India has consolidated 29 labor laws under the umbrella of four labor codes. These include the Code on Wages, the Code on Social Security, the Industrial Relations Code and the Occupational, Safety, Health and Working Condition Code. However, the rules for these codes are yet to be notified as of September 2021 and HR policies in India continue to be governed by the old laws for the time being.

Once the new codes have their implementation rules in place, the legal regime will provide flexibility to employers by easing hiring and retrenchment norms.

Main sources of employment law in India

As per the Indian Constitution, the federal as well as state governments are empowered to enact suitable legislations to regulate and protect the interests of employees, as well as to create and increase employment opportunities.

Depending on the type of industry, nature of work undertaken, number of employees, location, remuneration of the employees, etc., different legislation, such as the Industrial Disputes Act 1947, Factories Act 1948, and the respective Shops and Establishment Acts of relevant states have been enacted.

With the objective to consolidate and reform labor laws and to facilitate the ease of doing business in India, the Government of India has enacted four labor codes, which subsume approximately 29 labor laws.

The four new labor codes are: the Code on Wages, 2019; the Code on Social Security, 2020; the Occupational Safety, Health and Working Conditions Code, 2020; and the Industrial Relations Code, 2020. Though all the codes have been passed by both houses of parliament and received the assent of the president, they are yet to be enforced by way of a specific notification in this regard by the central government. Until such date, the extant labor laws referred to and explained herein shall continue to apply.

What to know before hiring in India?

Before you start hiring in a new country, it is vital to understand the general landscape of the country’s workforce and employment regulations and compliance obligations to abide by.

Let’s look at some key information to understand before recruiting in India.

Workforce skills in India

India is one of the fastest growing economies in the world; however, it needs to generate five to ten million jobs a year to keep up with the growth rate. Therefore, the unemployment rate for university graduates is high and many Indians are often forced to look overseas for a job. This has led to a surge of Indian professionals working as expatriates in the United States, United Kingdom, Australia, Middle East, Southeast Asia, and also remotely.

The enrollment in higher education institutions (HEIs) has increased four-fold since 2001, India’s gross enrollment ratio (GER) – the percentage of people aged 16-23 who are enrolled in tertiary education – is at 26.3 percent. This implies that approximately 48.8 million young adults in India are attending a higher education institution. Employers will thus find a relatively highly educated talent pool to recruit for their company in India. 

Some of India’s most prominent and developing industries include industrial production, technology, information technology (IT) and business services outsourcing, retail, financial services, healthcare, and tourism. 

Remote work culture

With more than 1.3 billion people living in India, the country is one of the top hubs for remote workers, especially in the IT sector. Moreover, India has a rapidly growing population and a high literacy rate. India is the world’s second-largest English-speaking country, with around 125 million people, second only to the United States. It is no wonder that many global companies tend to hire remotely from India.

How can a company become eligible to hire employees in India?

To hire new employees in India, one can establish a company as an employer or work with an Employer of Record (EOR), also known as a professional employment organization (PEO).

An EOR will already have everything in place that is needed to start hiring new employees in India, so one can begin the hiring process immediately. Additionally, EORs are well-versed with Indian employment laws and how to structure competitive salary and benefits packages.

Passing off these HR responsibilities also means one avoids the risk of non-compliance.

The alternative to partnering with an EOR is to establish one’s own company branch or subsidiary in India and handle the logistics of hiring and other HR tasks internally. To set up a subsidiary in India, one must start by researching the regulations that apply to the sector.

Most international companies that establish a subsidiary in India choose either a private or public limited liability company structure. To establish one’s subsidiary and start hiring someone in India, one must have obtained the following:

  • Director Identification Number (DIN)
  • Digital Signature Certificate (DSC)
  • Business name approved by the Registrar of Companies
  • Memorandum and Articles of Association
  • Incorporation application
  • Certificate to commence operations
  • Company seal
  • Permanent Account Number (PAN)
  • Employees’ Provident Fund Organization filing
  • Value-added tax (VAT) registration
  • Medical insurance application

One may also need to obtain special permits or other permissions depending on one’s industry or location. Companies must plan for sufficient time to make sure every requirement is in place before the recruiting process is initiated.

Employment contract

Foreign-owned businesses hiring employees in India should pay attention to the Industrial Disputes Act and the Shops and Establishments Act. The latter Act administers the hours of work, payment of wages, leave, holidays, terms of service, and other conditions. Apart from labor laws, there are industrial laws, the Companies Act, and the Contract Act, 1872 that govern employment conditions in India. There are other wages and remuneration Acts too, that regulate the salaries, bonuses and equal pay between the genders. When hiring employees, standard practice is to have an employment contract between employer and employee. For hiring employees in India, the best way to get this done is to draft it together with a local expert. This is to ensure the contract is valid and it complies with the Indian labor law.


Employers should seek to periodically audit their wage structure to ensure it remains competitive within the local labor market. However, it is perhaps more important to ensure wages are compliant with prevailing laws.

Under the Minimum Wages Act, 1948, all employers in the organized sector must provide ‘the basic cost of living’ to employee categories specified within the act. The Code on Wages, 2019 further enables the federal government to fix minimum statutory wage for millions of workers.

The Equal Remuneration Act, 1976 mandates non-discrimination for payment of wages to men and women, while The Payment of Wages Act, 1936 orders the timely disbursement of wages to employees.

Payment of wages below the minimum wage limits amounts to forced labor. This is prohibited under the Bonded Labor System (Abolition) Act, 1976.

Companies should ensure that employment contracts consider this while defining the terms and conditions for the remuneration for employees.

Negotiating compensation packages is an involved process in India due to all the allowances many employees receive on top of their basic pay. These allowances can equate to so much that an employee’s basic salary constitutes just 40 percent of their total compensation. These allowances may include:

  • Performance-based bonuses
  • Children education allowance
  • Children hostel allowance
  • House rent allowance (HRA)
  • Vehicle allowance
  • Telephone or mobile phone Allowance
  • Leave travel allowance or concession (LTA/LTC)
  • Special allowance

Some of these allowances are taxable, while others are tax-exempt up to a certain point. Determining the right amounts to include in an employee’s compensation package is a complex task, which is why international employers may want to consider outsourcing HR for their Indian employees. Employees will look for a certain salary and a compensation package that is structured in the most tax-efficient way possible.

Note that India does not have a national minimum wage but does give local governments the authority to establish minimum wage rates. The rates differ depending on location, industry, the nature of employment, and the employee’s age.

Taxes and social security contributions

India recently introduced a new tax regime that eliminates 70 tax exemptions but offers lower tax rates. This new regime coexists with the old one, and employees can choose which system they want to follow. Both systems are progressive, so employees will fall within a certain slab based on their income. Employees making below a certain threshold don’t have to pay income tax at all.

India also has a social security program, which is administered by the Employees’ Provident Fund Organization (EPFO). Under this program, employers and employees contribute to the Employees Provident Fund (EPF), which is a retirement savings scheme. Employees make the bulk of this contribution.

However, employers alone must cover contributions to other types of social insurances available in India. You may refer to the section on social security to know more.

Employer contributions

Provident Fund

The Provident Fund is a retirement savings scheme mandated by the Indian government. Every month the employer and employee must each contribute an equal amount. The contribution is 12% of the employee’s basic salary, dearness allowance, and retaining allowance. However, if the company has less than 20 employees or if it meets other conditions, the maximum contribution rate is 10 percent each.

Upon retirement, the employee will receive a lump sum amount including both the employee and employer’s contributions with interest accrued.

State insurance

Companies with at least 10 employees, or 20 employees in the State of Maharashtra, must make contributions to the Employees’ State Insurance fund. For all employees whose monthly wages do not exceed INR 21,000 (US$285), the employer must contribute 3.25 percent of the employee’s monthly salary and the employee must contribute 0.75 percent.

Payment of gratuity

Gratuity is a type of benefit in India for employees who are retiring or leaving the company after several years of service. This is applicable to companies that have had at least 10 employees within the preceding 12 months.

To be eligible for gratuity, the employee must render 5 full years with the employer except in cases where he or she can no longer work due to an accident or illness.

Gratuity is equivalent to 15 days’ worth of wages for each year of service. The number of years is rounded to the nearest number of years, that is, five years and seven months would count as six years of service.

Annual bonuses

In India, the law requires employers to pay bonuses. As stated in the Payment of Bonus Act, 1965, companies with at least 20 employees or factories with at least 10 employees must pay each eligible employee a bonus. The act states that the employer must pay the bonus within the financial year.

The amount must be at least 8.33 percent but not exceeding 20 percent of the salary or wage earned by the employee or INR 100, whichever is higher. The compensation package must include this bonus.

According to Section 16 of the same Act, the company does not have to pay its employees the bonus for the first five years if it has not made a profit for that financial year. However, after the first five years, the company will have to pay the bonus whether it has profited that year or not.

Failure to comply with the act could result in imprisonment or a fine of up to INR 1,000 (US$13.84).

Work hours and overtime pay in India

For most industries, employees should not work more than nine hours per day, and not more than 48 hours per week in total.

The Minimum Wages Act, 1948 states that if an employee has fixed minimum wages for a particular period of time, the employee should receive overtime pay for work done beyond the specified period. Like the regulations for work hours, regulations for overtime pay may also vary depending on the industry.

The cost of hiring an employee in India

Hiring new employees is a significant financial undertaking. The main consideration is the cost of labor, which can be complicated to calculate in India due to the way compensation packages are structured. In addition to determining the amount each new employee will cost the company, one also needs to consider the costs of the recruiting process.

These costs may entail the following:

  • Registration costs for setting up the Indian entity
  • Lawyers and accountants to help in compliance with Indian employment and taxation laws
  • HR recruiter and manager’s time spent on hiring tasks
  • Fees for a hiring agency if one chooses to outsource
  • Cost to host or attend hiring events
  • Job advertisement costs
  • Travel costs for any recruiters traveling to India
  • Relocation costs for new hires if applicable
  • Cost to conduct background checks through a third-party provider

Maternity and paternity Leave

The Maternity Benefits (Amendment) Act, 2017 applies to all shops and any establishments that employ over 10 workers. Under the Act, 26 weeks of paid leave is available for women for the first two children, and 12 weeks subsequently. Companies employing more than 50 people must also provide crèche services.

The Paternity Benefits Bill, 2017 is set to be up for discussion in the next parliamentary session. However, a significant number of organizations, especially foreign companies like Microsoft and IKEA, already include a mutually decided paternity leave clause within their company policy. This practice has been well received by the Indian workforce and lauded as a good HR move.

Prevention of sexual harassment in the workplace

The Indian government has brought the safety of women in the workplace to the forefront of its law making.

An Internal Complaints Committee must be set up by all organizations with more than 10 employees in accordance with the norms laid out in the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013. All complaints should be actively pursued, evidenced, and redressed immediately.

To guarantee employee safety, companies must draft appropriate HR policies within the firm, and ensure they are clearly communicated to all personnel.

HR personnel should organize workshops or sensitization programs and encourage communication to promote an organizational culture that provides for a fair and safe working environment for all its employees.

Impact of digitalization

Workplaces are becoming increasingly virtual. Firms and employees both require real-time employee information to improve critical efficiencies and maintain core compliances within the organization.

The scope of work for HR departments has expanded to include the use of digital technology, through apps and in-house databases, especially in the service and consultancy sectors. This includes the use of online platforms and applications for processes, such as recruitment, learning and development, and even day-to-day administration.

Business leaders should consider affordable integrated software solutions that automate aspects of HR administration and payroll. This allows back offices to focus on providing value added services, allowing front offices to invest in growth, services, and innovation. Making use of third-party vendors may be a cost-effective strategy for smaller companies.

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