Employment Law for India

Two documents, two jobs

Employers routinely confuse these. An offer letter is a short pre-joining document that proposes the role, CTC, joining date and a few conditions (background check, references, no competing employment). An appointment letter is the binding employment contract issued on or near the joining date — it governs the relationship for its full duration. Issue both: the offer to secure acceptance, the appointment letter to set the terms.

Clauses that actually matter

• Designation, reporting and place of work: Note that a transferable place-of-work clause can affect later "retrenchment" arguments.
• Compensation: Break CTC into basic, HRA, allowances, PF and gratuity so the employee understands take-home. Under the new Code on Wages, "wages" must be at least 50% of total remuneration.
• Probation and confirmation: State the probation length and that confirmation is in writing (silence should not auto-confirm).
• Notice period: Symmetric notice (or pay in lieu) for both sides.
• Confidentiality, IP assignment and non-solicit: Enforceable in India; post-employment non-compete clauses are generally void under s.27 of the Indian Contract Act 1872.
• Governing policies: Incorporate the handbook, leave policy and POSH policy by reference.

Practical guidance and common mistakes

Use Lekha's Employment Offer Letter to make the offer, then the Appointment Letter as the real contract. Get a signed acceptance copy back and keep it on file. Common mistakes: relying only on an offer letter with no proper contract; promising an annual CTC figure that the employee reads as guaranteed take-home; copying a foreign template with an unenforceable two-year non-compete; and forgetting to attach or reference the POSH policy, which the law requires you to display.

Takeaway: The offer letter wins the candidate; the appointment letter protects the company — issue both, and make the appointment letter the document that actually governs the job.

From 29 laws to four codes

India has consolidated dozens of central labour statutes into four Labour Codes. They have been enacted by Parliament and are being brought into force as states notify their rules. Even before full enforcement, the direction of travel is clear and worth designing your policies around.

The four codes

• Code on Wages, 2019: Unifies the Payment of Wages Act 1936, Minimum Wages Act, Payment of Bonus Act and Equal Remuneration Act. Introduces a national floor wage, a uniform definition of "wages" (basic must be at least 50% of CTC), and timely payment rules.
• Industrial Relations Code, 2020: Subsumes the Industrial Disputes Act 1947, Trade Unions Act and Standing Orders Act. Raises the threshold for prior government permission on lay-off/retrenchment/closure to establishments with 300+ workers, and requires standing orders for those units.
• Code on Social Security, 2020: Consolidates PF, ESI, gratuity, maternity benefit and adds gig and platform workers into the social-security net.
• Occupational Safety, Health & Working Conditions (OSH) Code, 2020: Merges the Factories Act, Contract Labour Act and others, covering safety, working hours, leave and welfare.

What changes in practice

The 50%-of-wages rule is the big one: it can raise PF and gratuity contributions and reduce take-home if your CTC was heavily loaded with allowances. Restructure pay thoughtfully. The IR Code also formalises a fixed-term employment category with pro-rata statutory benefits, which is cleaner than rolling contract-labour arrangements.

Common mistakes

• Assuming the codes are not yet "live" and ignoring them entirely — your state's Shops & Establishments Act still applies in the meantime.
• Keeping basic salary artificially low (e.g. 30% of CTC) to suppress PF.

Takeaway: Treat the four codes as the destination — align pay structure, fixed-term contracts and standing orders now so notification day is a non-event.

What the POSH Act requires

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 applies to every workplace with 10 or more employees. You must constitute an Internal Committee (IC), adopt a policy, run awareness sessions, and file an annual report with the District Officer.

Constituting the Internal Committee

Under s.4 the IC must have: a Presiding Officer who is a senior woman employee; at least two employee members committed to the cause of women or with relevant experience; and one external member from an NGO or a person familiar with sexual-harassment issues. At least half the members must be women. Members serve up to three years.

Complaint and inquiry timeline

• Filing: A written complaint within 3 months of the incident (extendable by a further 3 months for good reason) — s.9.
• Conciliation (optional): Only if the complainant requests it, and never as a monetary settlement — s.10.
• Inquiry: Completed within 90 days, following principles of natural justice (notice to respondent, right to respond, no cross-questioning of the complainant in person) — s.11.
• Report: IC submits findings within 10 days of completing the inquiry — s.13.
• Action: Employer acts on recommendations within 60 days; either party may appeal within 90 days — s.18.

Practical guidance and common mistakes

Adopt Lekha's POSH Policy, display it prominently, and run annual training — the IC's existence on paper is not enough. Common mistakes: appointing an IC without an external member (which invalidates the inquiry); a male Presiding Officer; pushing the complainant toward a cash settlement; and missing the annual report filing. False or malicious complaints can be acted on, but you cannot punish a complaint merely because it could not be proved.

Takeaway: A correctly composed IC and a documented 90-day inquiry are non-negotiable — get the committee's composition right first, because a defective IC taints everything that follows.

Probation done right

Probation lets both sides test the fit. Typical periods run three to six months. Confirmation should be express and in writing — many disputes arise because a contract is silent on what happens when probation lapses, and the employee argues they were automatically confirmed. State clearly that continued employment past the probation end-date does not amount to confirmation until a confirmation letter issues, and that probation may be extended once.

Performance Improvement Plans (PIP)

A PIP is a documented, time-bound plan giving an underperforming employee specific, measurable goals and support to meet them. It is not in itself a statutory requirement, but it is your best evidence that a later exit was performance-based and fair, not arbitrary or mala fide. A defensible PIP:

• Identifies concrete shortfalls with examples, not vague "attitude" complaints.
• Sets measurable targets and a realistic review window (usually 30–90 days).
• Records regular check-ins and the manager's support offered.
• States the consequence of not improving, in writing.

Increments and confirmation

On confirmation or at an annual review, an increment or revised CTC is communicated by letter. Keep the basic-wage portion compliant with the Code on Wages 50% rule. Lekha's Increment Letter documents the revised salary cleanly, and a confirmation letter (often issued together) records the end of probation.

Common mistakes

• Treating a PIP as a box-ticking prelude to firing — courts and tribunals see through sham PIPs.
• Giving only verbal feedback, then exiting someone with no paper trail.
• Leaving probation open-ended so the "temporary" status drags on for a year.
• Announcing increments verbally without a letter, creating disputes over the agreed figure.

Takeaway: Confirm in writing, run PIPs in good faith with real support and a paper trail, and document every pay change — fairness plus documentation is what protects you if the relationship later sours.

The crucial workman / non-workman line

India does not have universal at-will employment. The key question is whether the employee is a "workman" under s.2(s) of the Industrial Disputes Act 1947 (broadly, those doing manual, skilled, technical, operational or clerical work) or a managerial/supervisory employee who is not a workman. Workmen get strong statutory protection; non-workmen are governed mainly by their contract and the Shops & Establishments Act.

Terminating a workman

Ending a workman's service for reasons other than proven misconduct is retrenchment. Under s.25F, if the workman has completed 240 days in a year, you must give: one month's written notice (or pay in lieu); retrenchment compensation of 15 days' average pay per completed year of service; and notice to the appropriate government. Section 25G requires "last in, first out" within a category unless you record reasons to depart from it. Skipping these steps makes the termination void and can lead to reinstatement with back-wages.

Terminating a non-workman

For managers and senior staff, follow the contract: serve the agreed notice (or pay in lieu) and settle dues. There is no retrenchment compensation, but you still owe a fair process and cannot terminate in a way that is discriminatory or punitive-without-inquiry where misconduct is alleged.

Misconduct terminations

Dismissal for misconduct (theft, fraud, harassment) requires a domestic inquiry: a charge-sheet, an opportunity to respond, an impartial inquiry officer and a reasoned finding — natural justice. Skip this and even a guilty employee may win reinstatement on procedural grounds.

Common mistakes

• Assuming a "manager" title means the person is not a workman — courts look at actual duties, not designation.
• Retrenching a 240-day workman without s.25F compensation and government notice.
• Dismissing for misconduct with no inquiry.

Document the exit with Lekha's Termination Letter.

Takeaway: Classify the employee first — for a workman, s.25F and a fair process are mandatory; for a non-workman, follow the contract — but never substitute a title for the duties test.

What full & final settlement covers

On exit, the employer prepares a full and final (F&F) settlement reconciling everything owed both ways: unpaid salary up to the last working day, reimbursements, bonus, leave encashment, gratuity, and notice adjustments — net of recoveries (advances, asset non-returns, notice shortfall). Good practice is to settle within 30–45 days; the Code on Wages pushes toward settling within two working days of the last day where feasible.

Gratuity

Under the Payment of Gratuity Act 1972, an employee who completes five years of continuous service is entitled to gratuity at 15 days' wages for every completed year (formula: last drawn basic+DA × 15/26 × years). It is capped (currently ₹20 lakh) and is tax-exempt up to that limit. The five-year rule is relaxed on death or disablement.

Leave encashment

Accumulated earned leave is paid out at the basic-wage rate per your leave policy and Shops & Establishments rules. Tax treatment differs for government vs private employees and changed recently — private-sector leave-encashment exemption limits have been raised, so apply the current threshold.

TDS and statutory dues

• TDS: Deduct income tax on the taxable portion of the settlement under s.192. Issue Form 16.
• PF: Settle the employee's PF account / facilitate transfer; do not "adjust" PF into the cheque.
• Recoveries: Notice-pay shortfall and unreturned assets can be netted off, but spell them out on the F&F statement.

Practical guidance and common mistakes

Use Lekha's Full & Final Settlement statement so every head is itemised and signed off. Common mistakes: denying gratuity to someone who crossed five years; forgetting leave encashment; deducting "training bond" amounts that were never agreed; and delaying the cheque for months, which invites a labour-commissioner complaint.

Takeaway: An itemised F&F that correctly computes gratuity, leave encashment and TDS — and is paid promptly — closes the relationship cleanly and prevents most post-exit disputes.

Why written policies matter

Policies turn the law and your expectations into rules everyone can see, and they are your evidence of fair, consistent treatment. They are usually bundled into an employee handbook referenced by the appointment letter.

Leave policy

Your leave policy must respect the minimum earned/sick/casual leave your state's Shops & Establishments Act (or the Factories Act) prescribes — you can give more, never less. Cover accrual, carry-forward caps, encashment, and statutory maternity leave of 26 weeks under the Maternity Benefit Act. Define how unused leave is treated at exit (this feeds the F&F).

Remote and hybrid work

Remote work is largely contractual in India. A clear policy should address working hours and availability, data security and device use, reimbursement of internet/equipment, eligibility, and which state's law governs if the employee works from a different state. Note that "place of work" affects jurisdiction and registrations.

Code of conduct

A code of conduct sets behavioural standards — integrity, anti-harassment (cross-referencing your POSH policy), conflict of interest, IT and social-media use, and the disciplinary process for breaches. A documented code underpins any misconduct inquiry.

Background verification and DPDP consent

Background verification (BGV) involves processing personal data, so the Digital Personal Data Protection Act 2023 (DPDP) applies. Collect informed, specific, written consent before running BGV; tell candidates what you will check, why, and how long you keep it; collect only what is necessary; and let them withdraw consent. Treat employee data (Aadhaar, bank, health) as sensitive and restrict access.

Common mistakes

• Giving less leave than the state Act's floor.
• Running BGV with no consent or a buried clause — non-compliant under DPDP.
• A remote policy that is silent on data security and reimbursement.
• A code of conduct with no linked disciplinary procedure, so misconduct exits look arbitrary.

Takeaway: Write clear leave, remote, conduct and BGV-consent policies that meet statutory floors and DPDP consent rules — documented, consistent policy is what makes day-to-day decisions defensible.