Employment Law

In short — Indian employment law runs across a lifecycle: hiring and documentation, ongoing statutory compliance, and exits and disputes. That whole field has been reshaped by the four Labour Codes — the Code on Wages 2019, the Code on Social Security 2020, the Occupational Safety, Health and Working Conditions (OSH) Code 2020 and the Industrial Relations (IR) Code 2020 — which came into force on 21 November 2025, consolidating 29 earlier central labour laws. The Codes are the primary framework, but implementation is still bedding in: the detailed Central and State Rules are being notified progressively, and transitional arrangements keep the earlier Acts and their rules in effect until they are replaced. Several fixed points endure regardless — most importantly that post-employment non-compete clauses are generally unenforceable under section 27 of the Indian Contract Act 1872, and that workforce exits for covered “workmen” require due process. POSH compliance and employment in M&A are dealt with on their own pages. Because the Codes’ state-by-state rollout is uneven, the current position should be confirmed for the specific state and sector at the time of use.

A single guide to the employment lifecycle in India — hiring, compliance, and workforce exits and disputes — under the new Labour Codes.

At a glance

• Framework: Four Labour Codes (Wages 2019, Social Security 2020, OSH 2020, IR 2020) in force 21 November 2025, consolidating 29 laws; Central and State Rules still being notified; legacy Acts transitional
• Hiring: Written documentation and appointment letters, senior-hire packages (LTIP, ESOP, garden leave, change-of-control), fixed-term employment (equal treatment and pro-rata gratuity), contractor and secondment arrangements (FEMA and tax)
• Restrictive covenants: Post-employment non-compete is generally void under section 27, Indian Contract Act 1872; confidentiality, IP assignment and garden leave are more defensible
• Compliance: Code on Wages (uniform wage definition and the ~50% basic-pay rule), EPF and ESI, gratuity, statutory bonus, 26-week maternity benefit, Shops & Establishments and OSH obligations
• Exits: Due process and domestic inquiry; retrenchment under the ID Act 1947 / IR Code 2020; the prior-approval threshold raised from 100 to 300 workers
• Disputes: Conciliation, Labour Court and Industrial Tribunal; employment injunctions; grievance redressal committees for 20+ workers
• Separate pages: POSH compliance; employment in mergers and acquisitions

1. The framework — Indian employment law and the Labour Codes transition

Employment in India is governed by a layered body of central and state law, and that body has just been through its largest reform in decades. With effect from 21 November 2025, the four Labour Codes came into force, rationalising 29 earlier central enactments into four consolidated statutes: the Code on Wages 2019 (wages, minimum wages, bonus and equal remuneration), the Code on Social Security 2020 (provident fund, ESI, gratuity, maternity benefit), the Occupational Safety, Health and Working Conditions Code 2020 (factories, contract labour, working conditions) and the Industrial Relations Code 2020 (trade unions, standing orders, retrenchment and disputes).

The Codes are now the primary framework, but the transition is not complete. Labour is a subject on which both the central government and the states legislate, so each Code requires Central Rules and a matching set of State Rules to become fully operational, and that notification is happening progressively rather than all at once — draft Central Rules were gazetted at the end of 2025 and several states are still to follow. Until the Rules under a given Code are notified in a given state, transitional provisions preserve the earlier Acts and their rules. The practical position for an employer is therefore a new primary statute sitting over a body of legacy law that continues to apply in places. Throughout this guide we cite the Code provision together with the legacy Act it replaces, because for any specific question the operative detail may still come from the older instrument depending on the state and sector. The current Rules position should be confirmed for the relevant state at the time of use.

A second threshold point is who the law protects. Much of the protective regime — standing orders, retrenchment protection, access to the Labour Court — applies to a “workman” (now “worker” under the IR Code), a category defined by the nature of duties rather than job title, and generally excluding those in primarily managerial or supervisory roles above a wage threshold. Managerial and senior employees are largely governed by their contract and by general civil law rather than the industrial-relations machinery. Establishing whether a given employee is a “worker” is often the first analytical step in an exit or dispute.

2. Employment contracts and documentation

India has historically had no single statute compelling a written employment contract, but written documentation is now both expected and, for many employers, effectively required — the OSH Code obliges employers to issue appointment letters, and clear documentation is the foundation of every later compliance and dispute position. A standard suite runs from the offer and appointment letter (designation, compensation structure, working hours, leave, notice and place of work) through to detailed policies. For senior and executive hires, the package is more elaborate: long-term incentive and ESOP arrangements (for listed companies, within the SEBI Share Based Employee Benefits and Sweat Equity Regulations 2021), garden-leave and notice provisions, and change-of-control protections.

The Codes formalise fixed-term employment at national level. Under the IR Code a fixed-term worker must receive the same wages and benefits as a permanent worker doing similar work, and is entitled to gratuity on a pro-rata basis even without completing the usual five years of continuous service — a meaningful change for project-based and contract hiring. Contractor and secondment arrangements need particular care: engaging workers through a contractor brings the contract-labour regime (now within the OSH Code) into play, and secondment of staff into India by a foreign group carries exchange-control (FEMA) and tax consequences, including the risk that the arrangement is characterised as a taxable supply of manpower or creates a permanent establishment. Foreign employers adapting a group template for India should expect to localise it substantially — Indian statutory entitlements, the wage definition discussed below, and the restrictive-covenant position all differ from common-law norms.

3. Restrictive covenants, confidentiality and intellectual property

This is the area where Indian law most often surprises foreign employers. Under section 27 of the Indian Contract Act 1872, an agreement that restrains a person from exercising a lawful profession, trade or business is void to that extent. The settled position is that a post-employment non-compete is generally unenforceable in India: a clause preventing a former employee from joining a competitor or setting up in competition after the employment ends will usually not be enforced, however carefully drafted. Restraints that operate during the employment (an exclusive-service obligation) stand on much firmer ground, and the courts will protect an employer’s legitimate interests through other routes.

What tends to survive, therefore, is not the non-compete but its alternatives: confidentiality and trade-secret protection (enforceable during and after employment, including by injunction to prevent misuse of genuinely confidential information), assignment of intellectual property created in the course of employment, garden leave during a notice period (the employee remains employed and bound), and — more variably — non-solicitation of clients and staff, which courts treat with more caution than confidentiality. The drafting lesson is to secure the employer’s position through robust confidentiality, IP-assignment and garden-leave provisions rather than a blanket non-compete, and to calibrate any non-solicit narrowly. IP-assignment clauses should be express and should address both the statutory baseline and the specific categories of work product, since the default position under copyright and patent law does not capture every situation.

4. Statutory compliance — wages, bonus and social security

The Code on Wages 2019 introduces a single, uniform definition of “wages” across the wage, bonus, provident-fund and gratuity regimes, and with it the rule that excluded allowances cannot exceed 50% of total remuneration — so that basic wages must be at least half of the package. Because provident fund, gratuity and bonus are all computed on this “wages” base, many employers have had to restructure compensation to comply, typically increasing the basic-pay component, which raises both statutory contributions and cost-to-company. The Code also provides for a statutory floor wage set by the central government, beneath which state minimum wages cannot fall, and continues the discipline of timely payment of wages.

The social-security obligations — now consolidated under the Code on Social Security 2020 — remain substantial. Provident fund (under the framework of the EPF & Miscellaneous Provisions Act 1952) applies to establishments above the prescribed headcount, with matched employer and employee contributions; Employees’ State Insurance (ESI Act 1948) applies to covered establishments for employees below a wage ceiling; and gratuity (Payment of Gratuity Act 1972) is payable at 15 days’ wages for each completed year of service on exit after five years’ continuous service, subject to the statutory cap — with the pro-rata entitlement for fixed-term workers noted above. Statutory bonus (Payment of Bonus Act 1965) is payable to eligible employees below a wage threshold at between 8.33% and 20% of the bonus-base. The Maternity Benefit Act 1961 provides 26 weeks of paid maternity leave for the first two children (less for subsequent children and for adoptive or commissioning mothers), nursing breaks, and a creche facility for establishments with 50 or more employees. Equal-remuneration obligations, formerly under the Equal Remuneration Act 1976, now sit within the Code on Wages. Several of these thresholds and ceilings are periodically revised, so current figures should be confirmed.

5. Statutory compliance — establishments, safety and returns

Beyond wages and social security, employers must navigate establishment-level compliance that is heavily state-specific. Every commercial workplace must register under the relevant state’s Shops and Establishments Act, which governs working hours, weekly closure, leave, holidays and record-keeping — and a multi-state employer needs a separate registration in each state, each with its own rules and returns. Workplaces that are factories fall under the Factories Act 1948 (premises using power with 10 or more workers, or 20 or more without power), with obligations on safety, working conditions, weekly hours and hazardous processes; this regime is being subsumed into the OSH Code 2020, which also introduces national obligations such as mandatory appointment letters and, for certain categories, free annual health examinations.

Compliance is not a one-time exercise: employers must file periodic statutory returns — monthly, quarterly and annual depending on the obligation — across provident fund, ESI, professional tax, the Shops & Establishments registration and (where applicable) the factory regime, with penalties for late or missed filings. The Codes contemplate a move toward consolidated registration, single returns and digital filing, which should reduce the administrative load over time, but until the Rules are fully notified the existing portals and cadences continue. For a foreign employer setting up in India, the practical sequence is to incorporate or register the entity, obtain EPFO and ESIC registration, put a FEMA-compliant payroll and employment-visa structure in place, and only then begin hiring — sequencing that is best mapped at the outset rather than retrofitted.

6. Termination, discipline and retrenchment

Ending employment in India is governed by how the employee is classified and why the employment is ending. For a “workman”/”worker”, the protective machinery of the IR Code (and, in transition, the Industrial Disputes Act 1947) applies; for managerial and senior staff, the contract and general civil law govern, subject to the restraint-of-trade position above.

Termination for cause — misconduct or, in some cases, unsatisfactory performance — generally requires due process. Where the matter is disciplinary, the established route is a domestic inquiry: a written charge sheet, an opportunity to respond, a fair hearing before an inquiry officer, and a decision supported by evidence, all observing the principles of natural justice. The standards of conduct and procedure are often set by the establishment’s standing orders (historically under the Industrial Employment (Standing Orders) Act 1946, now within the IR Code, with the threshold for mandatory standing orders raised to 300 workers). A termination that skips due process is the most common reason employers lose wrongful-termination claims.

Retrenchment — termination for economic or operational reasons rather than fault — has its own protective code. Under section 25-F of the ID Act 1947 (carried into the IR Code), a covered workman with at least a year’s continuous service is entitled to one month’s notice or pay in lieu and retrenchment compensation of 15 days’ average pay for each completed year of service, with proper notice to the authorities. A significant reform is the threshold for prior government permission: establishments above a stated size previously needed government approval before retrenchment, lay-off or closure under section 25-N/25-O, and the IR Code has raised that threshold from 100 to 300 workers (with states able to vary it), giving larger employers more flexibility while preserving the protections for smaller-establishment workers. The order of selection (typically “last in, first out” within a category, absent good reason) and re-employment preferences also continue to apply.

7. Separation, settlement and gratuity

Many exits are best handled not through contested termination but through a negotiated separation. A well-drafted separation agreement records the agreed exit terms, settles outstanding entitlements, and secures a mutual release of claims — and, for senior exits, can package garden leave, accelerated or preserved incentive vesting, an agreed announcement, and enforceable confidentiality and (narrowly drawn) non-solicitation undertakings consistent with section 27. The discipline of a clean full and final settlement matters: the employer should account for and pay all statutory dues — salary to the last working day, leave encashment, gratuity where the service condition is met, any statutory bonus, and provident-fund settlement — and obtain a clear acknowledgement, because unpaid statutory dues are a frequent source of later claims. Gratuity in particular is a statutory entitlement that cannot be contracted away, and is payable on exit (including resignation and, on a pro-rata basis, to fixed-term workers) once the qualifying conditions are met.

8. Disputes, investigations and injunctions

When an exit or a workplace grievance escalates, India’s dispute machinery comes into play. For an industrial dispute involving a worker, the typical path begins with conciliation before a conciliation officer; if conciliation fails, the matter may be adjudicated by a Labour Court or Industrial Tribunal under the IR Code (in transition, the ID Act), whose awards are enforceable and reviewable by the High Court under Article 226/227 of the Constitution. Timelines can be long and outcomes are fact-sensitive, which is one reason negotiated settlements are common. The IR Code also requires establishments with 20 or more workers to constitute a Grievance Redressal Committee as an internal first stage.

Two further tools matter in practice. Internal investigations — into fraud, data theft, conflicts of interest or policy breaches (other than sexual harassment, which follows the separate POSH process) — allow an employer to establish facts, preserve evidence and support any subsequent disciplinary or legal action; they should be conducted carefully so that the findings can withstand later scrutiny. And employment injunctions are available to restrain genuine wrongs: a court may injunct the misuse of confidential information or trade secrets, enforce a garden-leave obligation, or restrain breach of a valid in-term restraint — but, consistent with section 27, will not enforce a bare post-employment non-compete. Framing an injunction application around confidentiality and property rather than competition is usually what makes it viable.

9. Foreign employers and the cross-border dimension

For foreign businesses and India-facing groups, several recurring situations bring these threads together. A foreign group hiring into an Indian subsidiary needs a localised contract suite, EPFO/ESIC registration and a FEMA-compliant payroll before onboarding. A group seconding executives into India must structure the secondment with care, given the exchange-control, tax and permanent-establishment exposure that secondment arrangements attract. A multinational running a multi-state workforce faces a patchwork of Shops & Establishments registrations and state Rules under the Codes, and benefits from a single coordinated compliance map rather than state-by-state improvisation. And any group applying a global HR template to India should expect to rework the restrictive covenants, the wage structure (to meet the 50% basic-pay rule) and the statutory-benefit clauses so that the document is enforceable and compliant rather than merely translated.

Two related India employment matters are dealt with separately: POSH compliance — the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act 2013, including Internal Committee constitution, training and the annual return — has its own page; and employment in mergers and acquisitions — transfer of undertakings, employee due diligence, and transaction-triggered terminations — is covered on the M&A employment page.

Detailed questions are answered in our India employment FAQs, covering employment contracts, statutory compliance, workforce exits and termination, and workplace disputes.

Key points at a glance

Frequently asked questions