terms governing termination of employment; vii) restrictive covenants; and viii) governing law and dispute resolution.

As discussed above, it is important to note that for ‘workmen’, some employment terms and certain service conditions can only be changed with 21 days’ prior written notice (for certain States like West Bengal, Telangana and Andhra Pradesh, the above notice requirement is 42 days). If any workman challenges the proposed changes before the labour courts during this period, it is likely that the said change will be suspended, pending resolution of the dispute by the court.

Fixed-term/Open-ended Contracts

Fixed-term employment contracts are permitted in India, as long as the employer is employing the person for a short-term requirement. The Government has recently stated that fixed-term contracts will be permitted across sectors; earlier, they were expressly permitted only in the apparel manufacturing sector. However, it is unlikely that employers will be able to convert existing permanent positions into fixed-term employment positions.

In the context of fixed-term employment contracts, the Indian judiciary has consistently held that successive fixed-term contracts cannot be used as a substitute for employing the person on a ‘permanent’ or ‘unlimited term’ basis and that fixed-term employment is not to be used in job roles or functions that are permanent in nature, as far as the particular employer or industry is concerned. Fixed-term employment contracts may be signed directly between the employer and employee or created through use of a contractor under the provisions of the CLRA. Expiry of a fixed term contract will typically not be considered ‘retrenchment’ under the provisions of the ID Act; thus, the compliances pertaining to retrenchment would not have to be undertaken in this case.

Trial Period

Indian law permits new employees to be placed on a trial or ‘probation’ period. Such period is meant to provide employers the opportunity to assess the abilities and suitability of the employee to the organisation; and hence, by definition, allow the employer greater freedom to terminate employment if the employee is found unsuitable during the probation period. The IESO Act envisages a probation period of 3 (three) months – this is largely followed by companies that are not subject to the IESO as well. The general market trend in India is to have a probation period between 3 and 6 months, especially in the technology and services sectors.

During the probation period, the employer will usually have the right to terminate employment of the probationary employee without providing any notice; however, this would be subject to the stipulations of the concerned S&E legislation as well. At the end of the probation period, the employee may be ‘confirmed’ as a permanent employee or dismissed. Terms with respect to an employee’s probation period should be adequately captured under his/her employment agreement/appointment letter.

Notice Period

In terms of Indian labour legislation, ‘workmen’ who have undertaken at least 1 year of continuous service are entitled to a notice period of 1 month, or equivalent wages in lieu thereof. In addition, the employer would be required to pay ‘retrenchment compensation’ to the workman, which is calculated at the rate of 15 days’ wages for every completed year of service. Further, for industries having more than 100 workmen (300 workmen in certain States), the above notice period requirement may differ and there may be certain other compliances with respect to undertaking a retrenchment exercise. However, no notice period (or payment in lieu thereof) or payment of retrenchment compensation is required in the case of workmen dismissed for misconduct, provided the employer conducts an internal inquiry prior to such dismissal.

Additionally, any notice period prescribed under the relevant S&E Acts, as well any requirements under the relevant employment contract in this regard would have to be taken into account. Given that India does not recognise the employment at-will doctrine, judicial precedents have held that termination of employment without providing any prior notice would render the contract of employment as an ‘unconscionable bargain’, and hence illegal.

Any questions

Ask our member firm IndusLaw in India