Labor Laws in India [Complete Guide]

Planning to hire remote employees in India? You'll find a wealth of available talent; however, India's complex regulatory framework can trip up even experienced international employers.

With over 40 traditional labor statutes recently consolidated into four streamlined codes, navigating Indian employment law requires careful attention to both federal and state-level requirements. 

Companies that get it wrong face substantial penalties, including fines and potential criminal liability.

Key takeaways:

• India's four labor codes consolidate dozens of older statutes, but employers must still navigate state-specific differences until implementation is complete.
• Employers must contribute to multiple social security programs, with combined rates typically ranging from 20-25% of an employee's gross salary.
• Termination procedures are strictly regulated, requiring proper cause and notice periods that vary based on employee classification and tenure.

Labor Laws in India: What You Need to Know

India's labor laws operate through a dual central and state legislation system. Historically, this created a maze of over 40 overlapping statutes that often contradicted each other. The Indian government's response has been ambitious: four new labor codes designed to streamline the entire system.

The four codes consolidating Indian labor law are:

• The Code on Wages, 2019: Covers minimum wages, bonus payments, and wage-related disputes
• The Industrial Relations Code, 2020: Governs employment contracts, termination procedures, and dispute resolution
• The Occupational Safety, Health and Working Conditions Code, 2020: Sets workplace safety standards and working hour regulations
• The Social Security Code, 2020: Manages provident fund, gratuity, and insurance schemes

Implementation has been uneven across states, with some regions fully adopting the new codes while others maintain older legislation. Companies hiring in India must verify which framework applies in their specific locations.

State governments retain significant authority over labor matters. What's legal in Maharashtra might require different procedures in Karnataka. This decentralized approach means compliance strategies must account for regional variations in everything from minimum wages to factory regulations.

Who Is Covered by the Employment Laws in India?

Indian employment laws apply to virtually all employer-employee relationships, but coverage varies based on business size and industry type. The new labor codes have attempted to standardize these thresholds, though state variations persist.

Most employment protections kick in once a business employs 10 or more workers. Smaller establishments often face reduced compliance obligations, though basic wage and safety requirements typically apply regardless of size.

The laws cover permanent employees, contract workers, and apprentices differently. Permanent employees receive the strongest protections, while contract workers hired through third-party agencies fall under separate regulations. Independent contractors operate outside traditional employment law, though misclassification carries serious penalties.

Certain sectors face additional requirements. IT companies, manufacturing facilities, and mining operations must each navigate sector-specific regulations beyond the core labor codes.

Employment Contracts & Probation Periods

Indian law doesn't mandate written employment contracts for all positions, but they're strongly recommended and required for specific categories of workers. Contracts should cover the full terms of employment, including specifying job responsibilities, compensation structure, working hours, and termination procedures.

Essential contract elements include the employee's designation, salary details, leave entitlements, and any confidentiality or non-compete clauses. Companies must also clearly outline probation terms, performance evaluation criteria, and grounds for termination.

Probation periods are legally permissible and commonly used. For most positions, probation can generally last from three to six months, though some companies extend this to one year for senior roles. During probation, termination procedures are simplified, requiring shorter notice periods and reduced severance obligations.

Probationary employees still receive basic protections. They're entitled to minimum wage, statutory benefits, and safe working conditions. However, they typically don't qualify for certain long-term benefits like gratuity payments.

Working Hours & Wages

Standard working hours in India are capped at eight hours per day and 48 hours in a workweek. The Occupational Safety, Health and Working Conditions Code maintains these limits while introducing more flexibility for specific industries.

Overtime work requires employee consent and triggers premium pay rates. Employees earn double their normal hourly rate for overtime hours, with additional restrictions on total weekly hours, including overtime.

Rest periods are mandatory. Workers must receive at least one day off per week, and daily shifts cannot exceed 12 hours, including overtime. Night shift workers receive additional protections and compensation premiums.

Minimum wages vary dramatically across states, skill levels, and industries. The central government sets baseline rates, but states can establish higher minimums. Unskilled workers in Delhi might earn INR 17,000 monthly, while similar positions in rural areas could start at INR 8,000.

Key compensation components include:

• Gratuity: Lump-sum payments for employees completing five years of continuous service, calculated at 15 days' wages per year worked
• Bonus: Annual payments for employees earning below specified thresholds (typically around INR 21,000/month), on average ranging from 8.33% to 20% of annual wages

Employers must maintain detailed payroll records and comply with complex deduction rules. The Payment of Wages Act restricts unauthorized deductions and mandates specific payment timelines.

Health & Safety Standards

Workplace safety requirements depend heavily on industry type and facility size. The Occupational Safety, Health and Working Conditions Code establishes baseline work environment standards that apply across sectors.

Manufacturing and construction companies face the strictest requirements. These include mandatory safety equipment, regular health checkups, accident reporting procedures, and safety committee formation. Factories employing 500 or more workers must appoint full-time safety officers.

Office environments have lighter obligations but still must ensure basic safety measures. This includes fire safety equipment, emergency evacuation procedures, and ergonomic workspace standards. Companies with a large number of female employees may need additional security measures and harassment prevention policies.

Anti-discrimination protections cover gender, religion, caste, race, and place of birth. Sexual harassment prevention is mandatory for all employers, requiring internal complaint committees and regular awareness training.

Employer Taxes

Indian employers contribute to multiple mandatory social security programs. These tax contributions typically range from 20-25% of an employee's gross salary, making them a significant cost factor in hiring decisions.

Major employer contributions include:

• Employees' Provident Fund (PF): 12% of basic salary plus dearness allowance
• Employee State Insurance (ESI): 3.25% for medical coverage (applies to workers earning below INR 25,000 monthly)
• Professional Tax: State-specific levies ranging from INR 200-2,500 annually
• Labour Welfare Fund: Required in some states, usually a nominal monthly amount

Independent contractors typically handle their own tax obligations, though companies must verify contractor status carefully. Misclassified workers can trigger retroactive employer contribution requirements plus penalties.

Professional tax rates vary significantly by state. Maharashtra charges higher rates than Tamil Nadu, and some states entirely exempt certain categories of workers.

Termination Guidelines & Severance Pay

India doesn't recognize at-will employment. Termination of employment requires proper cause, adequate notification, and often government approval for larger establishments.

For companies with 100 or more workers, layoffs and terminations require government permission under the Industrial Relations Code. This process can take months and isn't guaranteed approval. Smaller companies have more flexibility but still must follow due process.

Valid termination grounds include misconduct, poor performance, redundancy, and economic necessity. However, employers must document issues thoroughly and often provide improvement opportunities before termination.

Notice periods depend on employee category and tenure:

• Workers: 30 days' notice or payment in lieu
• Officers and managers: Typically 90 days, though contracts may specify more extended periods
• Probationary employees: 14 days or contract-specified terms

Severance pay requirements include:

• Retrenchment compensation: 15 days' average pay per year of service for layoffs
• Gratuity: 15 days' wages per year for employees completing five years
• Notice pay: Full salary for the notice period if payment in lieu is provided

Health Insurance

The Employees' State Insurance (ESI) scheme provides medical coverage for workers earning below INR 25,000 monthly. Both employers and employees contribute to this program, with employers paying 3.25% and employees contributing 0.75% of wages.

ESI covers medical expenses, disability benefits, and dependents' healthcare needs. The scheme operates through a network of hospitals and dispensaries, though service quality varies by location.

Many companies supplement ESI with private health insurance, particularly for higher-earning employees excluded from the government scheme. Private coverage often provides better hospital networks and faster service.

Paid Leave Laws

Indian labor law mandates several paid leave policies, with specific entitlements varying based on the applicable state regulations and company size.

Vacation and Holiday Leave

Employees typically earn about one day of leave for every 20 days worked, which adds up to around 15 days off each year. Known as "earned leave" or privilege leave, it can be carried forward and cashed out upon employment termination.

Casual leave typically provides 12 days annually for short-term, urgent, or unforeseen personal needs. Unlike earned leave, casual leave usually can't be rolled over to the following year.

Public holidays vary by state and religion, ranging from 10-15 days annually. National holidays like Independence Day and Republic Day apply universally, while religious festivals depend on local demographics.

Companies often provide additional vacation days beyond statutory minimums to attract talent, particularly in competitive sectors like technology and finance.

Sick Leave

Employees earn one day of sick leave per month, up to 12 days annually. Employees receive full pay during sick leave, funded entirely by the employer for the first few days, with ESI potentially covering extended illnesses.

Extended sick leave may require medical certification, particularly for absences exceeding three consecutive days. Some companies provide additional sick leave benefits beyond statutory requirements.

Parental Leave

The Maternity Benefit Act provides 26 weeks of paid maternity leave for women with children born after their employment begins. Leave can start up to eight weeks before the expected delivery date, with the balance taken afterward.

Employees receive their full salary during maternity leave, with the employer covering the entire amount. Women who adopt a child are entitled to 12 weeks of paid leave. 

Paternity leave isn't mandated by federal law, though some states and private companies choose to offer paternal benefits. Companies in progressive states or competitive industries often provide one to three weeks of paternity leave.

Indian Independent Contractors

Companies can hire independent contractors in India, but classification requirements are strict. Misclassification carries significant penalties, including retroactive employee benefit payments and fines.

Independent contractors operate their own businesses, use their own tools, control their work methods, and serve multiple clients. They invoice for services rather than receiving regular salaries and handle their own tax obligations.

Contract workers employed through third-party agencies fall under the Contract Labour (Regulation and Abolition) Act. These workers receive certain protections and benefits, though fewer than permanent employees. Employers may still have obligations regarding working conditions and welfare measures.

The distinction between employees, contract workers, and independent contractors has significant implications for tax obligations, benefits, and termination procedures. Companies should consult legal experts before hiring contractors.

Penalties for Not Following Indian Labor Laws

Non-compliance with Indian labor laws triggers escalating penalties, which can include fines, criminal prosecution, and business closure orders.

Financial penalties range from INR 10,000 to INR 200,000 for most violations, with repeated offenses facing higher fines. Serious violations like wage theft or safety violations can result in criminal charges carrying potential jail terms of six months to three years.

Administrative penalties include license revocation, business closure orders, and blacklisting from government contracts. Labor departments can also impose corrective orders requiring specific actions within defined timeframes.

Employee claims for unpaid benefits, wrongful termination, or safety violations can result in substantial damage awards.

How to Stay Compliant When Hiring in India

Companies have two primary options for hiring Indian employees: establishing a local entity or partnering with an Employer of Record (EOR).

Setting up an Indian subsidiary requires significant time, cost, and ongoing compliance management. The process involves company registration, tax registration, labor law compliance setup, and ongoing administrative obligations. Minimum capital requirements and bureaucratic procedures can delay operations by several months.

An EOR eliminates these complications by serving as the legal employer of Indian employees while allowing companies to maintain day-to-day management control. This approach provides immediate market entry, comprehensive compliance management, and protection from regulatory changes.

EOR services handle payroll processing, tax compliance, benefits administration, and regulatory reporting. They also stay current with changing regulations and ensure ongoing compliance without requiring internal expertise.

Hire in India with RemoFirst

Ready to tap into India's skilled workforce without the compliance headaches? RemoFirst makes hiring employees in India straightforward and compliant.

We handle employment law compliance across 185+ countries and will ensure your Indian hires receive proper contracts, benefits, and protections while keeping you safe from regulatory pitfalls. Our local experts stay current with changing regulations so you can focus on growing your business.

‍Book a demo to see how we can help you employ the best talent in India and around the world.