Termination of Employment


Many employers may find themselves in an obligatory position to terminate employees. Employee termination is a sensitive issue to be handled by the employer. Handling employees amidst complex & superimposing labour laws in India is quite a challenge.

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Termination of Employment

In times of a pandemic (COVID-19), with a tumbling economy and a menial number of businesses and services functioning, many employers are struggling to manage the employee cost. Lots of deliberations are going on in the discussion rooms on how to identify and manage the optimum workforce, to keep the company functioning. Some companies are having no options but to resort to employee lay-offs and reduction of monthly payments, in spite of the recent MHA advisories against these measures.

Why not have a look on some of the laws related to termination of employment that you must be aware of as an employer. Knowledge of these will help you to be on top of the legal, employment, and labour jurisprudence in India.

Indian Laws related to employee termination:

The Payment of Wages (PoW) Act, 1936:

This Act specifies certain responsibilities of employers towards their workers who receive wages at the workplace. The recent MHA directive regarding employee terminations during the COVID-19 outbreak were based on this Act and its definition of ‘wage’. The PoW Act defines wages and regulates wage payments to certain groups of employed persons. As per the Act, employers are required to pay wages only to the following groups of employees -

  • Workmen employed in an industrial establishment, railways, factories and other such establishment specified in the Act
  • Employees of shops & establishment who are not exempted by the SCE Act of the State concerned
  • Employees receiving an average monthly wage up to Rs 24,000 ( vide a notification to revise the salary threshold, dated August 28,2017)

Industrial Dispute Act, 1947:

This is a federal law that spreads to all of the country's mainland and deals with industrial disputes between employer and employee and checks over rights infringement.

Key features include:

  • Payment of compensation during retrenchment.
  • Procedural guidelines during mass retrenchment of industrial closure.
  • Trade union regulation and unfair conduct.

Payment of Gratuity Act, 1972:

Payment of gratuity is obligatory for employees being terminated who have been in service of the establishment continuously for more than 5 years.

  • The gratuity is remunerated as wages for 15 days of service for every year spent in service.
  • The maximum remuneration can be up to 20, 00,000 INR above which it is liable to tax.
  • In case of death or incapacitation of an employee, 5 years of service is not obligatory for payment of gratuity.

Payment of Bonus Act, 1965:

Annual bonuses are a mandatory part of industry guidelines and have to be settled during the termination of an employee.

  • It is pertinent to companies with more than twenty employees or factories with labour count more than 10.
  • The minimum payable bonus is 8.33% of the annual wage of the employee and a maximum payable bonus is 20% of the annual wages.
  • The company is indebted to pay the bonuses to employees earning 21,000 INR or less per month.

Delhi Shops and Establishments Act, 1954:

This law has a wide clasp on guidelines regarding employer-employee relationships including, recruitment, wages, working hours, holidays, termination, etc.

The establishment is answerable to authorities regarding the circumstances under which an employee was terminated.

Firing an Employee:

Industrial employers must be vigilant as, unlike the western countries the concept of ‘Hire and Fire’ is completely obsolete in India. An employee in India cannot be terminated without appropriate elucidations. The reasons may include a frequent absence from labour, misdemeanour, disablement, or fraud.

In case of retrenchment, the industries are permitted to avail the 'last in - first out' notion.

The company is liable to produce evidence for bankruptcy, insolvency, or any other binding reason in case of a mass termination.

The establishment must be thoroughly aware of the terms and conditions that were signed on the employment agreement during the recruitment and must abide by the given assurances to avoid any legal hindrance.

Consulting a legal advisor is a good decision to make sure the meeting meets all the demands of the labour laws about termination.

The company is liable to follow the HR policies established by them in the company’s memorandum.

Procedure to be followed:

The constitutional structure does not mention a standard procedure for termination; therefore the companies are advised to follow the guidelines on the signed labour contract and be cautious of not causing any infringement to the labour laws. Conventional procedures in accordance with the laws are as follows:

  • A termination notice must be served to the employee before 30 – 90 days.
  • In the case of factories, mines, or other heavy labour establishments with more than 100 workmen, government approval must be sanctioned and in other cases a government notification is sufficient.
  • A justifiable reason must be submitted for the cause of termination.
  • Gratuity and Bonus Payments must be remunerated.
  • If the employee being terminated has toiled in the establishment for more than two years and the reason for termination is redundancy then a severance package must be calculated and remunerated.
  • In case of termination due to misdemeanour, fraud, harassment, etc., the company is not liable to pay a gratuity or severance pay.
  • Ensure with the HR that the termination gratifies the labour contract as well.
  • Conducting an Exit Interview is a good gesture and ensures better morale of the employees
  • Hire a legal advisor if necessary to avoid any legal impediments.

Certain safeguards to consider while terminating employees

Before going ahead with employee termination, an employer should consider taking the below-mentioned safeguards-

  • He should ensure compliance with the provisions of termination prescribed in the employment contracts, on a case to case basis.
  • He should ensure compliance with the SCE Act of the particular jurisdiction where the employee is engaged or located.
  • He should issue a carefully drafted termination letter to the employee. Else, the employee may contest that he is not a ‘wage’ earner and hence, cannot be terminated.
  • The employee may register a complaint with the Government and seek relief against the action of the employer. In conditions such as the present COVID-19 pandemic, the Govt. may adopt a sympathetic view in favour of the employee. The labour department may overstep its jurisdiction and may eventually direct the employer to pay wages to the employee on compassionate grounds. In such a situation, we recommend the employer should pay the employee his dues ‘under protest’, with a disclaimer, stating the employer’s right to recover the same, after the situation improves.
  • The employer should create proper documentation, should such a termination end up in a Court on a later date.

Mass termination and Unemployment has been a part of the world economy since the depression in 1929. Modern Era is not immune to such situations as in instances such as the Wall Street market crash in 2009 and sometimes even due to pandemics as of in 2020.

However, the industries must make sure of the justification of all labour laws and in case of termination to keep their morale alive.

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