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HR and Payroll in India: 10 Best Practices for Employers

By Rohini Singh, India Briefing, Dezan Shira & Associates
Posted: 12th June 2018 08:38

As India integrates into the global market, foreign firms entering the country have to strike a balance between following their own best practices while adapting to local norms and having a firm understanding of legal requirements in the country.  

Good human resource (HR) practices streamline organizational functions and ensure low attrition rates while growing workforce capabilities and driving value within an organization. In-company policies play as important a role as other legal factors.

Here we briefly discuss 10 key areas that foreign employers should pay attention to when handling staff in India.

1. Employment Contracts

India does not mandate a written employment contract. However, it is advisable for companies to establish at least basic contracts to ensure easy establishment of terms and conditions of employment.

Indian employment laws are diverse and form a complex framework that employers must navigate carefully. Apart from labor laws, there are industrial laws, The Companies Act, and the Contract Act, 1872 that govern employment conditions in India.

Both the state and federal governments create and enforce laws pertaining to employment in India, which can complicate compliance. HR managers should keep themselves updated and develop employment contracts in accordance with these to prevent future legal complications.

2. Wages

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.

Companies should ensure that employment contracts consider this while deciding remuneration for employees.
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.

 3. Termination of employment

Employees in India may only be terminated as per the terms and conditions within their employment contract.
However, companies should note that all employers must adhere to the federal and state labor laws when laying off or terminating workers – the conditions drafted in company contracts cannot supersede these legal statues.
Finally, termination without notice is prohibited in India. Termination periods vary by function and length of employment.

4. 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.

5. Prevention of sexual harassment in the workplace

The Indian government has brought the safety of women in the workplace at the forefront of 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.

6. Public holidays and work weeks

India observes three national holidays – Republic Day (January 26), Independence Day (August 15), and Gandhi Jayanti (October 2).

On these days, all institutions, whether public or private, must remain closed.

Government approval is necessary for any organization to function on these days. Only certain establishments such as factories and industries where the work process is considered to be continuous, hospitals, and travel agencies are allowed to operate 365 days/24 hours – subject to additional wages and staff deployed for work on those days. 

Additionally, firms must inform the annual list of holidays and weekly offs available to employees each year. The number of leaves and categories of leave must ideally be explained in the employee contract.

Many laws in India, such as the Factories Act, 1948, also provide for the maximum number of work hours and the amount of overtime wages to be paid to labor employed.

7. Restrictive clauses in employment contracts

Employers should note that including restrictive clauses into a contract might not be enforceable through the Indian courts. The Contract Act, 1872, necessitates the fundamental right of all citizens to carry on any profession, trade, or business.

Non-compete, non-disclosure, non-solicitation, and ‘garden leave’ clauses are examples of restrictive clauses that can only be imposed by the courts if plausible grounds – with respect to time-period and nature of activities involved – are provided.

The best way to ensure enforceability is to restrict the scope of the clauses as much as possible within these dimensions. However, this does not guarantee legal protection to employers.

8. Gratuity and Provident Fund

The Payment of Gratuity Act, 1972 provides the guidelines for gratuity owed to an employee.
The number of years of service of the employee is the criteria for deciding the amount of gratuity owed, and this payment by the company is obligatory by law.

The minimum amount (more may be approved) must be given to an employee in case of the following circumstances:

  • Retirement;

  • Resignation;

  • Disablement due to accident or illness; or,

  • Death of the employee (gratuity paid to employee’s nominees).

However, if an employee is dismissed for proven criminal or moral reasons, no gratuity is owed to him.
Similarly, the Employees Provident Fund Organization of India (EPFO) oversees and regulates the Employee’s Provident Fund (EPF).

Under this scheme, the employer and employee contribute an equal amount to the fund every month, which is accessible to the employee at certain points in their career.

The EPF scheme is mandatory for a salary below Rs 15,000 (US$220) and voluntary thereafter.

9. Impact of digitalization 

Workplaces are becoming increasingly virtual. Firms andemployees both require real time employee analytics to improve critical efficiencies within the organization.

The scope of work for HR departments has expanded to include the use of digital technology to provide this information, through apps and in-house databases, especially in the service and consultancy sectors.

This includes the use of online applications for processes such as recruitment, learning and development, and even day-to-day administration.

HR departments should maintain and regularly interact with these digital platforms to ensure efficiency in talent acquisition and management as well as communication with all company stakeholders.  

10. Adaptive work culture

Job seekers in India are moving away from traditional work modes, such as a ‘9 to 5’ time pattern – to a holistic view of building careers.

Organizations are also gradually incorporating the idea of work-life balance into their corporate culture.
Adaptive and sensitized HR departments are key to improving these organizational values, and fostering a balance between employee satisfaction and productivity.

Working conditions in Indian multinational companies are also changing to incorporate flexi-time or work from home options into employment contracts to boost employee retention and loyalty.
This article was first published on India Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.

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