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Termination and Severance Policies

Learn about the legal processes for employee termination and severance in India

Notice period

In India, there is no single law that mandates specific notice periods for employment termination. Notice requirements can come from several sources including Central Labor Laws, State Shops and Establishments Acts, and Employment Contracts and Collective Bargaining Agreements (CBAs).

Central Labor Laws

The Industrial Disputes Act, 1947 (IDA) applies to establishments with a minimum of 100 employees. Section 25F of the IDA mandates a one-month notice period (or payment in lieu) for termination of a "workman" (as defined by the Act) who has completed at least one year of continuous service. Other central labor laws might have specific notice period requirements for specific industries or types of employees, but these are generally less prevalent.

State Shops and Establishments Acts

Most Indian states have their own Shops and Establishments Acts, which regulate working conditions in various establishments. These Acts often prescribe minimum notice periods, typically around 30 days, for employers to terminate employees who have crossed a specific service threshold (e.g., three months in Delhi).

Employment Contracts and Collective Bargaining Agreements (CBAs)

Individual employment contracts can specify notice periods, which can be higher than the minimums set by law. CBAs, prevalent in many sectors, often dictate notice periods for unionized employees. These can be more elaborate and include variations based on seniority etc.

Key Points to Remember

In the absence of a specific notice period in the contract or a relevant CBA, the applicable state Shops and Establishments Act, or the IDA (if applicable), determines the minimum notice period. Employers must adhere to the higher notice period if stipulated by the contract, a CBA, or a relevant law. Failure to provide the required notice period can lead to the employee being entitled to wages in lieu of notice.


Always refer to the specific employment contract, relevant state Shops and Establishments Act (if applicable), or the IDA (if applicable) to determine the exact notice period requirements. If a CBA is in place, consult its provisions to understand any specific notice period clauses. Seek legal advice for navigating complex situations or potential disputes regarding notice periods.

Severance pay

In India, severance pay entitlements are primarily governed by the Industrial Disputes Act, 1947 (ID Act) and the Payment of Gratuity Act, 1972 (Gratuity Act). These Acts establish a framework, but the specific terms of a severance package can also be influenced by employment contracts.

Industrial Disputes Act, 1947 (ID Act)

The ID Act applies to establishments employing a certain number of workers, depending on the industry. It governs retrenchment compensation, which is a form of severance pay provided in cases of layoffs due to operational reasons.

  • Eligibility: Employees who have completed at least one year of continuous service are entitled to retrenchment compensation under the ID Act.

  • Calculation of Retrenchment Compensation: The Act mandates a minimum compensation of 15 days of average pay for every completed year of service, or any part thereof exceeding six months. "Average pay" is generally interpreted to include basic salary and dearness allowance.

  • Important Note: The ID Act may not apply to managerial or supervisory roles.

Payment of Gratuity Act, 1972 (Gratuity Act)

The Gratuity Act is a separate legislation that provides for gratuity payment to employees upon termination of service under certain conditions.

  • Eligibility: Employees who have completed a minimum of five years of continuous service are entitled to receive gratuity under the Act.

  • Calculation of Gratuity: The gratuity amount is calculated as one-half of the last drawn basic salary and dearness allowance multiplied by the total completed years of service, subject to a maximum ceiling.

Employment Contracts

An employee's employment contract may also specify severance pay entitlements. These contractual terms can be more generous than the minimums provided under the ID Act or the Gratuity Act.

Termination process

Terminating an employee's contract in India involves following a specific process outlined by a combination of factors:

  • Company Policy: It's crucial to consult the company's HR policies and employee handbook for established procedures regarding termination.

  • Employment Contract: The terms of the individual employment contract can dictate termination-related details. However, it's important to remember that Indian labor law supersedes any contractual clauses that may be less favorable to the employee.

  • Applicable Labor Laws: Two primary Acts govern employee termination in India:

    • The Industrial Disputes Act, 1947 (ID Act): This Act applies to establishments with a minimum number of workers, depending on the industry. It outlines guidelines for termination, with exceptions for termination due to misconduct.

    • The Payment of Gratuity Act, 1972 (Gratuity Act): This separate Act governs gratuity payments to employees meeting specific service criteria upon termination.

General Termination Process

Here's a generalized outline of the termination process in India, keeping in mind the legal considerations mentioned above:

  1. Performance Management (if applicable): In cases of performance-related terminations, the company may follow a documented performance improvement process before termination.

  2. Issuing Termination Notice: A written notice specifying the reason for termination and effective date should be provided to the employee.

  3. Full and Final Settlement: This includes settling dues like unpaid salary, earned leave encashment, and other dues as per the employment contract and applicable Acts (Gratuity Act & ID Act).

  4. Exit Interview (Optional): Conducting an exit interview can provide valuable insights for the company.

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