Employee hiring structures in India and applicable law

By Rashmi Pradeep and Abe Abraham, Cyril Amarchand Mangaldas

Employment engagement structures in India are broadly of three types: direct employment; deploying third-party agency workers; or engaging consultants/retainers.

Rashmi Pradeep
Cyril Amarchand Mangaldas

The most common form of engagement is direct employment, which would involve employment of full-time permanent employees, part-time permanent employees, temporary employees or fixed-term employees.

Full-time permanent employment is the most prevalent among the different models under the direct employment structure. Here the employer typically enters into a contract with the individual and sets out the terms on which they would be employed, including salary and benefit details, working hours and termination provisions.

In circumstances where workflow is such that engaging full-time employees is both costly and superfluous, organizations look to engage part-time permanent employees. The challenge that employers face in engaging such part-time employees lies in understanding to what extent statutory benefits such as leave, weekly time off, maternity leave and gratuity would apply to part-time employees who work only for a few hours every day or a few days in a week.

Organizations also look to engage employees under the fixed-term structure. This affords employers greater flexibility especially in handling termination-related issues because termination of service of fixed-term employees is excluded from the purview of the Industrial Disputes Act, 1947 (IDA), provided the engagement of fixed-term employees is for a bona fide purpose. The IDA sets out a detailed procedure for terminating the service of other employees, which includes payment of statutory severance compensation.

Although engaging fixed-term employees, if done for a bona fide purpose, gives the employer a lot more flexibility in terminating their service, if the contracts with fixed-term employees were to be routinely extended then such an arrangement, if challenged, may be considered as a ruse by the employer to avoid its obligation to pay severance compensation and may not be upheld by the courts. In such an eventuality the fixed-term employees would be treated as full-time employees employed for an indefinite period and the termination provisions under the IDA would then equally apply to such employees.

Given the difficulty in dealing with termination of full-time employees and the limitations inherent in employing individuals on a fixed-term basis, employers may opt to engage agency workers as this provides flexibility in engaging personnel without being saddled by the above-mentioned issues. The advantage of this model is that the employer is not liable for complying with the statutory provisions governing termination of the service of such employees as that is a liability which their immediate employer would have to discharge.

Abe Abraham
Principal associate
Cyril Amarchand Mangaldas

However, if the courts are of the view that the arrangement is a sham then such agency workers could claim direct employment with the organization and if successful, the organization would have to extend all employment benefits to such agency workers. Therefore, though this model has certain advantages, prolonged use of this model, especially where the work is perennial or intrinsic to the business of the organization, could expose such an organization to claims of direct employment from such agency workers.

Also, engagement of agency workers is governed by the Contract Labour (Regulation and Abolition) Act, 1970, which imposes vicarious liability on the organization should the immediate employer fail in its obligations towards such workers.

Organizations also engage specialists through the consultancy model, where such individuals are engaged for their specialized skills. Engagement of consultants is relatively straightforward and is also more tax efficient for the consultants. If, however, the authorities take a view that the organization exercises management control over such consultants and the actual relationship is more in the nature of a direct employment relationship than that of independent service providers, then the organization could be exposed to allegations of non-compliance with both tax laws and employment laws.

This is because consultants, as independent service providers, are not entitled to employee benefits or special protection under employment laws.

Keeping these points in mind an organization would have to consider which models of employee engagement would work best for its operations and business requirements.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Rashmi Pradeep is a partner and Abe Abraham is a principal associate at the firm.


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