Highly educated workers, competitive costs, and explosive growth in tech expertise have made India a top hiring destination for global companies. In fact, our 2025 State of International Hiring Survey Report found that 88% of companies plan to hire in India next year. However, 62% also ranked India as their biggest compliance challenge.
That’s because India’s compliance system operates on multiple levels simultaneously. National labor laws overlap with dozens of state-specific codes that differ by region, industry, and company size. What might appear simple on paper quickly becomes a maze of regulations and filings.
If you miss the mark on compliance in India, the fallout can be serious — including big fines, back pay issues, legal headaches, and even temporary shutdowns. However, when companies get it right from the start, they not only stay protected from legal fallout but also gain a competitive edge in one of the most dynamic talent markets in the world.
Key takeaways:
- India is consolidating 29 labor laws into four codes, which will fundamentally expand employer responsibilities and increase penalties for violations.
- Courts typically side with workers in misclassification disputes, ordering companies to pay years of retrospective benefits plus interest and fines — no matter what the worker’s contract states.
- Professional tax rates, EPF thresholds, and filing schedules vary dramatically across India's 28 states, with penalties accumulating daily for missed deadlines.
Understanding India's Compliance Environment
Picture a compliance puzzle where the pieces keep changing shape. India's labor and tax systems layer federal mandates over state-specific rules, then add regional requirements that shift based on your location, industry, and headcount.
Right now, the entire framework is being rebuilt. Between 2019 and 2020, the government passed four comprehensive labor codes to replace 29 existing laws: the Code on Wages, Code on Social Security, Industrial Relations Code, and Occupational Safety, Health and Working Conditions Code.
These changes will fundamentally reshape operations. Take the Industrial Relations Code: companies with up to 300 employees can now adjust their workforce without government approval — up from the previous 100-worker threshold. That sounds like flexibility, but the flip side is steeper penalties for getting other aspects wrong.
The real challenge is staying compliant in multiple jurisdictions as regulations shift — and that requires real due diligence.
Labor Law & Employment Contract Risks
Employment contracts in India must satisfy both national labor codes and state-specific Shops and Establishments Acts. These regulations outline working hours, overtime calculations, leave entitlements, and termination procedures, with details varying significantly.
Contracts require precision. Job descriptions, compensation breakdowns, benefits eligibility, notice periods, termination grounds — courts scrutinize every clause. Vague language gets interpreted in the employee's favor. Companies often discover this during disputes when ambiguous overtime provisions or unclear termination clauses cost them significant back pay.
Industry-specific regulations multiply the complexity. Manufacturing facilities face different requirements than IT companies. Call centers operate under distinct rules from retail establishments. Each variation demands specific documentation and procedures.
The ongoing labor code changes add another layer of complexity. The Code on Wages establishes a uniform "wages" definition to reduce disputes, while the Social Security Code extends benefits to gig and platform workers. Companies need to start updating their systems now, rather than scrambling to implement them after they go into effect and risk being out of compliance.
Employee Misclassification Risks
Classifying someone as a contractor doesn't automatically make them one in the eyes of the law. Indian courts look past contractual labels to examine the actual working relationship, and under the Industrial Disputes Act, they usually side with workers.
Regulators use a multi-factor test examining control over:
- Work methods
- Financial independence
- Equipment ownership
- Service exclusivity
Consider a typical scenario: a company hires independent contractors for software development, provides them with company laptops, requires them to work specific hours, and restricts them from taking on other clients. Indian labor courts routinely reclassify these arrangements as employment relationships, triggering a misclassification ruling.
Misclassification penalties can be steep. Companies must pay retroactive employment benefits from day one of the engagement, including paid leave, bonuses, and social security contributions. Then comes interest charges on delayed payments, followed by penalties for non-compliance. Legal defense costs can pile up quickly, as cases often drag through the courts for months.
Reputational damage amplifies the financial hit. Word spreads fast in talent markets. Other contractors might start questioning their status. Potential clients will often hesitate to engage with companies that are facing labor disputes.
Even bulletproof contracts won't save you if the substance of the relationship looks like employment. Courts examine how work actually gets done, not what the paperwork claims.
Payroll & Taxation Risks
India's payroll system combines federal complexity with state-level variations. Requirements change frequently, and getting them wrong triggers immediate financial consequences.
Mandatory contributions to the Employee Provident Fund Organisation (EPFO) kick in once a business hits the 20-employee mark. Companies must register with the EPFO within one month of crossing that threshold and employers and employees are required to contribute 12% of the basic salary and dearness allowance.
Contributions are due by the 15th of each month. Miss that deadline, and you'll pay 12% annual interest on the delayed amount. The EPFO can also impose penalties up to INR 5,000 for late returns. They recently reduced damage rates from 25% to a cap of 12% annually for delays, but that's still a significant hit on already-tight margins. Professional tax rates make things messier, as they vary dramatically by state.
Operating in multiple states? Each location requires separate registrations, distinct payment schedules, and unique compliance procedures. That means a company with employees in five states manages five different professional tax regimes simultaneously.
The EPFO doesn't take enforcement lightly. Daily penalties can accumulate fast. Worse, payroll mistakes often cascade. An error in EPF calculations affects ESI contributions, which in turn impact professional tax, ultimately affecting income tax withholding.
Statutory Benefits & Social Security Risks
Mandatory benefits in India aren't negotiable, regardless of how you structure your operations. Companies that treat these as optional face severe penalties.
Beyond EPF, other required benefits include:
- Employee State Insurance (ESI): Health insurance and social security for employees below specific salary thresholds. Both employer and employee contribute, with contribution limits and filing requirements varying by state. The ESI Act governs these requirements.
- Gratuity payments: After five years of continuous service, employees receive gratuity calculated on their last drawn salary and years of service. The Payment of Gratuity Act, 1972 provides the exact formula.
- Maternity benefits: The Maternity Benefit Act mandates 26 weeks of paid leave for the first two children, 12 weeks for subsequent children. Companies with 50 or more employees must provide crèche facilities (aka daycare) within a reasonable distance, allowing mothers four daily visits.
Maternity violations carry consequences: fines of up to INR 5,000 or imprisonment for up to three months. Companies can't assign physically challenging tasks during the 10 weeks preceding delivery, and female employees may not work during the six weeks immediately following childbirth.
Miss any statutory benefit and expect penalties, employee lawsuits, and regulatory investigations that freeze operations while you sort things out.
Data Protection & Employee Privacy
India's Digital Personal Data Protection Act (DPDPA), which passed in August 2023, finally went into effect in late 2025. The law applies to any digital personal data processed in India and also covers foreign companies that offer goods or services to people in India.
To be compliant, organizations must obtain clear, affirmative consent before processing data, with a few exceptions for legal requirements and specific employment-related purposes.
When it comes to employee data security, information must be accurate and complete, especially when it influences decisions or is shared with other parties. Companies also need to implement solid technical and organizational safeguards in place and provide a straightforward method for individuals to report concerns or complaints.
Data breaches require notification to both the Data Protection Board of India and any individuals impacted by the breach. Organizations classified as Significant Data Fiduciaries face additional requirements: appointing a Data Protection Officer based in India and conducting annual Data Protection Impact Assessments.
Cross-border data transfers remain permitted unless the Indian government specifically restricts transfers to certain jurisdictions.
Termination & Offboarding Risks
India's termination laws provide employees with strong protection. Improper terminations can result in court-ordered reinstatement years later, with full back pay.
One-month notice periods are typically required, although contracts often specify longer periods, sometimes up to three months. Companies can also provide pay in lieu of notice for immediate separation.
Involuntary terminations require valid, documented reasons. Misconduct dismissals must include a fair inquiry, providing employees with an opportunity to defend themselves before termination. Retrenchments need economic justification and government notification for larger employers.
There are multiple severance obligations for employers, including:
- Retrenchment compensation: 15 days' wages per completed year for workers with over one year of tenure
- Gratuity: 15 days' wages based on last drawn salary for every completed year (employees with 5+ years), capped at INR 20 lakhs (roughly USD 23,840)
- Leave encashment: Payment for all unused leave days
- Contractual dues: Variable pay, bonuses, anything else stated in the employment agreement
India doesn't recognize at-will employment. Firing someone without proper notice or equivalent pay is a violation of the law. Larger employers terminating multiple workers must notify local governments before taking action.
Weak documentation or insufficient cause? Courts can order full reinstatement or massive compensation awards. Document everything, follow procedures precisely, and get local legal guidance before terminating any employees.
How an Employer of Record (EOR) Can Help
Managing India's compliance requirements demands specialized knowledge, local expertise, and constant attention to regulatory changes. Most companies lack the internal resources to handle this effectively.
One solution? Partnering with an Employer of Record. The EOR becomes the legal employer for your Indian workers while you maintain operational control. This arrangement provides several advantages:
- Compliance management: EOR providers track federal and state employment laws, tax regulations, and upcoming labor code changes. They handle all registrations, filings, and regulatory communications across every jurisdiction where you employ workers.
- Payroll accuracy: From EPF contributions to varying professional tax rates across states, EORs manage calculations, deductions, and payments. They ensure timely remittance and maintain proper documentation.
- Classification expertise: EORs structure relationships correctly from the start, preventing misclassification issues before they arise — whether you're engaging full-time employees, contractors, or other types of workers.
- Benefits administration: Managing EPF, ESI, maternity leave, and gratuity requires detailed knowledge of eligibility rules, calculation methods, and documentation requirements. EORs handle every aspect of benefits compliance.
- Contract preparation: EORs create employment contracts that satisfy both national and state requirements, clearly defining compensation, benefits, notice periods, and termination conditions.
Beyond day-to-day compliance, experienced EORs provide strategic insights into regulatory changes. As India implements its new labor codes, having a partner who can adapt your operations quickly becomes invaluable.
Compliantly Employ & Pay Indian Talent With RemoFirst
RemoFirst simplifies global hiring in India and 185+ countries as your Employer of Record. We handle the entire employment lifecycle: compliant contracts, accurate worker classification, onboarding, payroll, tax withholdings, social contributions, and statutory employee benefits.
Our platform gives you a single view of your entire global team's locations, salaries, currencies, tax documentation, and benefits. We stay ahead of regulatory compliance, including India's evolving labor code landscape, so your operations remain compliant as requirements shift.
Whether you're hiring your first employee in India or expanding an existing team, RemoFirst provides the local expertise and infrastructure you need without the need to establish a legal entity.
Book a demo to see how we can help you build your team in India and around the world with confidence.
