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Employment Law Issues in India

India’s Labour Ministry has proposed reforms that are aimed to significantly improve India’s labour compliance. Khaitan & Co examines the issues.

What are the common employment law issues that crop up in India?

Common employment laws issues in India can be divided into two areas: the issues faced by employers and the ones faced by employees, though some of these issues are common to both. We have summarized key employment laws issues which are most common below.

Issues faced by employer:

(i) Employees joining competing organisations is a common problem faced by employers. As per the Indian Contract Act 1872 (“Contract Act”), non-competition restrictions are deemed restraint in trade and therefore unenforceable post termination of employment irrespective of the covenants contained in the employment agreements. Further, the Contract Act does not recognize the concept of ‘reasonable restrictions’. As a result, even reasonable non-competition covenants are unenforceable post termination of the employment.

(ii) Under the Industrial Disputes Act 1947 (“ID Act”), in case of termination of workmen by organisations, the organisations are required to follow the last-in first out (“LIFO”) rule. It is important to note that unless an employee is actually performing managerial or supervisory duties, such employee will be deemed a workman under the ID Act. Therefore, organisations are required to record the reasons in writing in case they wish to deviate from the LIFO rule. While the intention behind the LIFO rule is justifiable, it may be difficult for modern businesses to follow this rule where employment is purely merit-based.

(iii) Other issues commonly faced by employers include challenges in enforcing recovery of training costs and garden leave clauses post termination of employment, as such clauses are again deemed as restraint in trade under the Contract Act.

(iv) At present, labour laws like the Factories Act 1948 (“Factories Act”) and the shop and establishment laws of different states prescribe working hours, number of overtime hours, etc. This becomes a challenge for employers, where employers have very limited flexibility in managing their workforce to achieve greater efficiency.

By Anshul Prakash (partner), Vinay Joy (associate partner), and Parag Bhide (senior associate)
By Anshul Prakash (partner), Vinay Joy (associate partner), and Parag Bhide (senior associate)

Issues faced by employees:

(i) It is common for employees to join similar sector industries which may be competing with their previous employer. As mentioned above, although the non-compete clauses are unenforceable post termination of employment, employees usually receive legal notices from their previous employers regarding alleged violation of non-compete clauses and therefore, need to spend their resources in such legal battles.

(ii) It is common for employees to receive legal notices from their past employers regarding alleged breach of provisions regarding confidential information. Employees should be extremely careful and ensure that they possess no confidential information of the previous employer and ensure to keep such information highly confidential. Also, necessary confirmations from the employer should be obtained in this regard.

Other issues:

Other issues include multiple laws and regulations governing labour matters. Under the Constitution of India, labour falls in the Concurrent List giving power to both the Central and the respective State Government to legislate on such items, with the residual law-making powers vesting with the Centre. This has resulted in a plethora of Central and State laws related to wages, employment, industrial relations, social security, etc. Moreover, certain labour laws are industry specific (for example - the Sales Promotion Employees (Condition of Service) Act 1976). This results in several compliances and regulatory requirements for the employers. As far as employees are concerned, they need to keep themselves abreast of reporting and other requirements prescribed for employees under various labour laws.

What sectors in particular face employment law challenges?

Sectors like IT and projects are prone to various challenges under Indian labour laws, particularly in more difficult times where such companies may need to reduce their excess workforce. However, under the abovementioned LIFO rule, the requirement of paying retrenchment compensation may become a bottleneck in such a process.

Manufacturing concerns and large corporates usually have trade unions, which are usually backed by political parties and are seldom interested in protection of interests of workers.

Companies that have a presence in several states have the herculean task of complying with several central laws as well as laws of respective states.

What are the most important recent changes in labour law regulations?

The Central Government has been pursuing a pro-reform agenda since they took over three years ago and the overall trend has been to simplify labour regulations. The Ministry of Labour and Employment of the Government of India (“Ministry of Labour”) has recently conveyed that the aim is to first concentrate on reforms that are focused on employee welfare and benefits. We have summarized key amendments/proposals for labour law reforms at the central level, below.

(i) Maternity Benefit (Amendment) Act 2017 (“MB Amendment Act”): This amends the Maternity Benefits Act 1961 (“MB Act”) and became effective from 1 April 2017. Salient features of the MB Amendment Act include increased maternity leave from 12 weeks to 26 weeks, availability of maternity leave of 12 weeks to adoptive and commissioning mothers, introduction of work from home options and requirement to provide crèche facilities in case of organisations employing 50 or more employees.

(ii) Special Benefits to Start-ups: The Ministry of Labour vide its notification dated 12 July 2016 has exempted all eligible start-up companies from labour inspections under 9 central legislations, namely, the ID Act, Trade Unions Act 1926 (“TU Act”), Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act 1996 (“BOCW Act”), Industrial Employment (Standing Orders) Act 1946 (“IESO Act”), Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act 1979 (“ISMW Act”), Payment of Gratuity Act 1972, Contract Labour (Regulation and Abolition) Act 1970 (“CLRA Act”), Employees’ Provident Funds and Miscellaneous Provisions Act 1952 and the Employees’ State Insurance Act 1948. This exemption has been granted for a period of 3 years and will be conditional upon the organisations providing self-compliance reports. Inspections under the specified legislations will be conducted only in case of credible and verifiable complaints against the organisation.

(iii) Combined Registers under various labour laws: On 21 February 2017, the Ministry of Labour notified the Ease of Compliance to Maintain Registers under various Specified Labour Laws Rules 2017 (“Ease of Compliance Rules”). The Ease of Compliance Rules enable an employer to maintain 5 types of combined registers under the following labour laws: (i) BOCW Act; (ii) CLRA Act; (iii) Equal Remuneration Act 1976; (iv) ISMW Act; (v) Mines Act 1952; (vi) Minimum Wages Act 1948; (vii) Payment of Wages Act 1936; (viii) Sales Promotion Employees (Conditions of Service) Act 1976; and (ix) Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act 1955 (collectively “Specified Labour Laws”). The 5 types of combined registers required to be maintained under the Specified Labour Laws, include: (i) Employee Register; (ii) Wage Register; (iii) Register of Loan / Recoveries; (iv) Attendance Register; and (v) Register of Rest Days / Leave account of employees / Leave with Wages.

(iv) Payment of Bonus Amendment Act: The Payment of Bonus Act 1965 (“Bonus Act”) which aims at ensuring a payment of bonus based on profit or productivity to workers in certain establishments. The Payment of Bonus (Amendment) Act 2015 (“Bonus Amendment Act”) sought to amend bonus entitlements prescribed under the Bonus Act. The provisions of the Bonus Amendment Act were made applicable retrospectively with effect from 1 April 2014 and a few High Courts have passed ad interim orders staying the retrospective operation of Bonus Amendment Act. Salient features of the Bonus Amendment Act, include increase in eligibility limit for the statutory bonus from INR 10,000 per month to INR 21,000 per month, increase in the calculation limit for the purposes of bonus to INR 7,000 or the minimum wage for the employment, whichever is higher.

(v) Child Labour (Prohibition and Regulation) Act 1986 (“CL Act”): This is intended to regulate the employment of workers below a certain age in industrial establishments. The Child Labour (Prohibition and Regulation) Amendment Act 2016 (“CL Amendment Act”) received Presidential assent on 29 July 2016 and was thereafter published in the Official Gazette. The CL Amendment Act amended the CL Act that prohibited the employment of children below the age of 14 years in certain hazardous jobs. Salient features of the CL Amendment Act include prohibition on employment of children below the age of 14 years in certain other professions such as bidi-making, mines, domestic work and power loom industries. In other professions, child labour is prohibited unless the child is involved in the family profession or trade after his/her school hours. Also, a new category ‘adolescent’ has been added defined as persons between the ages of 14 years to 18 years. Adolescents are prohibited from employment in hazardous industries as listed out in the CL Amendment Act. The penalties have also been increased to imprisonment ranging from 6 months to 2 years and fine in the range of INR 20,000 to INR 50,000.

Additionally, various states have also made some amendments to their respective labour laws. For example –

(i) The Government of Maharashtra vide its notification published in the Maharashtra Government Gazette on 5 January 2017 has announced that the CLRA Act will now be applicable to every establishment or contractor in the State of Maharashtra in which 50 or more workmen are employed or were employed on any day in the preceding 12 months. Prior to this, the limit for applicability of the CLRA Act in the State of Maharashtra was limited to 20 or more workmen.

(j) The Madhya Pradesh Labour Laws (Amendment) and Miscellaneous Provisions Act 2015 also carried out a number of amendments to the existing labour law framework. This amendment included provisions to allow women to work at night as well as a more beneficial retrenchment compensation equal to at least 3 months’ remuneration. This was probably one of the most controversial state amendments opposed fiercely by the opposition parties and a large section of workers. It is seen as ‘anti-worker’ and ‘pro-industry’ due to provisions such as allowing compounding of disputes by payment of a fine as well as change in the nature of an employee’s job without prior notice.

In respect of the recent reforms in maternity benefits, what are the practical implications?

The MB Amendment Act is one of the landmark amendments in the recent past. With the MB Amendment Act, India has become the third highest provider of paid maternity leave to women employees in the private sector after Canada (50 weeks) and Norway (44 weeks). This is a step in the right direction. As per clarifications issued by the Ministry of Labour on 12 April 2017, women employees who are presently undergoing maternity leave will also be entitled to additional leave as provided in MB Amendment Act. Moreover, as an option, the MB Amendment Act now recognises the facility to ‘work from home’.

Provisions regarding crèche facilities will be effective from 1 July 2017 and we expect the Ministry of Labour to come out with rules around crèche facilities like period up to which the crèche facility could be extended to concerned women as well as the aspect of availability, whether arrangements can be made with third party service providers for crèche facilities, distance from workplace, safety issues, third party liability and so on.

While the MB Act applies to all categories of women employees and this has also been clarified by the Ministry of Labour vide clarifications dated 12 April 2017, there are several aspects which need clarity. For example – being welfare legislation, whether the benefits under the MB Act will apply to long term interns.

What kind of reforms do you think are likely in the coming year in the Indian labour law space?

(i) The Factories Amendment Bill 2016 (“Factories Bill”): The Factories Act is intended to ensure that workers in factories enjoy a safe and healthy work environment. The Factories Bill to amend the Factories Act was passed in the Lok Sabha on 10 August 2016. The amendments sought in the Factories Bill are reformative and seek to unlock latent productivity in the manufacturing sector. Salient features of the Factories Bill include: (i) Overtime: It has been proposed to increase the existing limit of overtime hours for factory workers from 50 hours to 100 hours per quarter. The Factories Bill also proposes to increase the permissible overtime working hours in case of exceptional workload from 75 hours to 115 hours per quarter. It also allows further increase of up to 125 hours per hour by the Central/ State Government in view of the public interest. (ii) Empowering Central Government and State Governments: The Factories Bill seeks to empower the Central Government to make rules and orders in relation to employees who are currently exempted from the provisions of Chapter V (working hours for adults) of the Factories Act. These powers are presently vested only with the respective State Governments.

(ii) Labour Code on Industrial Relations Bill 2015 (“IR Code”): The Union Cabinet has taken up for consideration the “IR Code” which envisages a simplification and amalgamation of the ID Act, TU Act and IESO Act into one legislation. It envisages certain changes aimed to relax norms and increase the ease of doing business in the country. This includes increasing the minimum limit of employees for regulation by the IR Code from 100 to 300. In a move to benefit workers, it also increases the amount of retrenchment benefit to 3 months.

(iii) Other Code Bills: In addition to the IR Bill, the Ministry of Labour has proposed 3 Labour Codes viz. Code on Wages, Code on Social Security & Welfare, and Code on Occupational Safety, Health & Working Conditions with aim to consolidate major labour laws governing these aspects. The Labour Code on Wage Bill 2015, which aims to amend the law relating to wages and bonuses has already been drafted. Further, the draft Code on Social Security & Welfare which amalgamates the provisions of 15 central labour laws relating to social security has been placed in the public domain on 16 March 2017 for public comments.

(iv) The Employees Compensation Act 1923 (“EC Act”) was meant to provide compensation to workers in cases where they cannot continue work due to industrial accidents or to their kin on death. The Employees Compensation (Amendment) Bill 2016 (“EC Bill”) was introduced and passed in the Lok Sabha on 9 August 2016. The EC Bill makes it mandatory for employers to make their employees aware of their right to compensation. Employers are liable to a fine of up to INR 100,000 in case they fail to inform their employees of this right to compensation. This is an important initiative as many workers fail to claim the benefit available under the EC Act due to lack of awareness. Further, the minimum amount of compensation required to file an appeal against any order of compensation has been increased from INR 300 to INR 10,000 subject to the power of the Central Government to further increase this limit.

(v) The Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill 2016 (“MS Bill”) has been prepared by the Ministry of Labour to increase employment and productivity in the country. The MS Bill also aims to harmonise the state laws governing general welfare provisions in various states. The MS Bill is applicable to all establishments employing 10 or more workers but exempts manufacturing units. The salient features of the MS Bill are:

  • General welfare provisions: The MS Bill requires employers to make suitable arrangements for clean drinking water, latrine facilities, first aid facilities and, in some cases, canteen facilities too. It allows groups of employers to operate common facilities in case there is a paucity of space in the area.
  • Work hours and facilities for women: The MS Bill provides that a workplace must provide access to a night crèche facilities, ladies toilets and rest rooms. The consent of the woman worker must also be taken before assigning her to night duty.
  • Leave provisions: The MS Bill provides 45 days of earned leave, 8 days of casual leave and 5 festival leaves every calendar year. Additionally, an employee would also be entitled to leave on all national holidays.
  • The MS Bill also allows shops to remain open 24 hours a day, 7 days a week in an attempt to boost employment and consumption.

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Founded in 1911, Khaitan & Co is one of the oldest Indian law firms. It combines a rich heritage of over a hundred years with modern, cutting edge and solution-oriented legal practice and offers full service legal solutions to its domestic and international clients. The firm has a strength of 500+ fee earners, including 115 partners and directors across its four offices.

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The firm is one of India’s most recognised full-service law firms offering specialised advisory services to clients across all practice areas. The firm's Corporate/M&A practice and several other practice areas including banking and finance, capital markets, competition/ antitrust, dispute resolution, energy, infrastructure and resources, private clients, funds, hospitality, intellectual property, labour and employment laws, real estate, taxation, technology, media and telecom and white collar crime feature prominently in various leading international and Indian publications.

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  • Tier I Indian law firm – Corporate & M&A, Competition/Antitrust and Private Equity - Chambers Asia Pacific 2017
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  • Tier I Indian law firm – Antitrust and Competition, Banking and Finance, Capital Markets, Corporate/M&A, Dispute Resolution, Investment Funds, Labour and Employment, Projects and Energy, Tax and White Collar Crime - Legal 500 Asia Pacific 2017
  • Law Firm of the year and M&A Law firm of the year – IDEX Legal awards 2017
  • Law Firm of the year - Indian Business Law Journal – Indian Law Firm awards 2016
  • Firm of the year – India, The Asian Lawyer Emerging markets awards 2016

Over the years the firm has attracted and retained some of the best legal talent in India to provide the high-quality legal counsel expected from it. The strategic hiring of partners has resulted in the addition of new practice areas, strengthening of the existing practice areas and also bringing in the best international practices.


Its clients include business and financial enterprises, large business houses, banks, financial institutions, private equity funds, government bodies, educational and charitable trusts, cultural institutions, individuals, and estates and trusts from India and overseas.


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