Archer & Angel

12th February, 2018

Draft for discussion

Indian perspective on at-will employment:

At-will employment which basically means that an employer or an employee can end their
professional relationship with each other at any time for any reason except for the illegal
ones, is recognised by law in only a handful of countries, the major one being the United
States of America. While a lot of other countries including the Republic of India only allows
and recognises dismissal/termination of employees for a cause and has not adopted the
concept of at-will employment.

The drafting of Constitution of India, justifies such exclusion, which states that every citizen
has the right to practice the profession of his/her choice or to carry on any profession, trade
or business, and the same principal has been adopted by the Indian Contract Act of 1872
under Section 27 (Agreement in restraint of trade, void) which states that any
contract/agreement that is in restraint of any lawful profession/trade or business shall be
held void. The only exception to this rule is in the event, where a person “who sells the
goodwill of a business may agree with the buyer to refrain from carrying on a similar business,
within specified local limits, so long as the buyer, or any person deriving title to the goodwill
from him, carries on a like business therein, provided that such limits appear to the Court
reasonable, regard being had to the nature of the business”.

Termination of employment in India has to be in harmony with the provisions of the

employment contract or the letter of appointment of an employee which are drafted in
accordance with the provisions of the relevant state specific Shops & Commercial
Establishment Acts (“S&E”) and the Industrial Dispute Act, 1947 (“IDA”), as applicable.
However, in case of any conflict between the employment contract and IDA or S&E, if latter
has provision favoring the employee more than the terms of the employment contract, the
provisions of the S&E and IDA shall prevail over the same.

In India employees are categorized as “workmen” and “non-workmen”. As per the provisions
of IDA “workman” is any person (including and apprentice) employed in an industry to do
any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or
reward, but does not include an employee employed in the managerial or administrative
capacity or in a supervisory capacity and draws in excess of INR 10,000 per month. Similarly,
the laws pertaining to dismissal/termination is different in case employees of workmen
category than that of non-workmen category.

Dismissal/Termination under S&E:

S&E governs termination of employment, notice requirements, leave entitlements, hours of

work, overtime wages and health and safety conditions to be maintained at the workplace by
every employer. Termination of non-workmen category of employee is governed by the
 Archer & Angel
12th February, 2018
Draft for discussion
provisions of S&E (which is a state specific legislation) read with the terms of the employment
contract or the offer letter of the employee concerned.

Under most of the state specific S&Es, an employee at the time of dismissal/termination for
a reasonable cause is entitled to a notice period of at least one month or wages in lieu of
notice, and if an employer wishes to dispense with the services of that employee with
immediate effect, the same can only be done in case of proven misconduct, which allows an
employer to terminate the employee without any notice or payment in lieu of notice thereof.

Misconduct is generally defined by S&E which includes but is not limited to:

 acts of theft,

 fraud,

 misappropriation or dishonesty in connection with the employer's business or

property etc.

However, an employee can only be dismissed/terminated on the grounds of misconduct only

after proper disciplinary inquiries have been held.

Retrenchment under IDA:

The IDA which is the key central legislation that administers industrial relations in India,
grants certain distinct protections to the employees under workmen category (contrary to
that of the non-workmen category of employees under S&E) in case of dismissal/termination
of their employment including their retrenchment.

“Retrenchment” as defined by IDA means termination by an employer of the service of a

workman for any reason whatsoever, otherwise than as a punishment imposed by way of
disciplinary action and specifically excludes the events of voluntary retirement of workman,
retirement on reaching the age of superannuation, termination as a result of non- renewal of
contract of employment or termination on the ground of continued ill- health1.

The rules pertaining to dismissal/termination of services of workmen category employee are

different for:

a) industrial establishment/factory where a manufacturing process is being carried on

with or without the aid of power, a mine or a plantation (“Industrial Establishments”);
and
b) other establishments including Industrial Establishments with less than 50 workmen.

1
Section 2(oo) of IDA
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Draft for discussion
as per Section 25 (N) and 25 (F) respectively, of IDA.

a) In the case of workmen category employees, employed in Industrial Establishments

where not less than 100 workmen were under employment for an average per day
working day for preceding 12 months, the workmen who have been in continuous
service2 for more than 1 year cannot be retrenched without prior notice of 3 months
in writing indicating the reasons for retrenchment, or wages in lieu thereof. An
employer is also obligated to receive prior permission of the appropriate Government
by submitting an application in a prescribed manner, which includes reasoning for the
intended retrenchment. A copy of such application has to be simultaneously served
upon the concerned workmen. The retrenched workmen shall also be entitled to
receive at the time of retrenchment, a compensation equivalent to 15 days’ average
pay for every completed year of continuous service or any part thereof in excess of 6
months.

b) In the case of workmen category employees, employed in other establishments

Industrial Establishments employing less than 50 workmen, the workmen who have
been in continuous service for more than 1 year shall be entitled to 1 months’ notice
or payment in lieu thereof at the time of retrenchment. The workmen shall also be
entitled at the time of retrenchment a compensation equivalent to 15 days’ average
pay for every completed year of continuous service or any part thereof in excess of 6
months. Further, appropriate Government must also be notified of such retrenchment
in a prescribed manner.

2
Under IDA an employee who has worked for a period of 240 days in the preceding 12 months is deemed to
be in continuous service for 1 year.