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Business Laws

Employment Laws

Employment Laws


India is a country having diverse religions and cultures. It becomes necessary to harmonize industrial relations in the country with respect to such diversity. India's trade performance during 2003-04 was influenced by a number of factors which include productivity changes in the manufacturing sector, recovery of global economy and world trade, continued trade promotion and trade facilitation efforts of the government, and an appreciating Indian Rupee against the US dollar. Hence India has a wide variety of labour laws which are essential for the smooth functioning of industrial relations in the country.
In the year 2003-04, the Indian economy appeared to be in a resilient mode in terms of growth, inflation and balance of payment. Real gross domestic product is estimated to have grown by 8.1%. As per the Monthly Economic Report, of the Ministry of Finance, Government of India, dated October 2004, the overall industrial growth during the period April-August 2004 stood at 7.9% as compared to 5.9% during the period April-August 2003; the growth in mining, manufacturing and electricity during the period April-August 2004 was 5.2%, 8.2% and 7.7% as compared to 4.1%, 6.5% and 2.5% respectively during the corresponding period in the previous year. The data available from the 945 employment exchanges in the country indicates that in February 2004, the number of job seekers registered with the employment exchanges was 4.11 crore, out of which 70% were educated (10th standard and above). The number of women job seekers registered was 1.07 crore (26% of the total number of job seekers).
Women constitute a significant proportion of the labour force. Female participation in the workforce, however, varies across rural-urban areas. According to the 58th round survey of National Sample Survey Organization (NSSO), (carried out from July to December 2004) , the female workforce participation rate in rural areas declined to 281 per 1000 compared to 299 during the period July to December 1999-2000.
Therefore it could be seen that there exists a huge workforce in India, large amount of which is in the unorganized sector and therefore needs to be integrated alongwith the organized sector.

Compliance with labour laws and standing orders

While conforming to the essentials of the laws of contracts, a contract of employment must adhere also to the provisions of labour laws and the rules contained under the Standing Orders of the establishment.
The Minimum Wages Act 1948 has classified workers as:

  • unskilled;

  • semi-skilled;

  • skilled; and

  • highly skilled.

Labour Laws

The Industrial Employment (Standing Orders) Act 1946

Classification should be made as per the Standing Orders. Where there are no Standing Orders or service rules applicable to employees, then classification can be made either based on trade tests or any other test which is reasonable and in accordance with the Model Standing Orders. Generally, the workers are classified as

  • apprentice/trainee;

  • casual;

  • temporary;

  • badli/substitute;

  • probationer;

  • permanent; and

  • fixed period employees

Factories Act of 1948

The main objectives of the Factories Act are

  • to regulate working conditions in factories;

  • to ensure that basic minimum requirements for the safety, health and welfare of the factory workers are provided; and

  • to regulate of working hours, leave, holidays, overtime and employment of children, women and young persons.

This act applies to all factories including Government factories. A "factory" as defined in the Act means any premises including the precincts :

  • where ten or more workers are employed on any day of the preceding 12 months and a manufacturing process is carried on with the aid of electric power; and

  • where 20 or more workers are employed on any day of the preceding 12 months and a manufacturing process is carried on without the aid of electric power.

The obligations of the employers are, practically speaking, the rights of the employees to claim the minimum health and safety measures and welfare amenities as provided for in the Act, observance of working hours, holidays, overtime, annual leave and special protection against hazardous processes and dangerous substances, to obtain information relating to workers' health and safety at work from the occupier, to get trained by or through the occupier, in respect of workers' health and safety, to represent to the Inspector directly or though a representative in the matter of inadequate provision for protection of health or safety in the factory, not to pay any fee or charge for the facilities or appliances provided by the employer and to claim wages for or in lieu of allowable leave under the provisions of the Payment of Wages Act.

Payment of Wages Act 1936

Under the Payment of Wages Act 1936 the following are the common obligations of the employer :

  • every employer is primarily responsible for payment of wages to employees. The employer should fix the wage period (which may be per day, per week or per month) but in no case it should exceed one month;

  • every employer should make timely payment of wages. If the employment of any person is being terminated, those wages should be paid within two days of the date of termination; and

  • the employer should pay the wages in cash, ie in current coins or currency notes. However wages may also be paid either by cheque or by crediting in employee's bank account after obtaining written consent.

Minimum Wages Act 1948

The employer is bound to pay to every employee engaged by him wages at a rate not less than the minimum rates of wages fixed for that class of employees without making any deduction (except as permitted under the Payment of Wages Act). The employees are entitled to the minimum wages at all times and under all circumstances.

Workmen's Compensation Act 1923

The empoyer must pay compensation for an accident suffered by an employee during the course of employment and in accordance with the Act. The employer must submit a statement to the Commissioner (within 30 days of receiving the notice) giving the circumstances attending the death of a worker as result of an accident and indicating whether the employer is liable to deposit any compensation for the same. It should also submit an accident report to the Commissioner within seven days of the accident.

Employees Provident Funds and Miscellaneous Provisions Act 1952

The employer must pay its and the employees' contributions and administrative charges as required under the Act and schemes. Financial difficulty is no excuse for non-payment. The contribution has to be made irrespective of the fact whether wages are paid to the employee due to lockout, strike, or other related reason. Employer must furnish the necessary returns to the Provident Funds Commissioner.

Other Related Issues


In industrial law, punishments other than dismissal which an employer can impose (depending upon the gravity of misconduct) are recommended as a measure of disciplinary action on a worker. These alternatives can be in the form of :

  • warning;

  • fine;

  • withholding of increment;

  • demotion;

  • suspension; and

  • discharge.

Courts and Tribunals

Some important points to note regarding the courts and tribunals :

  • The first stage of review of the employer's disciplinary action against a worker is by the Labour Court or Industrial Tribunal appointed under the Act.

  • Unlike ordinary civil courts, the Industrial Tribunal's jurisdiction does not commence on the basis of any party approaching it directly but commences on the basis of reference made by the appropriate Government under the Act.

  • Labour Tribunals are expected to hold proceedings expeditiously and to submit the award to the appropriate Government within the specified time, if any.

  • The award requires publication within a 30 day period from the date of its receipt by the appropriate Government.

  • An award of the Industrial Tribunal ordinarily becomes enforceable on the expiry of 30 days from the date of its publication.

Duties Of Employers To Third Parties

Liability to government and revenue authorities

The State is an integral component of industrial relations. The four main tenets of the Government's labour policy can be summed up as :

  • to exercise political control over the industrial movement without jeopardizing the legal rights of entrepreneurs or employees;

  • to maintain industrial peace;

  • to encourage and recognise trade unions and employers' federations for collective bargaining; and

  • to ensure that individual rights should not be infringed.

(This is done through administrative and executive agencies. The employers are under obligation to Government for the peaceful observance of the above functions).

Employers are liable to pay taxes, contributions and assistance to various revenue authorities created by statute, such as income tax, central excise and sales tax under the central sales tax and state government sales tax laws. Employers must make timely deposits of contributions to the Provident Fund and the ESI authorities (under the law in force) and must file timely returns to respective authorities. Employers are automatically governed by the intention of the various legislation.

Obligations Of The Parties

Under various labour legislation, both the employer and employee have various statutory obligations to each other. Apart from the statutory obligations, there are certain principles peculiar to the contract of employment: cooperation, care and fidelity which are at the root of the employment relationship.
Employer and employee must cooperate to facilitate the performance of their mutual obligations under the contract of employment. The important general obligations of the employers and employees are discussed in the following paragraphs.

Employers' obligations to the employee
The employer's obligations to the employees are:

  • to provide each employee a copy of the service rules and a copy of Standing Orders, (if any).

  • to provide each employee a copy of the appointment letter or employment contract.

  • to pay the wages/salary on time.

  • to communicate any change in terms of service in writing to the employee.

  • to pay bonuses to eligible employees, under the provisions of the Bonus Act of 1965.

  • to deposit its contribution to the provident fund and the ESI along with the contributions of the employee.

  • to ensure security of staff and tools while on duty.

  • to provide tools that are functional.

  • to comply with the provisions of the employment contract and Standing Orders if the employer wishes to terminate the services of the employee.

  • to indemnify employees against expenses and liabilities incurred in the course of employment.

Employees' obligations to the employer
The employee's obligations to the employer are:

  • to perform the job peacefully and carefully.

  • to obey the orders of superiors.

  • to safeguard the assets of the Company, which are in possession.

  • to account for all monies and property received in the course of employment.

  • to inform and take permission for his future leave, so that the employer can make alternate arrangements.

  • to observe the employment contract or service rules applicable.

  • to give notice to the employer of an intention to leave the organisation as per the employment contract or service rules.

Terms implied by legislation and the courts.

Breach Of Contract

Avenues Available To Employer

When a worker/employee either individually or collectively is found guilty of any violation of the employment contract, the employer can take the following actions :

  • disciplinary action;

  • forced leave;

  • transfer of job;

  • demotion;

  • termination;

  • dismissal;

  • suspension; and

  • the right to claim compensation.

Disciplinary action

The employer may initiate disciplinary action against the worker by serving a show cause notice. The worker is required to reply to the notice within stipulated time with relevant facts and proof, failing which rigorous action can be taken.

Forced leave

The employer can insist and can grant leave to the worker as a matter of warning. The intention of this strategy is a worker will not be allowed to join with other workers for the time being.

Transfer of job

As a matter of punishment for violation of employment contract, the employer can transfer a worker to another department, unit, or place of work, where it will be inconvenient for the worker to work, so that after some time the worker leaves the organisation on his/her own.


If a worker is found guilty of a violation of the employment contract and the employer does not want to take hard action, the employer may demote the worker, or may start to keep records of performance in a confidential report for the future purpose of deciding further promotions, increments and other benefits.


The biggest avenue available to an employer is termination of the services of an employee. Termination can be done in accordance with the provisions of Industrial Disputes Act. Where the Standing Orders are in operation in the concerned establishment, termination shall be in accordance with such Standing Orders. If an appointment letter/contract of employment contains provisions relating to termination, it must be observed strictly.


Dismissal occurs when the employer strikes the name of the employee from the rolls for the commission of a 'serious misconduct' in violation of the contract. The employer has to observe the conditions precedent to dismissal.


The employer can suspend any worker during domestic enquiry conducted against such an employee for an alleged violation. However, the employee has to be given subsistence allowance during such suspension until the domestic enquiry ends. If the enquiry finds the worker guilty, employment can be terminated according to the seriousness of the 'misconduct'.

Right to claim compensation

Under the Indian Contract Act of 1872, when a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused (which naturally arose in the usual course of things). For example, when a worker has agreed not to divulge trade secrets or information relating to employer's business to third party and then subsequently breaches this secrecy clause, the employer is entitled to seek damages from the employee.

Rights available under the Industrial Disputes Act of 1947

The employer can raise a dispute and can approach the appropriate authorities established under the Act for the settlement of the dispute. It can take actions in accordance with the directions given by such authorities. In dealing with illegal strikes by the employees, the employer will be liable as a principal offender under the Penal Code, if "he assists, abets, aids, enables another in the commission of the offence or procures that other to commit the offence".

Termination Provisions & Notice

Termination means the end of the employment service. It can be initiated by either party. After termination, the employer/employee relationship comes to an end. Certain provisions must be followed in respect of termination. Generally termination provisions are mentioned in the contract of employment or in the Standing Orders applicable to the industry.

Reasons For Termination
Employer-initiated termination

Employer-initiated termination can occur for the reasons :

  • fixed term/contract coming to an end;

  • unsatisfactory probation;

  • termination by notice;

  • medical reasons;

  • breach of contract;

  • dismissal;

  • retirement; and

  • retrenchment.

Employee-initiated termination

Employee-initiated termination can occur in the following instances :

  • resignation during probation;

  • resignation with notice;

  • breach of contract; and

  • medical reasons.

Termination provisions

Notice should be in writing. If an employee intends to leave the service, the employee should give notice of this intention in writing to the employer. If the employee wishes, the employer has the right to accept the resignation with immediate effect (subject to payment in lieu of time worked).

The notice provisions for termination

As provided specifically in the contract of service, the employer may terminate the services of an employee after giving notice in writing or on payment of wages in lieu. The employer reserves the right to require an employee to work and not to relieve the employee during the notice period.
For temporaries, casuals and probationers, no notice is required if the service is terminated before the expiry of the period, subject to the provisions of the statutes.
There is no provision in law specifying the number of days of notice to be given to an employee while terminating services. Normal practice is that one-month notice is given for junior-level employees, with up to three months for senior level employees.

The Shops & Establishment Act

The Shops and Establishment Act is a state legislation act and each state has framed its own rules for the Act. The object of this Act is to provide statutory obligation and rights to employees and employers in the unauthorized sector of employment, i.e., shops and establishments. This Act is applicable to all persons employed in an establishment with or without wages, except the members of the employers' family.

This Act lays down the following rules:

  • Working hours per day and week.

  • Guidelines for spread-over, rest interval, opening and closing hours, closed days, national and religious holidays, overtime work.

  • Employment of children, young persons and women.

  • Rules for annual leave, maternity leave, sickness and casual leave, etc.

  • Rules for employment and termination of service.

Under this Act, registration of shop/establishment is necessary within thirty days of commencement of work. Fifteen days of notice is required to be served before the closing of the establishment State government can exempt, either permanently or for specified period, any establishments from all or any provisions of this Act.

Future Trends

Whistleblower protection

Effective from April 1, 2005, the Securities and Exchange Board of India (SEBI) directed Indian stock exchanges to implement a new set of reporting requirements, commonly known as Clause 49, for listed companies. Included in Clause 49 is a non mandatory direction for companies to establish an internal whistleblower policy. Corporate whistleblower policies would establish a mechanism for employees to report to management concerns about unethical behaviour, actual or suspected fraud, or violations of the company's code of conduct or ethics policy. The whistleblower mechanism also could provide for direct access to the chairperson of the company audit committee in exceptional cases, as well as safeguards for employees who availed themselves of the whistleblower procedures.

National Rural Employment Guarantee Act 2005

The aforementioned Act was notified on September 7, 2005 and the scheme launched on February 2, 2006. The objective of the Act is to enhance the livelihood security of the people in rural areas by generating wage employment through works that develop the infrastructure base of that area. The choice of work suggested addresses the causes of chronic poverty like drought, deforestation, and soil erosion. The objective behind suggesting certain key activities/works is to rejuvenate the natural resources of the area to stimulate the local economy enabling those who work for wage employment in creating an asset to take advantage of it to engage in productive ways of self employment, and augment their income. Section 4 of the Act provides that within six months from the date of commencement of the Act, every state government shall, by notification, make a scheme for providing not less than 100 days of guaranteed employment in a financial year to every household in the rural areas covered under the scheme and whose adult members volunteer to do unskilled manual work subject to the conditions laid down in the Act.

Labour Participation in Management

But there is a silver lining as well for the workers in the country which could be seen from the inclusion in the Board of Kanan Devan Hill Plantations Company of Ms. A Chandra, a worker in the largest participatory management tea company in the world. Seventeen years of dedicated service has got her into the Board of the Rs.105 crore company. The lady still earns Rs.82.65 for a day's work and still lives in the worker's lane with the rest of the workers.

Employee Stock Option Scheme

Employee Stock Option Schemes (ESOPs) are a method of employee compensation. They can be useful if the firm is growing rapidly and seriously wishes to retain a good and efficient work force.



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