India offers a vast pool of talented professionals across diverse sectors, making it a prime location for foreign companies to set up operations and build strong teams. However, hiring employees in India comes with its own set of legal and HR compliance requirements that foreign firms must follow to operate lawfully and ethically.
This article serves as a practical guide for foreign companies planning to hire in India—covering labor laws, employee rights, statutory benefits, and HR compliance essentials.
1. Understanding Indian Labor Laws
India’s labor law framework is governed by a mix of central and state-level laws. While the government has consolidated several laws into four labor codes, many legacy laws still apply in various contexts. Major areas of regulation include:
Wages and working hours
Social security and employee welfare
Conditions of employment and termination
Health and safety
Applicable laws include:
Factories Act, 1948
Shops and Establishment Act (state-specific)
Employees’ Provident Fund (EPF) Act
Employees’ State Insurance (ESI) Act
Payment of Gratuity Act
Minimum Wages Act
Foreign companies must comply with both central laws and local state-specific rules where the office or workplace is located.
2. Employment Contracts
Employment contracts are legally binding and must clearly state:
Job title and responsibilities
Work location and hours
Salary and allowances
Probation period (usually 3–6 months)
Notice period and termination clauses
Confidentiality and non-compete terms
Contracts should be signed by both parties and preferably printed on company letterhead. They help prevent disputes and demonstrate HR compliance.
3. Statutory Benefits and Deductions
Foreign firms hiring employees in India must provide the following benefits:
Provident Fund (EPF): Mandatory for companies with 20+ employees; both employer and employee contribute 12% of basic salary.
Employees’ State Insurance (ESI): Required for employees earning ≤ ₹21,000 per month.
Gratuity: Payable after 5 years of continuous service.
Bonus: Compulsory under the Payment of Bonus Act for eligible employees.
Leave entitlements: Annual leave, sick leave, maternity/paternity leave, and public holidays.
Employers must deduct taxes and contributions from salaries and deposit them with government authorities on time.
4. Payroll Compliance
Foreign companies must:
Register with EPFO and ESIC
Issue monthly payslips
Deduct TDS (Tax Deducted at Source) and file returns
Maintain payroll records
File annual labor returns (in prescribed formats)
Using a local HR/payroll service provider or establishing an internal HR department ensures these processes run smoothly and legally.
5. Termination and Exit Formalities
Termination must be fair and follow proper notice periods. Key guidelines include:
Provide written notice or severance pay
Settle dues, gratuity, and unused leave encashment
Issue a relieving letter and experience certificate
Unfair dismissal may lead to legal challenges under Indian labor laws, so a documented exit process is vital.