India 17 min

Employment laws in India: how to hire and stay compliant

Written by Shay Ogunsanya
Shay Ogunsanya


share to linkedInshare to Twittershare to Facebook
Link copied
to clipboard

A thriving economy, an abundance of top talent, and competitive rates make India the ideal place to expand your business. But, if you're planning to hire remote employees in India, you'll need to know about applicable employment laws so that you can ensure compliance. Failing to comply with local labor regulations can result in fines, legal penalties, and excessive administrative costs.

If you partner with an employer of record, though, a team of employment experts will guide you through the process of hiring, paying, and managing employees in India or beyond. Remote’s global employment services offer built-in security and compliance so that you don’t have to struggle with the headache of understanding complex local laws yourself.

This article will cover an overview of employment laws in India, how you can ensure compliance, and how an employer of record can support you to comply with local labor laws.

Overview of employment laws in India

While hiring abroad, companies face the additional hurdle of navigating local laws that differ from their own country's practices. It’s essential to understand the intricacies of Indian employment laws if you want your company to avoid administrative costs and legal penalties.

Terms of employment

New hires in India, as standard practice, sign an employment contract. Although Indian federal labor law does not require a contract to be in writing, states such as Karnataka and Delhi legally require written contracts for employees. To protect your company from liability, you should have employees sign a contract that includes basic terms of employment and additional information, such as:

  • Leave entitlement

  • Confidentiality requirements

  • Non-solicitation agreement

  • Termination policies

  • Dispute resolution

A probationary period for new employees is allowed under Indian law. This period lasts for three to six months. During the probationary period, employers can usually terminate an employee without notice. The initial appointment letter and employment contract should stipulate the terms of the probationary period and the rights of the employee and employer during and after that time.

Including detailed documentation in a written contract is the best way to save time and reduce risk when hiring abroad. It can also help protect you from liability and any disputes that may arise further down the road.

To fully clarify terms of employment, many companies set forth specific corporate policies in an employee handbook. An employee handbook can be especially useful for companies with international teams. It gives HR departments the opportunity to address employee classification, promotion, attendance, misconduct, and other nuanced policies that are too complex to address in a brief letter or contract. Employee handbooks serve as valuable references for both managers and employees. 

Categories of employees

Indian labor law recognizes two categories of employees:

  • Workman

  • Non-workman 

The Industrial Disputes Act of 1947 (IDA) defines a workman as a manual, clerical, technical, or lower-paid supervisory worker who does not have managerial or administrative responsibilities. A non-workman is a manager or supervisor earning more than 10,000 Indian rupees (INR, symbol: ₹) per month.

Employment laws and practices in India do not recognize independent contractors as employees. Labor courts in India use a “control test” to determine whether an individual is an independent contractor or an employee. If an employer has control over how the individual completes their work, that individual is likely an employee rather than a contractor. The courts also consider other factors, such as the nature of the work and who appoints and dismisses the worker.

Unlike employees, independent contractors don't receive statutory benefits such as retirement and leave. Employers pay contractors professional fees instead of a salary. When hiring independent contractors in India, you'll want to include these terms in your contractor agreement:

  • Independent contractor details and responsibilities

  • Nature of services 

  • Time period

  • Payment

  • Termination

  • Confidentiality

  • Breach of contract conditions

  • Legal details of the agreement

Laying out clear terms in your contracts for independent contractors can save you time and prevent legal issues down the road.

Budget your next hire with our free Cost of Employment Calculator

Use the calculator to find the total cost to hire an employee in a new country including all government mandated contributions.

Employee benefits

Employee benefits in India vary based on contract and location. However, federal employment and labor laws in India do require certain statutory benefits for all jobs. These benefits include basic wages, plus the following:

  • Gratuity payments

  • Provident funds

  • State insurance

  • Mandatory leave

  • Maternity benefits

Gratuity payments, provident funds, and state insurance benefits form a social security net for employees in India.

Gratuity payments

All employees who work for an industrial establishment with 10 or more employees are entitled to a gratuity if they have worked for over five years at the establishment and retire, die, or become disabled. In the case of the employee’s death, the employee's family and dependents are eligible to receive this benefit. 

Employees can also request a gratuity when changing employment after working for five years at the establishment. The payment formula is based on years worked and salary earned.

Provident funds

Provident funds are a post-retirement social security benefit in India similar to a 401k. Employees contribute 12% of their base salary to the fund, which the employer matches with a contribution of 12%. This benefit is mandatory for employers with 20 or more employees. It's also mandatory for employees that earn INR 15,000 or less every month, although employees who earn more can make voluntary contributions.

Employees can withdraw all of their provident funds after the age of 58 or if they are unemployed for over two months. Premature death can also be a reason for full withdrawal, with the benefits going to the employee's family and dependents. To withdraw funds before retirement for other reasons, such as purchasing a home, employees must follow partial withdrawal rules and guidelines.

State insurance

India provides universal health care through its Employees' State Insurance Scheme. Under this policy, employees and employers pay a percentage of employee wages to the Employees' State Insurance Fund. State insurance benefits apply to establishments with 10 or more employees, and to employees that earn less than INR 21,000 (approximately USD 250) every month. Employees may use this benefit to cover medical care, disability care, maternity, and unemployment.

Mandatory leave

Indian labor law requires mandatory paid annual leave for employees. For employees who work more than 240 days in a year, the law requires 12 paid leave days. Employees also get a minimum of 24 hours off on Sundays, plus sick leave and other types of leave as applicable.

Maternity leave

Employers must offer 26 weeks of paid maternity leave to female employees who have worked for 80 or more days in the year before expected delivery. Female employees who are adopting a child are entitled to up to 12 weeks of leave. 

Minimum wage

The minimum wage in India varies based on state and industry. Nationally, the average minimum monthly wage in India is about INR 5,340. Although India has no federal labor laws that set a rate for minimum wage, Indian states do set minimum wages and penalties for noncompliance, which can include fines or imprisonment.

Indian law regarding minimum wage is based on the Minimum Wages Act of 1948. The proposed Code on Wages (2019), once in effect, will revise these laws to centralize minimum wage and set levels for workers in various industries. The new code includes changes in definitions and penalties for employer noncompliance.

Consult a legal expert and read our article on how to pay remote workers in India to make sure you're complying with state legislation on minimum wage regulations for your industry and workers.

Working hours

India's labor laws cap working hours at 48 hours weekly and 12 hours daily. These codes also restrict overtime and limit the amount of time that an employer can require an employee to work without a break.

Indian labor law working hours and overtime policies vary by state and depend on whether an employee is considered a workman or a non-workman. Some of these policies also vary by industry. For example, software developers who are individual contributors but not managers would be considered workmen under the revised Labor Codes.

Public holidays

India has regional and national public holidays that affect staffing and compensation. The three mandatory national paid holidays are Republic Day (January 26th), Independence Day (August 15th), and Gandhi Jayanti (October 2nd). Unless your company obtains a special exemption from the government, operations will have to remain closed on these days.

Other public holidays in India are based on state or region. Employees may be entitled to 14 or more public holidays a year, depending on where they are located. Check local laws for religious festivals and other occasions that could qualify as public holidays.

Employment laws regarding foreigners

Under Indian immigration law, foreigners seeking to work in India for an Indian employer must obtain an employment visa. Employment visas have specific eligibility requirements that the employee must meet, including skill level and salary requirements. These visas are usually employer-sponsored and set at a fixed duration.

For foreign employees working remotely from India for a foreign business with no corporate presence in India, the situation is more complicated. Under the Indian Income Tax Act, these employees may be considered as creating a “permanent establishment” for your company. That means they'll incur a tax liability for themselves or the company they work for. Any profits that this employee generates count as business income for your company, and you'll have to register and pay corporate taxes to the Indian government.

Employment laws regarding nationals hired by foreign entities

Indian nationals working for a foreign company are liable for income tax payments to India. Workers who spend over 182 days of the fiscal year in India are considered residents and must pay income tax to the Indian government.

The amount of tax an employee owes can change based on tax agreements and laws in India. For example, an individual's tax penalty may be reduced by tax deducted at source (TDS) and the Double Taxation Avoidance Agreement (DTAA). Employers registered in India may deduct TDS from an employee's tax burden. Some countries, including the U.S., have a DTAA agreement with India that prevents double taxation.

Background checks

Background checks are an important best practice when hiring remote employees. Employment laws and regulations in India do not limit or control background checks, which means that your company can process background checks for all recruits without running afoul of the law.

Consent is required for background checks, with electronic consent being a convenient option for HR departments. Criminal background checks are also legal, but be aware of local data privacy laws that could come into play when conducting checks. 

Conducting background checks for remote employees in India can take longer than usual since India lacks centralized data and many records remain in paper form. HR departments may need to modify expectations or policies surrounding background checks to complete them in a satisfactory and timely manner.

Employees vs. employer disputes

Disputes between employees and employers in India are usually related to either working conditions or employer-employee disagreements due to events like unjust termination, harassment, missing wages, or a breach of contract agreements.

The Industrial Disputes Act of 1947 (IDA) and Industrial Employment Standing Orders Act of 1946 (IESOA) cover employer-employee relationships, while the Factories Act of 1948 (FA) and the Shops and Commercial Establishment Acts (SEAs) relate to working conditions. 

The process for resolving disputes starts with a settlement through a conciliation officer. If the parties can't reach a settlement, the dispute will go to an industrial tribunal or higher labor courts, and to the Supreme Court at the highest level.

India has revised its earlier industrial dispute laws into the Industrial Relations (IR) Code, 2020, which, once in effect, will streamline industrial tribunals and rules for trade unions in industrial establishments. The new code also covers unemployment allowance. Understanding your obligations under these employment laws and practices in India can help your company avoid costly litigation.

Terminating employment

The IDA, IESOA, and the relevant Shops and Establishments legislations, are the main Indian statutes that cover termination of employment. Make sure that your employment contracts are fully compliant with both local and federal regulations regarding termination and severance. In cases where employment contracts conflict with state or federal laws, those laws supersede the contract provisions.

The IDA requires 30 to 90 days minimum notice when terminating workmen. Causes for termination include:

  • Retrenchment

  • Disciplinary issues

  • Performance issues or negligence,

  • Misconduct, such as:

    • Theft or fraud,

    • Willful damage to employer goods,

    • Absence without leave for a sustained period of time,

    • Taking bribes, etc.

link to Benefits to offer employees in India
7 min

Benefits to offer employees in India

Not sure about statutory benefits for remote workers in India? Interested in providing a more competitive benefits package for your employees in the country? This short guide has you covered.

Unfair labor practices in India

The IDA protects both employers and employees from unfair labor practices in India. Since noncompliance with these regulations can result in fines or imprisonment, it's important to make sure that your business follows guidelines on the fair treatment of employees.

Any of the following could be considered an unfair labor practice under Indian labor law:

  • Prohibiting employees from joining a union

  • Harassing or penalizing union employees

  • Terminating employees without just cause

  • Hiring contractors instead of permanent employees to avoid paying wages

  • Penalizing employees for reporting illegal activity

Equal employment opportunity laws in India prohibit discrimination against those with disabilities. Many companies in India enforce their own equal opportunity policies.

The upcoming Labor Codes include changes to equal opportunity laws. For example, the Code on Wages prohibits discrimination in wages or recruitment based on an employee's gender.

How to ensure compliance in India

Employment and labor laws in India are complex. Depending on where your business is located, you may be subject to unique state regulations in addition to Indian national law. Employment laws for opening a business in India mandate that employers obtain certain licenses and registrations to run a company, even if the company is a sole proprietorship.

Given the complexity of Indian employment law and the harsh penalties for noncompliance, you'll have to have a strong grasp of Indian labor laws and stay organized while managing your remote employees overseas.

Keep track of the worker classification status

The first step in staying compliant with labor law in India is to keep track of whether your workers qualify as workmen, non-workmen, or independent contractors within the Indian law system. These legal categories are important because they affect benefits, wages, termination requirements, and other employee rights.

By keeping track of your workers’ classification and their responsibilities, you can ensure that your policies are compliant with Indian labor laws. Crucially, it also helps you avoid misclassification risks.

Avoid misclassification laws and penalties in India 

If employees are misclassified as contractors in India, employers could have to pay unpaid benefits contributions to employees or face prolonged litigations. If they miss paying provident fund contributions to employees, employers could even face criminal sanctions.

The fast, simple, compliant way to hire in India

Hiring remote workers in India can benefit your business, but understanding complex state and national employment laws in India can be a challenge. If you don’t ensure compliance with Indian labor laws, you could find yourself in legal trouble.

But this shouldn’t stop you from hiring in India or internationally. Partner with a global employment service like Remote, and it can become much simpler to expand into new countries, including India.

With local market insights, localized contracts, invoice management, and a team of compliance experts on board, Remote can help you stay up to date with the changes in labor laws and ensure continued compliance in India. Additionally, with Remote, you can automate tasks and hire talent fast without having to go through local legal counsel or payroll partners. You'll save on administrative overhead and avoid costly fines while staying compliant with local laws.

Remote's global HR solutions empower you to hire in India with confidence. Check out how much it can cost you to hire a full-time employee in India with our free Employee Cost Calculator tool. Or contact our friendly team for a demo of the Remote platform or for advice on your global expansion plans.

link to Guide on hiring in India
14 min

Guide on hiring in India

India’s labor laws, payroll regulations, and benefits requirements vary among different states and union territories. India’s federal government does enforce certain requirements all around the country, however. This guide on hiring employees in India covers all the basics.


Difference between appointment letter and employment contract in India

Terms of employment: Q & A: India 

Employment contracts in India

Indian employment laws and need for an employee handbook 

Employment and employee benefits in India 

Legal framework differentiating employees from independent contractors

Employee benefits in India

Employees statutory death benefits

New gratuity policy for 2023

India includes special allowances in Provident Fund contributions

How does Employee Provident Fund (EPF) work? 

 Employees' State Insurance Scheme 

Leave policy for employees in India 

Maternity benefits (Amendment Act): all you need to know

A guide to minimum wages in India in 2023 

Minimum Wages Act 1948

Decoding the labour code on wages 

The ultimate guide to company holiday lists

Work hours and office timings in India

Details of visas granted by India

Working for a foreign entity while residing in India

Taxation of permanent establishment in India

Should you pay tax in India if you work from home for a foreign country?


The Employment Law Review: India

The Industrial Relations Code, 2020

Due process for terminating an employee in India

Unfair labour practices in India

The Code on Wages, 2019

Legal requirements to start a business in India 










Subscribe to receive the latest
Remote blog posts and updates in your inbox.