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Employment

This chapter deals with employment, labour laws, and various Acts etc are discussed here. Besides the key labour laws governing employment, the chapter also deals with mandatory provisions regarding social security, safety and workplace related legislation. The chapter also delves into employment agreements, hiring foreign nationals and provisions around the same.

LABOUR REGULATIONS

1. What is the general framework of labour laws in India?
2. What are the benefits and various applicability thresholds for key labour law legislations in India?
3. Are there any special requirements applicable for foreign nationals as employees of an organization?
4. Who are eligible for Business Visas?
5. Who are eligible for Employment Visas?

STOCK OPTION PLANS

1. What is an ESOP?
2. Why should companies offer an ESOP?
3. What are the tax implications of ESOP?
4. What are the key features of a standard employment contract?
5. Is it necessary to have a confidentiality agreement with the employee?
6. What kind of information can be protected by confidentiality agreement?
7. What factors to be kept in mind while drafting a non-compete contract?
8. What is a non-solicitation agreement?

LABOUR REGULATIONS

1. What is the general framework of labour laws in India?

The basic principle of labour regulations are enshrined in the Constitution of India which envisages securing to all citizens an equal right to adequate means of livelihood; just and humane conditions of work and maternity relief; and a living wage for all workers.

Labour is included in the Concurrent List under the Constitution of India whereby the Parliament as well as the Legislature of any State shall have the power to concurrently legislate on the subject of labour. However, certain matters with respect to labour such as regulation of labour and safety in mines and oilfields, industrial disputes concerning union employees are included in the Union List under the Constitution of India whereby only the Central Government is empowered to make legislations on such subjects.
The various labour legislations in India can be grouped into the following four broad areas:

a. Laws providing for employment security and industrial relations

  • Industrial Disputes Act, 1947;
  • Industrial Employment (Standing Orders) Act, 1946 (‘Standing Orders Act’); and
  • Trade Unions Act, 1926.

b. Laws providing for income security i.e., wages and other remunerations:

  • Payment of Wages Act, 1936;
  • Minimum Wages Act, 1948;
  • Equal Remuneration Act, 1976; and
  • Payment of Bonus Act, 1965 (‘Bonus Act’).

c. Laws providing for working conditions, safety and occupational health:

  • Factories Act, 1948;
  • State specific Shops and Establishment Legislations;
  • Maternity Benefit Act, 1961;
  • Contract Labour (Regulation and  Abolition Act), 1970 (‘CLRA Act’);
  • Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1970;
  • Child Labour (Prohibition and Regulation) Act, 1986;
  • Weekly Holidays Act, 1942; and
  • Apprentices Act, 1961.

c. Laws providing for social security and labour welfare.

  • Employees’ State Insurance Act, 1948 (‘ESI Act’);
  • Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (‘EPF Act’);
  • Payment of Gratuity Act, 1972 (‘Gratuity Act’);
  • Fatal Accidents Act, 1855;
  • Employees’ Compensation Act, 1923;
  • Employer’s Liability Act, 1938;
  • Personal Injuries (Compensation Insurance) Act, 1963;
  • Un-organised Workers’ Social Security Act, 2008; and
  • Labour welfare funds legislations of various States and/or sector specific welfare fund legislations.

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2. What are the benefits and various applicability thresholds for key labour law legislations in India?

The following table gives a brief summary of certain key labour law legislations:

Name of the Legislation

Applicability

Registration Certificate

Benefits

Standing Orders Act

  • Every industrial establishment wherein one hundred (100) or more workmen are employed.
  • Different States have provided separate threshold for the applicability of the Standing Order Act. For instance, in Andhra Pradesh and Karnataka, the Standing Order Act is applicable to industrial establishment employing fifty (50) or more workmen.)
  • Other industrial establishments, employing less than one hundred (100) workmen, as notified by the appropriate Government.

Within 6 months from which the Standing Orders Act becomes applicable, the employer is required to submit the draft standing orders to the prescribed authority for certification.

  • Employer is required to define the conditions of employment for his establishment.
  • Payment of subsistence allowance at the prescribed rate to a worker who has been suspended by the employer pending investigation or inquiry into complaint of misconduct against him.

ESI Act

  • Factories other than seasonal factories, employing ten (10) or more persons.
  • Other establishments as notified by the appropriate Government. Certain States and Union Territories, like Andhra Pradesh, Bihar, Gujarat, Delhi, Jharkhand, Punjab Rajasthan and West Bengal have made the ESI Act applicable to establishments employing ten (10) or more persons.
  • The factory or establishment to which ESI Act is applicable will continue to be governed by it irrespective of the fall in the number of employees below ten (10) or cessation of the manufacturing process which was carried on with the aid of power.
  • Employer should submit a declaration of registration in the prescribed manner and an employer’s code number will be allotted.
  • Employer to obtain signed declaration form from all covered employees.
  • Employees earning less than Rs. 15,000 (Rupees Fifteen Thousand only) per month are eligible for the benefits under the ESI Act.
  • ESI Act is aimed at conferring benefits on employees in case of sickness, maternity and employment injury. Accordingly, all eligible employees should be insured.
  • Employer is required to contribute a sum equal to 4.75% of the wages payable to the employee and the employee should contribute 1.75%, to the Employee State Insurance Corporation.

EPF Act

  • Every establishment which is a factory engaged in any industry specified in Schedule I of the EPF Act and in which twenty (20) or more persons are employed.
  • Any other establishment employing twenty (20) or more persons as notified by the Central Government.
  • It is also applicable to those establishments where the employer and the majority of the employees have agreed that the Act is to apply to that establishment.
  • An establishment which is covered by the EPF Act will continue to be governed by it irrespective of the fall in the number of employees below twenty (20).

Every employer is required to apply in the prescribed form to the EPFO for allotment of the Code Number from the EPFO.

  • Benefits are restricted to employees drawing wages up to Rs. 6,500 (Rupees Six Thousand Five Hundred only) per month at the time of joining. Employees drawing salary
    above Rs. 6,500 (Rupees Six Thousand Five Hundred only) may be brought under the EPF Act, at the discretion of the management and by furnishing a joint undertaking to the Provident Fund authority.
  • International workers are also covered within the ambit of the EPF Act.
  • Presently there are three schemes in operation under the EPF Act viz. Employees’ Provident Funds Scheme, 1952; Employees’ Deposit Linked Insurance Scheme, 1976; Employees' Pension Scheme, 1995.
  • Under the Employees’ Provident Funds Scheme, 1952, every employer is required to contribute 12% (twelve per cent) or 10% (ten per cent), as the case may be, of the wages of the employee. The employee is also required to make an equivalent contribution.

Bonus Act

  • To a factory.
  • Other establishments in which 20 or more persons are employed on any day during an accounting year.
  • Other establishments as notified by the appropriate Government, employing not less than twenty (20) but more than ten (10) employees.
  • An establishment which is covered by the Bonus Act will continue to be governed by it irrespective of the fall in the number of employees below twenty (20).

NA

  • Employees earning not more than Rs. 10,000 (Rupees Ten Thousand only) and have worked in the establishment for not less than 30 (thirty) days in the relevant accounting year are eligible to avail the benefits of the Bonus Act. However, Section 32 of the Bonus Act exempts certain classes of employees.
  • The minimum bonus payable to an eligible employee is 8.33% of the wage or INR 100, whichever is higher and the maximum is 20%.

CLRA Act

  • Every establishment in which twenty (20) or more workmen are employed or were employed on any day of the preceding twelve months as contract labour. (Five (5) or more in Andhra Pradesh)
  • Every contractor who employees or who employed on any day of the preceding twelve months, twenty (20) or more workmen.
  • Does not apply to establishments where the work performed is only of an intermittent or seasonal nature, i.e. the work performed is less than one hundred twenty (120) days and (sixty) 60 days in a year respectively.

Principal Employer should obtain a registration certificate and the contractor should obtain a license.

  • Under the CLRA Act, the principal employer (who is the owner or occupier of a factory, or any person responsible for the supervision and control of the establishment), who intends to appoint contract labour through contractors, as well as the contractors, are required to obtain registration for the unit.

Gratuity Act

  • Every factory, mine, oilfield, plantations, port, railway company.
  • Every shop or establishment in which ten (10) or more persons are employed, or were employed, on any day of the preceding twelve (12) months.
  • Other establishments or class of establishments, in which ten (10)  or more employees are employed, or were employed, or, any day of the preceding twelve (12) months as notified by the Central Government.
  • An establishment which is covered by the Gratuity Act will continue to be governed by it irrespective of the fall in the number of employees below ten (10).

 

  • Every employee (other than apprentice) is entitled to receive gratuity after he has rendered continuous service for five (5) years or more, at the time of termination of his services.
  • Gratuity is payable at the rate of fifteen (15) days’ wages for every completed year of service or part thereof in excess of six (6) months subject to a maximum of Rs. 10,00,000 (Rupees Ten Lakhs only).

Maternity Benefit Act

  • Every establishment being a factory, mine or plantation including any such establishment belonging to Government.
  • Not applicable to any factory or other establishment to which the provisions of the ESI Act applies.

NA

  • Pregnant female employee who has worked with the employer for a period of not less than eighty days (80) in the twelve (12) months preceding the date of her expected delivery is entitled to maternity benefits up to a maximum of twelve (12) weeks. No employer is permitted to employ a female employee nor is she permitted to work, during the six (6) weeks immediately after the delivery.
  • Maternity benefits are payable at the rate of the average daily wages for the period of actual absence.
  • An employee eligible for maternity benefits is also entitled to medical bonus of Rs. 1,000 (Rupees One Thousand only), if no pre-natal or post natal care is provided for by the employer free of charge.

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  • 3. Are there any special requirements applicable for foreign nationals as employees of an organization?

All laws that regulate employment relationships in India apply equally to Indian and foreign nationals working in India with the exception of law relating to (a) the remittance of money under the Foreign Exchange Management Act, 1999; (b) taxation; and (c) immigration requirements. A foreign national, who has been employed by an entity to work for its India operations, has to obtain an Employment Visa. Business visas are granted for limited purposes.

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  • 4. Who are eligible for Business Visas?

Business visas are issued only to a foreign businessman who wants to visit India to establish an industrial/ business venture or to explore possibilities to set up industrial business venture in India or wants to purchase or sell industrial products strictly as per the norms specified in the visa manual for business visas.

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  • 5. Who are eligible for Employment Visas?

Employment visas are usually issued to skilled and qualified professionals or persons who are being engaged or appointed by a company, organization, industry, or undertaking, etc. in India on contract or employment basis at a senior level, skilled positions such as technical expert, senior executive, or in a managerial position. Additionally, these employees or professionals must earn a minimum annual salary of USD 25,000 (United States Dollar Twenty Five Thousand only), with the exception of  (a) ethnic cooks, (b) language teachers (other than English language teachers)/ translators; and (c) Staff working for the concerned Embassy/High Commission in India.
Further, employment visa is not granted for jobs, which are routine, ordinary or secretarial/clerical; and/or for which large number of qualified Indians are available.

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STOCK OPTION PLANS

 

  • 1. What is an ESOP?

An ESOP is an employee stock option plan where an option is given by a company to its employees, to purchase or subscribe to at a future date, the securities offered by the company, at a pre-determined price. For a listed company, the ESOS needs to be framed in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

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  • 2. Why should companies offer an ESOP?

Companies offer their employees ESOPs to motivate, reward, remunerate and retain their employees. By aligning the interest of the employees with the company and the management, ESOP allows the employees to be a part of the growth story of the Company and reap the benefits of such association subsequently.

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  • 3. What are the tax implications of ESOP?

With effect from April 1, 2009, the securities issued under the ESOP are taxed as perquisite. The perquisite tax would be levied on the difference between the fair market value (‘FMV’) of the shares on the date of exercise of the options minus the price on which it was offered by the company to the employee. Further, as issuance of shares under the ESOP is not an exempted transfer, capital gains tax would be levied on the profit made from sale or transfer of shares over the FMV.

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EMPLOYMENT AGREEMENTS

 

  • 4. What are the key features of a standard employment contract?

Appointments are made in writing through offer letters, which on acceptance by the employee concerned, forms the employment contract between the employer and the employee. These employment letters also contain the service or conduct rules of the organization integrated into it.


An employment contract usually includes the following details:

  • 1. Terms of employment;
  • 2. Probation period;
  • 3. Duties and Responsibilities;
  • 4. Compensation structure;
  • 5. Discipline and conduct rules;
  • 6. Leave rules;
  • 7. Transferability;
  • 8. Confidentiality and non-disclosure;
  • 9. Non-compete;
  • 10. Non-solicitation;
  • 11. Assignment of intellectual property;
  • 12. Termination of employment;
  • 13. Arrangements during notice period;
  • 14. Retirement; and
  • 15. Grievance and disciplinary procedures.

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5. Is it necessary to have a confidentiality agreement with the employee?

It is imperative for a company to execute confidentiality or non-disclosure agreements with its employees, to prevent the dissemination of non-public information concerning the company, such as trade secrets, business connections, to name a few. Further, a confidentiality agreement/non-disclosure agreement, by identifying which information is confidential in nature, helps in supporting the fact that the confidentiality of the information was impressed upon the recipient, often a necessity to succeed in a dispute involving breach of confidentiality obligation. The confidentiality agreement may also lay down the manner of use of any confidential information, including requirements for personnel to return all confidential information and material to their employer at the time of termination of their employment and/or preventing such personnel from utilizing such confidential information in the subsequent employment.


As detailed further below in paragraph 5.12, restrictions on the employee operating beyond the period of employment is usually not upheld in India. However, the Courts in India mostly recognize the right of the employer to protect its confidential information, not only during the period of employment, but also post-termination of the contract of employment since such restriction does not amount to any restriction on trade or livelihood.

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  • 6. What kind of information can be protected by confidentiality agreement?

Any information may be treated as confidential, if the information

  • Has the necessary quality of secrecy about it, namely, it must not be something which is public property and public knowledge, such as company’s business relationship or financial affairs and such other information, which may be treated to be the proprietary information of the company;
  • Is capable of being isolated from other information, which the employee is not prohibited from using or disclosing; and
  • The information was handed over in the circumstance of confidence.

Confidentiality agreement intends to protect, all such information of the company, whether or not in writing, of confidential nature, unauthorized disclosure of which may result in some loss to the company, whether pecuniary or not.

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  • 7. What factors to be kept in mind while drafting a non-compete contract?

Under the Indian Contract Act, 1872 any agreement, which restrains anyone from carrying on a lawful profession, trade or business, is treated as void to that extent. The exceptions to this rule is a restriction imposed under a sale of goodwill, or those imposed upon a partner of a partnership firm, under the Partnership Act. This general rule of prohibition of restraint of trade is also applicable to an employment contract. However, the Courts in India have made a distinction between a non-compete provision during the employment and post-employment period.
As per the settled jurisprudence, a non-compete provision, which is applicable during the term of the employment is not an agreement in restraint of trade and hence enforceable. However, negative covenants pertaining to the period post termination, which restricts an employee's right to seek employment and/or to do business in the same field as the employer, would be in restraint of trade and, therefore, a stipulation to this effect in the contract would be void. Any restriction on employment post-termination, on the ground that such restriction is reasonable, has not found favour with the Indian Courts either. However, courts have held that certain limited restrictions in furtherance of valid confidentiality obligations do not constitute restraints on trade. 

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  • 8. What is a non-solicitation agreement?

A non-solicitation agreement binds the employee not to contact the employer's customers or remaining employees and such a clause is enforceable both during and after the employment. However, while the employee bound by the non-solicitation agreement may be restrained through an injunction from making such solicitations and while damages may be claimed against breach of such obligations, injunction against any of the remaining employees preventing them from taking up employment with such other employee after termination of their current employment with the company would usually not be granted.

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