Employment termination in India is a sensitive area governed by a combination of central and state-specific labour laws. Due to the adoption of socialism in our country, labour laws are designed to protect the workers/employees from the arbitrary, oppressive, and prejudicial behaviour of employers. The termination laws in India are enacted to safeguard employees against arbitrary action and to prevent any miscarriage of justice. “Therefore, the termination process must be undertaken with due care to ensure legal compliance and minimise the risk of disputes. For employees, it is essential to be aware of the general rules governing termination, while for employers, it is equally imperative to adhere to the statutory provisions and contractual obligations.
In this blog, we will understand the rules governing termination, types of termination, and mandatory requirements..
Rules Governing Employment in India
Employment in India is governed by a mix of central and state laws, depending on the type of employee. The following are the main statutes governing employment in India:
- The Industrial Disputes Act, 1947: It governs the conditions for retrenchment, layoffs, and closures, notice periods and compensation in case of termination, grievance redressal and dispute resolution between employer and employee, and protection against unjust termination.
- The Shops and Establishments Act (State-wise): This Act applies to commercial offices, retail shops, and other non-factory establishments.
- The Factories Act, 1948: It governs health, safety, welfare, work hours and rest intervals of the workers, including their working conditions, cleanliness, ventilation, and lighting, and rules of employment of women and children in factories.
- The Payment of Wages Act, 1936
- The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
Involuntary Termination
When the employer ends the employment of an employee, the reasons for involuntary termination include:
- Termination for misconduct: This happens when an employee is removed from service due to serious violations such as theft, fraud, insubordination, harassment, or violation of company policies.
- Termination due to redundancy/retrenchment: Redundancy or retrenchment occurs when the role or position itself becomes unnecessary, and it can be due to restructuring, cost-cutting, automation, or downsizing.
- Termination during probation: Employees on probation can be terminated with shorter notice periods since the employment is still under assessment. Their employment is confirmed only after the completion of their probation period upon the approval of the manager/senior.
- Termination due to expiry of contract: In cases where employees are hired on fixed-term contracts, employment ends automatically upon the expiry of the contract.
- Closure of business: If a company or business unit is shut down permanently, all employees are terminated as a result of the closure.
Notice Period Requirements
1. For Industrial Workers (Non-Managerial Staff):
Under the Industrial Disputes Act, 1947, a workman who has been employed for at least one year must receive:
- At least one month’s notice (or wages in lieu of notice)
- Retrenchment compensation, if applicable
However, if the termination is due to misconduct, no notice period may be required, but only after a proper disciplinary process.
2. For office, managerial, or white-collar employees:
These employees are not covered under the Industrial Disputes Act, 1947, so their termination conditions depend on:
- Employment contract: The employment contract governs the relationship between the employee and the employer. It highlights the rules governing employment. The agreement provides clear rules for the notice period and rules governing the employment of an employee during the notice period.
- Company policies: In general, companies offer 30 to 90 days’ notice, or payment in lieu of notice. If an employer terminates without following contract terms, the employee has the right to seek damages in the Labour Court of the appropriate jurisdiction.
Termination During the Probation Period
Employers often place new employees on a probation period for 3 to 6 months. During this time:
- The notice period is shorter
- Termination is easier for both parties
It is pertinent to note that even probationers cannot be removed arbitrarily without sufficient notice. The Honourable Supreme Court of India has ruled that if termination is done in a way that stigmatises the employee, then a formal inquiry may be required even during probation.
Retrenchment and Layoffs
Retrenchment is the removal of an employee due to economic or business reasons, such as cost-cutting measures, role redundancy, business restructuring, market decline, etc. The law requires that:
The worker has completed at least one year of continuous service
The employer gives:
- One month’s notice
- Retrenchment compensation equal to 15 days’ average wages for every completed year of service
- The “last in, first out” rule should be followed unless valid reasons exist
NOTE: In large industrial establishments (100 or more workers), prior approval from the government is mandatory before retrenchment.
Termination Due to Misconduct
Misconduct includes serious violations such as:
- Theft or fraud
- Acts of violence
- Habitual absenteeism
- Breach of confidentiality
- Willful insubordination
Termination due to misconduct requires following the principles of natural justice, including:
- Issuance of a show-cause notice
- Conducting an internal inquiry
- Giving the employee a chance to respond
- A reasoned order of termination
If the employer skips this process, courts may consider the termination illegal, and the employee may be reinstated or awarded compensation.
Payment of Statutory Dues
After termination, the employer has to pay the following dues:
- Unpaid salary
- Leave encashment
- Gratuity (if an employee is eligible)
- Bonus (if covered under the Payment of Bonus Act)
- Severance pay (in case of retrenchment)
Gratuity becomes payable after 5 years of continuous service, and is calculated as:
Termination Without Cause
There is no concept of “at-will” employment in India. Employers have to have a valid reason to terminate an employee, especially if the employee is:
- Covered under the Industrial Disputes Act
- A permanent staff member
- Not serving a probation period
If an employer ends the employment without a reason and without following due procedure, the termination can be challenged in court.
Mass Layoffs and Closure
In case of mass terminations, such as factory closures or layoffs due to mergers or loss of business, the following must be followed:
- 30 to 60 days’ notice
- Severance packages
- Government approval (for larger units)
Contractual Employees
For those hired on fixed-term contracts, the employment ends when the contract expires. There is no need to send a separate notice unless the contract provides otherwise.
Conclusion
Termination is a sensitive process in India and must be done fairly, in compliance with established legal standards. Whether you are a factory worker, office executive, or manager, it is important to know your rights regarding notice, severance, and process. For employers, any failure to follow the legal process can lead to court cases, penalties, or even reinstatement orders from the labour court. Therefore, both parties must approach the termination process professionally with utmost care.
