The entire gamut of employer- employee relationships is governed by a number of labour laws, which would vary from State to State. The legislation is broad based and ranges from the size of signage to working hours for women to grievance procedures. However, a large chunk of the labour legislation applies only if the foreign investor were to carry out manufacturing activities in India.
Specifically, the statutes requiring payment of gratuity, bonus, provident fund contributions etc., need to be complied with on an ongoing basis as noncompliance would entail penal consequences.
Some of the central labour legislations which may be of relevance to a foreign investor are mentioned below. Apart from these, a particular State may have its own laws / rules with which an establishment would need to comply.
Payment of Bonus Act, 1965
Payment of Bonus Act, 1965 applies to every factory and establishment all over India. Bonus is granted under the Act based on profit or on productivity. It will be applicable if the number of employees is greater than or equal to 20 on any day during an accounting year. It would only be applicable to an employee (other than an apprentice) whose total salary does not exceed INR 10,000/- per month. The minimum bonus payable is generally 8.33 percent of salary or wages earned by the employee in an accounting year.
Employees provident fund and Miscellaneous Provisions Act, 1952
Social security regime in India is primarily governed by Employees’ Provident Fund and Miscellaneous Provisions Act 1952, (the Act) and comprises of following schemes:
- Employees Pension Scheme, 1995 (EPS)
- Employees Provident Fund Scheme,1952 (EPFS)
- Employee Deposit linked Insurance Scheme (EDLIS)
The above schemes provide for the social security of employees working in an establishment employing 20 or more people .The employer is required to contribute towards these schemes for the employees earning wages below INR 6,500 per month. However, employees earning wages more than INR 6,500 can voluntarily choose to participate in these schemes.
Recently, the government of India, issued a notification introducing a new concept of international workers (IWs) which includes expatriates (foreign citizens) working for an employer in India and the Indian employees working overseas. The IW(s) are required to join the schemes from 1 November 2008 and the employers are required to contribute towards these schemes irrespective of the salary threshold of INR 6,500 per month. A relief has been provided in case of excluded employee which primarily refers to IW coming from a country with which India has a social security agreement.
Currently, India has signed social security agreements with Belgium, Germany, France, Switzerland, Luxembourg, Netherlands, Hungary and Denmark. SSAs with Belgium and Germany have become effective from 1 September 2009 and 1 October 2009 respectively.
Benefits covered under Social Security Agreements (SSAs)
- Employees on an assignment up to specified period are exempt from making social security contributions in the host country provided they enjoy the status of detached workers, i.e. they continue to make social security contribution in their home countries and have obtained certificate of coverage (CoC) from the appropriate authority in their home country which serves as a proof of exemption from the social security contributions in the host country.
- Employees on assignment for more than a specified period and making social security contributions under the host country laws will be entitled to the export the benefits under the SSA at the time of relocation to the home country on completion of their assignment or on retirement.
- Employees are entitled to the benefit of totalisation of benefits, i.e. the period of service rendered in the host country shall be considered for eligibility of social security benefits.
Payment of Gratuity Act, 1972
The Payment of Gratuity Act, 1972 provides for gratuity inter alia to employees in factories, plantations, shops, establishments, and mines in the event of superannuation, retirement, resignation, death or total disablement due to accident or disease. The employee will get 15 days of wages based on the rate of wages last drawn for every completed year of service in excess of 6 months.
Gratuity is payable in any one of the following circumstances:
- on the employee’s retirement; or
- on his becoming incapacitated prior to such retirement; or
- on termination of his employment; or
- on the employee’s death (gratuity is received by the successors of the employee).
However except in the case of death or disablement, gratuity is payable only if the employee has rendered 5 years of continuous service.
Recently, the both houses of Parliament (Lok sabha and Rajya Sabha on May 3, 2010 and May 5, 2010 respectively) has approved the proposed ‘Payment of Gratuity (Amendment) Bill, 2010’ under the said Act in respect of enhancing the existing monetary limit upto which gratuity can be paid to an employee from INR 0.35 million to INR 1 million. Consequently, the limit upto which gratuity would be exempt under the Act, stands increased upto INR 1 million.
The proposed Bill will be enacted once it becomes an Act when the Presidential assent is received for the same.
The Employees State Insurance Act, 1948
The Employees State Insurance Act, 1948 provides certain benefits to employees (of factories and specified establishments) in case of sickness, maternity, disabilities and employment injury resulting in loss of wages or earning capacity. It will be applicable if the employees are more than or equal to 10 on any day in the preceding 12 months . As per the recent amendment in the Employees State Insurance (Central) Rules, 1950, the existing wage ceiling in respect of coverage of employees under the said Act has been enhanced from INR. 10,000 per month to INR. 15,000 per month. The amendment shall come into force with effect from May 1, 2010.
The sickness cash benefit includes a cash allowance that equals half of the sick person’s average daily wages during the previous six months.
In case of an employment injury, disablement and dependents’ benefit may be granted. When the disablement is full, the person will receive a monthly pension as applicable. Medical care and treatment to insured workmen are provided by Provincial Governments at appropriate hospitals, dispensaries and other medical institutions. All the medical care costs may be shared by
the Corporation Provincial Government.
Contract Labour (Regulation and Abolition) Act, 1970
The Act is applicable if the number of contract employees in an establishment (principal employer) is 20 or more on any day of the preceding 12 months.
Contract labour refers to a workman who is hired for the work of an establishment through a contactor. For e.g. the security services, housekeeping services being provided by an Agency (contractor) to the principal employer. It is the primary responsibility of the contractor to provide wages and other benefits to the contract labour. However where the contractor fails to discharge his liability, the onus shifts on the principal employer. In order to ensure that the contractor is complying with its various obligations, generally a compliance certificate specifying the compliance with respect to the various laws is submitted by the contractor to the principal employer at timely intervals (say once in a quarter).
Shops & Establishment Act
This law broadly regulates the employment of workers in shops and commercial establishments and is applicable depending on the specific rules of each State in India. This law sees to inter alia regulate the opening and closing hours of shops and establishments, and provision of weekly holiday with wages.
Generally, every State requires registration with the Shops and Establishment authorities for obtaining a certificate which is required to be displayed in the establishment at all times.
Minimum Wages Act, 1948
The object of this Act is to ensure fixing of minimum rates of wages in certain employments as specified. The employer shall pay to every employee in a specified employment the minimum rates of wages fixed under the Act. The minimum wages are fixed state wise and employment wise. It also provides for regulation of working hours, overtime, weekly holidays and overtime wages.
Industrial Disputes Act, 1947
This Act applies to every industrial establishment and seeks to provide for the investigation and settlement of industrial disputes arising on account of employment, or non-employment or the terms of employment or with the conditions of labour of a workman. This Act inter alia does not apply to persons engaged mainly in managerial or administrative capacities and persons engaged in supervisory capacities drawing wages exceeding INR 1,600 per month (i.e. approx USD 32.89 per month).
Workman’s Compensation Act, 1923
This Act provides for the payment of compensation by the employer to his employees (for their dependents in the event of fatal accidents) if personal injury is caused to them by accidents arising out of and in the course of their employment.
Maternity Benefit Act, 1961
The objective of this Act is to regulate the employment of women in certain establishments for certain periods before and after childbirth and to provide for maternity and other benefits. The Act applies inter alia to every factory, mine and shop and establishment in which such persons are employed on any day of the preceding 12 months.
A woman shall be entitled to maternity benefits (subject to eligibility) at the rate of the average daily wage for the period of her actual absence and any period on and immediately following the date of delivery. In addition, every woman shall also be entitled to receive a medical bonus of INR 1,000 (i.e. approx USD 20.55), subject to conditions.
Profession tax is a State level tax imposed in India on professions, trades, callings and employments. The tax is state specific and would vary from state to state with respect to applicability and quantum of levy.
USD 1= INR. 48.66