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07. Termination of Employment Contracts
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07. Termination of Employment Contracts

Grounds for Termination

There are various modes of termination of employment that are recognised in India, including: i) expiry of a fixed term contract / mutual separation; ii) resignation by an employee; iii) retirement or superannuation; iv) layoffs, termination due to transfer of business/closure of an undertaking/organisational restructuring; and v) termination by an employer for ‘cause’. Termination for ‘cause’ may involve one or more of the following:

  • established breach of employment contract and/or internal policies;
  • employee having committed any criminal offence / authorities having initiated criminal proceedings;
  • employee’s inability to fulfill material obligations of his job;
  • misconduct;
  • inefficiency/ poor performance, after undertaking sufficient processes such as a performance improvement plan;
  • loss of confidence by management; and
  • abandonment of employment / continuous absenteeism.

Collective Dismissals

‘Collective dismissal’ of employees is permitted under Indian labour laws, only in certain circumstances and upon satisfaction of specified conditions. In this context, the ID Act describes the following processes with respect to workmen: i) ‘retrenchment’, which is defined as termination of workmen’s services for any reason whatsoever, otherwise than as punishment inflicted by way of disciplinary action; ii) ‘layoffs’, which is defined as the failure, refusal or inability of an employer to employ a workman, on account of shortage of power, raw materials, break-down of machinery, natural calamity or any other reason beyond the employer’s control. The ID Act also prescribes conditions for transfer / closure of an undertaking that would result in redundancies.

In case of retrenchment, depending on the number of workmen engaged, employers are required to either notify/seek prior approval of the concerned labour department. Also, employers are required to provide employees who have been in service for at least 1 year, a notice of 1 or 3 months (or equivalent pay) and ‘retrenchment compensation’ calculated at 15 days’ wages for every completed year of service. It is important to note that in case of retrenchment, employers must follow the “last in, first out” principle, wherein the employment of the shortest-serving employees will be the first to be terminated, unless the employer has justifiable reasons for not doing so.

In a layoff situation, prior approval of the concerned Government may be required, and compensation would have to be paid, in the manner prescribed. Laid off workmen can also be retrenched in the manner prescribed under the IDA. Provisions with respect to layoffs under an organisation’s certified Standing Orders (as may be applicable) or internal policies, will also need to be taken into consideration.

The above stipulations are all in the context of workmen – in case of managerial employees, there are no specific requirements under statute, and any dismissal would be as per the terms of their contract.

Individual Dismissals

As per the IDA, any dismissal of an individual workman would also be considered ‘retrenchment’ as described above. Accordingly, (depending on the number of workmen engaged at the establishment), the employer would have to provide prior notice of termination of either 1 month or 3 months, or equivalent wages in lieu thereof. In addition, ‘retrenchment compensation’ would have to be paid, at the rate of 15 days’ wages for every completed year of service.

However, in case of employees who are dismissed for misconduct (provided the employer conducts an internal inquiry prior to such dismissal) no prior notice of termination or retrenchment compensation would be required.

In the case of employees other than workmen (i.e. managerial cadre), provisions of the employment contract and the relevant S&E Acts would have to be considered. Since India does not recognise at-will employment, termination of employment without providing any prior notice at all (or equivalent pay) would typically render the contract of employment as an ‘unconscionable bargain’, and hence, illegal.

Several States, such as Andhra Pradesh, Bihar, Punjab, Rajasthan and Karnataka have issued ordinances to relax the applicability of the ID Act to certain establishments, such that provisions relating to layoffs, retrenchment, closure of certain establishments, wherein the number of workmen employed is not less than one hundred, has recently been increased to three hundred workmen. In addition to the above, some States have introduced changes in the retrenchment compensation, which was previously calculated as fifteen days’ average pay for every completed year of continuous service, or any part thereof in excess of six months.

Is Severance Pay Required?

Yes, a severance payment would have to be made by the employer. However, the quantum of the amount and the processes followed would be different, depending on specific circumstances. For instance:

Voluntary resignation: If the employee voluntarily resigns, the employer must accept the same and communicate whether the employee has to serve the notice period / the notice period has been waived. In such an instance, the employer would be required to pay the following as part of severance pay:

  • all accrued and unpaid wages;
  • wages in lieu of accrued earned leave;
  • gratuity in accordance with PG Act (i.e. 15 days wages for every completed year of service), subject to a maximum of INR 2 million (~USD 27270); and
  • any other contractual dues, such as variable pay, performance bonus, etc.

Termination initiated by employer: In case of termination for misconduct (which is established as per the clear processes set out in the employee handbook, policies, and employment contract), the employer would be required to make the following payouts:

  • all accrued and unpaid wages;
  • wages in lieu of accrued earned leave;
  • gratuity in accordance with PG Act, except where (i) any willful act, omission or negligence of the employee has caused damage to employer property; (ii) the employee has been terminated for riotous or disorderly conduct or any other act of violence; or (iii) the employee has been terminated for an offence involving moral turpitude committed in the course of employment; and
  • any other contractual dues.

Separation Agreements

Is a Separation Agreement required or considered Best Practice?

While a separation agreement is not mandatory under Indian laws, it is increasingly being followed by Indian companies, especially in cases of contentious separations / separation of senior executives.

What are the standard provisions of a Separation Agreement?

The key clauses in a separation agreement pertain to the employee releasing the company from all present and future liabilities with reference to the employment relationship, assignment by the employee of any and all IP created in the course of employment to the employer, the employee agreeing to adhere to confidentiality obligations and the employee returning all company property in his/her possession or control. The reasons for separation and the terms and conditions of severance, including any separation consideration paid out and any benefits provided, should be accurately captured.

Does the age of the employee make a difference?

No, there are no restrictions regarding age. However, the employee must have attained the age of majority (18 years) as required under the Contract Act.

Are there additional provisions to consider?

Yes, separation agreements should be customised based on specific circumstances and should closely reflect the terms of the employment contract / employee handbook and internal policies. Such customisation may be undertaken basis the following considerations:

  • Is the termination part of a workforce reduction?
  • Is the termination part of a transfer of undertaking? If so, is there any change to the employment terms? Are any employee benefits being carried over?
  • Is the termination part of a disciplinary proceeding?
  • Is there company information or equipment that the employee needs to return?
  • Are there any stock option related queries to be addressed?
  • Does the employee have any specific confidentiality obligations?
  • Is there a possibility of the employee disparaging the employer and its other employees?
  • Should the employee be offered ‘garden leave’?


Depending on the responses to the above questions, corresponding provisions should be added to the separation agreement.

Remedies for Employee Seeking to Challenge Wrongful Termination

The remedies available for employees seeking to challenge a wrongful termination include:

  • reinstatement of employment;
  • back pay;
  • loss of wages and earning capacity;
  • all other expenses.

Workmen can approach the labour department and the industrial tribunal in this regard.

Whistleblower Laws

Currently, legislation in India concerning whistleblowers mainly pertains to listed companies and the public sector. In terms of regulations prescribed by the Securities and Exchange Board of India (SEBI), companies listed on a recognised stock exchange in India have to devise an effective whistleblowing mechanism that enables stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. Under the (Indian) Companies Act, 2013, certain categories of companies are also required to constitute a ‘vigil mechanism’ for their directors and employees to report genuine concerns or grievances.

The Whistleblowers Protection Act, 2014 (which has not yet seen the light of day, with further controversial amendments being proposed) mainly governs alleged corruption and misuse of power by public servants and seeks to protect persons who expose alleged wrongdoings in government bodies, projects and offices.

It is also important to note that India has recently amended its Prevention of Corruption Act, 1988, wherein the giving of a bribe by any person (including the private sector) to a public servant for an improper performance of public duty, has now been made an offence (penalties extend to fines and imprisonment), whereas previously, only the receipt of a bribe by a public servant was covered.


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