Indian Labor Law-Labor Contract and Termination of Employment

Laws for labourers in India


Labour Contract Law and Employment Termination in India

Usually, employers invest a lot of resources to train their employees’ professional skills or expertise in order to allow employees to serve the company for a long time. But in practice, after acquiring the necessary professional skills or knowledge, employees tend to seek higher-paying job opportunities. There is no doubt that due to the different interests and positions of the two parties, employers and employees have conflicts of interest in this regard. In order to restrict employees from hopping, some employers will set specific clauses in the labor contract, such as stipulating that employees shall not leave their jobs or engage in similar jobs within a specific period after training. In addition, employers also tend to stipulate in the labor contract some terms that are still in effect after resignation, such as trade secret protection clauses, non-competition clauses, restrictions on poaching employees and customers, etc.


This article mainly discusses some controversial clauses in labor contracts and the points that employers should pay attention to when drafting labor contracts.


Before drafting any service agreement or labor contract, it is very important to determine the legal status of the other party. For example: common law jurisprudence and academic theory believe that “Independent Contractor” does not belong to “Employee” in labor law (independent contractor is a concept in Anglo-American law, which refers to those who sign contracts with enterprises and agree.

Workers who use their own equipment and personnel to complete specific tasks in their own workplaces, and the company pays them. Independent contractors are not employees.

A typical example is Uber drivers, but Uber in the United States is also constantly trapped by whether the driver is an employee or not. In litigation). At present, Indian courts have determined that many “independent contractors” are “employees” in the labor law based on the content of the relevant contract clauses.



1. What is binding force of labor contract?

During the performance of the labor contract, the binding force of the labor contract on “Wrongfully terminated or dismissed” is mainly reflected in the following three situations:


a) The first situation: the “Master-servant relationship” regulated purely by the labor contract between the employer and the employee. The employee sued for compensation for being improperly dismissed.

The meaning behind this corrective method is that the nature of the personal service contract determines that one party cannot be forced to work for the other party.

An employee can sue the employer for compensation on the grounds of being improperly dismissed, and the employer can also sue the employee for compensation for violation of the labor contract.

But this kind of compensation can only be in the form of money, not a way to obtain re-employment after being deemed invalid.


b) The second situation: The “master-subordinate relationship” regulated by labor law or industrial law. If an employee sues the employer for improper termination of the labor relationship on the basis of the specific provisions of the labor law or industry law, it may be possible to obtain re-employment relief.

This re-employment compensation method is different from the relief compensation provided by the Indian Contract Law and the Special Relief Law, because there is no provision for the re-employment remedy.


c) The third situation: This kind of “master-slave relationship” hired by the central or local government departments or created in accordance with laws and regulations.

In this case, if an employee who has been improperly dismissed can prove that the dismissal is unfair or violates the requirements of specific laws and regulations, the improper dismissal shall be deemed invalid, and the relevant employee may continue to perform the previous work.


2. What are the restricted business practices according to the Indian Law of Contract?

The “Indian Contract Law” stipulates that any contract that restricts engaging in legal professions or business activities is invalid.

Except for “sale of goodwill”, the law does not recognize any other restrictions on business, even if the relevant restrictions may be reasonable.

The Indian courts have determined that the non-compete agreement after resignation is invalid and not enforceable, but the prohibition clause during the labor contract is valid.


3. What is non-compete clause in Labour Contract?

During the duration of the labor contract, the employer has the right to restrict its employees from engaging in relevant competitive behaviors or prohibit them from signing other labor contracts during the labor contract.

During the validity period of the labor contract, employees can only engage in the content agreed in the labor contract, and this situation is not considered as restricting business behavior.

The exception to this situation is: If the content of the labor contract or non-competition clause is found to be “unreasonable” or “too harsh” or “leaning to one side” (from the High Court of Calcutta “Shee Gopal Paper Mills Ltd v. Surendra K. Ganeshdas Malhotra” case).


4. Whats is the binding force of the prohibition clause in labour contract?

The Indian court held that a contract signed between two employers/companies aimed at not digging at each other or persuading each other’s employees is binding, because such limited content contracts are directly signed by the respective employers and are directed at the employer’s behavior.

Rather than employee behavior, it is more fair than such restrictions and constraints between employers and employees.


From the perspective of the employer, it is very necessary to agree on the prohibition of solicitation clauses when signing contracts with suppliers or intermediaries or signing other commercial contracts.

This clause should not only be valid during the performance of the labor contract, but preferably extend to one year after the termination of the labor contract. Therefore, the design of contract terms should be carefully considered, and it is best to set a special compensation clause.


5. Whats is the binding force of confidentiality clause in labor contract?

Different from the non-competition clauses, the non-disclosure agreement clauses continue to exist after the termination of the labor contract, and the employer can sue for restoration or compensation for the former employee joining a competitor and using the confidential information available during his employment.


What is Termination of Employment in the Indian Labour Law?

According to Indian labor legislation, “employee” can be divided into two categories: “workman” and employees other than Workman.

The “workman” in the “Labor Dispute Law of 1947” refers to those who are explicitly/implicitly employed in an industry for remuneration/wage, unskilled/skilled, technical/operational, clerks or management personnel, etc.

Personnel include those who have been dismissed or fired due to labor disputes, but do not include military personnel, police officers, and personnel whose monthly salary exceeds 10,000 rupees mainly engaged in management, administrative or supervisory functions.

The termination of employment for workman workers is mainly based on the Labor Dispute Law of 1947 and its labor contract. The procedures for termination of employment for non-workman are mainly stipulated in the “Store and Commercial Establishment Law” of various states and labor contracts.


According to current Indian laws, every industrial organization with more than 100 employees is obliged to obtain government approval and permits when severing, layoffs or closing operations (in this case, the labor contract is not considered).

It will be illegal for the employer to take actions that lead to widespread unemployment without obtaining government permission.

Employees who are dismissed during this period are still entitled to corresponding salaries. However, companies with fewer than 100 employees do not need to obtain government permission and can lay off employees in accordance with the provisions of Parts 25F, 25G and 25H of the Labor Dispute Law.




1) What are the allowable reasons for termination of employment?


1.1. Incompetent or inefficient work


The purpose of the enterprise is to pursue commercial profits, so the enterprise will not allow the employment of an employee who is continuously inefficient or who fails to meet the company’s requirements. The labor contract signed between the employer and the employee clearly stipulates the job requirements and the job expectations that the employee should meet.

Therefore, the dismissal of the employer on the grounds of dissatisfaction with the employee’s work is usually determined by the court to be effective.



1.2. Due to improper behavior or breach of labor contract obligations or confidentiality obligations

The employer can terminate the labor contract based on the employee’s “improper behavior”, and it will take effect immediately without prior notice or payment of corresponding wages. However, the concept of “improper behavior” is more subjective, so the employer should specify in its employee handbook or other human resources policies what kind of behavior is considered improper and will eventually lead to the termination of the labor relationship.

Similarly, breaches of confidentiality obligations, such as disclosure of customer information, technical details, chemical formulas, etc., can also be effective reasons for terminating labor relations.



1.3. The labor relationship is terminated due to persistent illness


2) What are the circumstances that do not allow termination of employment?

According to the Maternity Leave Law, female employees cannot be dismissed during maternity leave. Employees who are entitled to sickness allowance or maternity leave allowance under the “Employees National Insurance Law” shall not be dismissed during this period.



3) Other matters needing attention

For the “workman” who has been employed continuously for one year, the employer should pay attention to the following points:



3.1 If the labor relationship is terminated due to reasons other than misconduct, the employer can choose to notify the relevant employees one month in advance to terminate the labor relationship and inform the related reasons, or pay one month’s salary to terminate the labor relationship (in this case, one month’s notice is not required).

The one-month notice period is the shortest period according to the law, and employers and workers can also agree on a longer notice period in the labor contract.



3.2 When the labor relationship is terminated, the employer shall pay the employee the equivalent of 15 days’ salary for each year (the part greater than 6 months is counted as one year).



3.3 According to the “Labor Dispute Law”, if an employee is laid off and the relevant employer re-recruits, then the employer needs to give the laid-off employee a chance to re-employ, and this opportunity needs to be better than other new applicants.


4) Other welfare related:


4.1 Provident fund

After the termination of employment, the employer does not need to pay the employee’s provident fund. Employees can choose to withdraw their provident fund amount or transfer their provident fund account to the next employer. 


4.2 Severance pay

After serving for 5 years, if you lose the ability to work due to retirement, resignation, death, work injury or illness, you can get a severance pay (except for dismissal due to misconduct). If the amount of work in the last month is X, the calculation formula for severance pay is severance pay=[(X/26)*15]*years of service. But the total amount does not exceed Rs 1 million.


4.3 Holiday discount

Basically, the “Store and Commercial Establishment Law” of each state stipulates that employees have the right to discount their unused holidays when they leave or are dismissed. Generally, employers have corresponding policies and regulations.



Author’s Bio

Name: Ajay Rastogi

Educational Qualification: LLB

Profession: Advocate / Lawyer

Work Experience: 20 Years of Legal Practice

Profile Link:


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