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Termination Rules in India: Guide for Foreign Employers

September 7, 2026
Gaurav Vashistha
Foreign Company Setup in India
0

Table of Content

India does not follow the broad concept of at-will employment seen in jurisdictions such as the United States. Termination rights depend on the employment contract, applicable labour laws, employee classification, and state-specific regulations. Foreign employers running an Indian subsidiary need to internalise that before anything else, because it changes how every headcount decision gets made. A layoff that would take an afternoon in Texas or London can take months here, and the difference isn’t bureaucracy for its own sake. Employee termination rules in India start from a different assumption than most common law systems. The law treats the employee as the party who needs protecting, not the employer. Every exit an employer initiates needs a documented reason, a procedure that matches the type of exit, statutory payments on a fixed clock, and, for large-scale retrenchment, government sign-off before it happens. Tribunals lean toward the worker almost by default, and when an employer can’t back up its case with paper trail, the usual outcome is reinstatement plus back wages for the entire gap. Get it wrong, and the financial exposure can significantly exceed the cost of a properly managed separation. The Industrial Relations Code, 2020 has been in force since November 21, 2025, replacing the Industrial Disputes Act, 1947. Despite the change in legislation, much of the existing legal framework for employee termination has been retained.

Which Law Actually Governs Terminations Now?

The IR Code 2020, in force since November 21, 2025, but state Shops and Establishments Acts still do most of the daily work. The Industrial Relations Code, 2020 was enacted to consolidate and replace the Industrial Disputes Act, 1947, the Trade Unions Act, 1926, and the Industrial Employment (Standing Orders) Act, 1946 into a single framework.. Even with this change, employers will find that the rules on retrenchment compensation, reinstatement, and government approval for large-scale layoffs are much the same as before. What changed is the threshold for needing that permission, a new re-skilling fund contribution, and tidier procedure. Meanwhile, state Shops and Establishments Acts keep governing the everyday stuff for most commercial employers, including IT firms and professional services businesses: notice periods, wage settlement deadlines, leave encashment at exit. A company with offices in Mumbai, Bengaluru, and Gurugram is juggling three sets of state rules on top of the central Code, not one uniform national standard.

Who Counts as a “Worker,” and Why Does It Matter?

Whether someone is legally a “Worker” decides how much protection they get, and the line is blurrier than most foreign employers assume. The IR Code’s strongest protections, retrenchment pay, reinstatement rights, government notification, apply to “worker”: people doing skilled, unskilled, manual, technical, operational, clerical, or supervisory work below a set wage ceiling. Managers and administrative staff above that ceiling fall outside the definition, and their exits are governed mostly by contract law. That line isn’t always where people expect it. A software engineer at a foreign-owned IT subsidiary usually is a Worker, because “technical work” covers the role. A mid-level HR or finance manager could land on either side depending on duties and the current wage threshold, which the central government revises periodically.

Assumption	Reality
“They’re salaried and senior, so they’re not a Worker”	Wrong test. It’s about the nature of the work, not the title
“Engineers are managerial, so IR Code doesn’t apply”	Most technical ICs qualify as workmen
“We can treat all employees the same way at exit”	Worker status changes the legal exposure significantly

Employers who assumed well-paid technical staff sat outside the Worker definition have generally found out the hard way, in tribunal.

What Does an Individual Termination Actually Require?

A documented reason, the right notice, statutory payments on time, and for workmen facing disciplinary dismissal, a formal domestic enquiry. Skipping the domestic enquiry is the most common misstep among foreign employers, and it’s costly even when the underlying misconduct was real. If a Worker is being dismissed for fraud, insubordination, or persistent underperformance, the process generally needs:

A written charge sheet
A genuine chance for the employee to respond
An enquiry run by someone neutral
A finding based on the evidence actually presented
A penalty that follows the finding, not one decided in advance

Missing this doesn’t automatically void the dismissal, but it shifts the burden onto the employer to prove the misconduct if challenged. Do the enquiry properly, and that burden moves substantially back to the employee. Performance-based exits, the most common category for IT and professional services subsidiaries, need their own paper trail: documented performance issues, a formal improvement plan with real targets and timelines, and proof the employee actually had a chance to fix things. Handing someone three months’ pay in lieu of notice, with no performance file behind it, doesn’t insulate the company from a wrongful termination claim.

What Is Retrenchment Compensation and When Do You Owe It?

Fifteen days’ average wages per completed year of service, owed to any Worker with over a year of continuous service who’s retrenched for a non-disciplinary reason. Section 64 of the IR Code sets this out. It doesn’t apply to resignation, retirement, superannuation, expiry of a fixed-term contract, or termination on health grounds, only to genuine retrenchment. The math uses fifteen-twenty-sixths of monthly basic plus dearness allowance, per year of service (twenty-six being the standard working days in a month). Take an employee with seven years’ service and a last-drawn basic plus DA of Rs. 60,000:

Component	Value
Monthly basic + DA	Rs. 60,000
Daily rate (÷26)	Rs. 2,308
15 days’ pay	Rs. 34,615
Years of service	7
Total retrenchment compensation	≈ Rs. 2,42,308

The Code from November 2025 also adds a re-skilling fund contribution: fifteen days’ wages per retrenched worker, paid by the employer into a government fund within forty-five days. That’s a separate obligation from the compensation paid to the employee, and it doesn’t go to them; it goes to the state. In practice, most severance packages exceed the statutory floor. Contracts for professional and managerial staff typically run one to three months’ notice, and ex-gratia amounts often get negotiated into a separation agreement. Companies pay above the minimum both to cut litigation risk and because courts tend to view employers who acted fairly more favourably. One point worth underlining: because these protections attach only to employer-initiated exits, negotiated resignations are the norm in India, not the exception. Company and employee agree on a package, the employee resigns, and everyone avoids the retrenchment machinery altogether. This is the standard playbook for foreign companies trimming headcount for business reasons.

When Does Mass Retrenchment Need Government Approval?

Once an establishment averages three hundred or more workmen over the previous twelve months, retrenchment, layoffs, or closure all need prior government permission. That threshold used to be one hundred under the old Industrial Disputes Act; some states, including Andhra Pradesh and Karnataka, had already moved to three hundred before the central law caught up. Failure to obtain required prior permission can render the retrenchment legally invalid and may expose the employer to remedies such as reinstatement, back wages, or other relief depending on the circumstances.. Getting that permission means filing with the State Labour Department, which has real discretion here. Expect to demonstrate that alternatives were considered, that the selection process was fair, and that the compensation offered is adequate. None of that is guaranteed to be quick. Below the threshold, the procedural obligations don’t disappear, they’re just lighter. Employers still owe one month’s notice or pay in lieu, statutory compensation, and notification to the labour authority, just without needing sign-off first.

What Are the Notice Period Rules?

One month under the IR Code minimum for workmen being retrenched, but contractual notice, usually thirty to ninety days for professional staff, is what actually governs most exits. Probationary employees generally get less protection, though several state Shops and Establishments Acts still require at least a month’s notice once probation passes a certain length. In the tech sector specifically, three-month contractual notice has become the default for senior engineers, and it’s a term that’s hard to negotiate down once someone knows their market value. Taxation matters here too. Under the Income Tax Act 2025, effective April 1, 2026, most termination payouts are taxed as salary or as profits in lieu of salary. Gratuity carries a Rs. 20 lakh exemption; notice pay and ex-gratia amounts are fully taxable. Structuring a package to be tax-efficient within the statutory floor is standard practice, not a workaround. Leave encashment is separate and non-negotiable: accumulated earned leave gets paid out at the terminal basic salary rate regardless of why someone left, and under the Code on Wages 2019, that settlement typically needs to happen within two working days of the last working day.

What Happens If an Employee Challenges the Termination?

The case goes to an Industrial Tribunal or Labour Court, and if the termination is found unjustified, reinstatement with full back wages is the default remedy, not a fallback. The Supreme Court, in cases such as Workmen of Meenakshi Mills Ltd, has repeatedly treated reinstatement as the presumptive outcome rather than an exception. Employers can’t simply offer money instead unless the tribunal specifically allows it. A skipped domestic enquiry, missing performance documentation, or anything that looks like retaliation for union activity tends to end this way. Labour disputes can take several years to resolve, depending on the forum, jurisdiction, complexity, and appeals involved.That’s the arithmetic behind why experienced employers in India spend so much on documentation upfront: getting the process right at the point of termination is cheaper than defending it for half a decade afterward.

Conclusion

For foreign employers, Employee termination rules in India can look very different from what they’re used to. There is no concept of at-will employment, workmen enjoy strong statutory protections, and large-scale layoffs may require prior government approval. Although the IR Code 2020 raised the retrenchment threshold to 300 workers and introduced a re-skilling fund, it largely retained the existing safeguards for employees. Companies that manage headcount reductions successfully usually follow the same approach. They document performance concerns early, conduct a proper domestic enquiry where disciplinary action is involved, seek legal advice before making termination decisions, and use well-drafted separation agreements to reduce the risk of future disputes. Corporate Legit Consulting LLP advises foreign companies on employee termination rules in India, retrenchment compensation calculation, severance compliance structuring, domestic enquiry procedure, government permission applications for mass retrenchment, and separation agreement drafting under the IR Code 2020 and applicable state Shops and Establishments Acts. Talk to us before the termination conversation happens, not after.

Frequently Asked Questions

1. Does at-will employment exist in India?

No. Employee termination rules in India do not recognise at-will employment. Every employer-initiated exit requires a documented reason, a specific procedural sequence depending on the type of exit, and statutory payments within mandated timelines. For workmen retrenched after more than one year of service, retrenchment compensation is mandatory. For dismissals on disciplinary grounds, a domestic enquiry process is required. Tribunals can order reinstatement with full back wages where the termination is found to be unjustified.

2. What is retrenchment compensation in India and how is it calculated?

Retrenchment compensation India under Section 64 of the Industrial Relations Code 2020 is mandatory for workmen with more than one year of continuous service who are retrenched for any non-disciplinary reason. The statutory rate is fifteen days’ average wages for each completed year of service, calculated as fifteen-twenty-sixths of the monthly basic wages plus dearness allowance per year of service. Retrenchment compensation does not apply to voluntary resignation, retirement, or termination due to misconduct.

3. When does the Indian government's permission become mandatory for mass retrenchment?

Under the Industrial Relations Code 2020, prior government permission is required before retrenching workers in establishments employing three hundred or more workers on an average working day in the preceding twelve months. This threshold was raised from one hundred under the predecessor Industrial Disputes Act 1947. Without government permission, mass retrenchment in qualifying establishments is void and workers can claim reinstatement.

4. What happens if a foreign employer terminates an employee without following proper procedure in India?

If an employee challenges the termination at an Industrial Tribunal or Labour Court and the tribunal finds it unjustified, the standard remedy is reinstatement to the original position with full back wages from the termination date to the date of reinstatement. The employer cannot substitute a monetary payment for reinstatement unless the tribunal specifically directs it. A contested wrongful termination case reaching a final order can take two to five years and cost three to five times the original statutory severance amount.

For an otherwise eligible independent Indian entity, the current criteria include being within 10 years of incorporation/registration, having turnover of not more than ₹200 crore in any financial year since incorporation/registration (₹300 crore for DeepTech startups), and undertaking innovation, development or improvement of products, processes or services, or having a scalable business model with high potential for employment generation or wealth creation

5. What changed under the Industrial Relations Code 2020 for employee termination rules in India?

The IR Code 2020, operative from November 21, 2025, consolidated the Industrial Disputes Act 1947, the Trade Unions Act 1926, and the Industrial Employment (Standing Orders) Act 1946 into a single statute. The government permission threshold for mass retrenchment was raised from one hundred to three hundred workmen. A re-skilling fund contribution of fifteen days’ wages per retrenched worker, paid by the employer to a government fund within forty-five days, was introduced. The substantive protections for workmen, including retrenchment compensation and reinstatement rights, remain materially the same.