MANAGING RISK IN INDIA

     “Labor Relations: Avoiding the Common Pitfalls Associated with an Indian Workforce”
                           Authored by: Jackson Walker L.L.P.1

I.       Introduction

        There are a number of legal pitfalls and unexpected sources of trouble that appear for
U.S. companies employing or contracting with Indian nationals. Common problems that arise
for U.S. companies employing or contracting with Indian nationals include certain prohibitions
on the termination of employees, the payment of certain benefits without U.S. equivalents and
the non-enforceability of non-competition provisions in employment contracts. This paper will
highlight and explain the legal pitfalls most frequently encountered by U.S. companies that make
us of the Indian workforce.

        The Indian workforce is attractive to U.S. employers for numerous reasons. For example,
India has a large English-speaking population and one of the world’s largest pool of scientific
and technical personnel. Twenty-two million people in India have graduated from college and
over seven million of those persons have a degree in science and engineering.2 Due to many
factors, including a high rate of domestic unemployment, wages are relatively low for all
categories of workers, including managers and skilled labor.

        The relationship between an employer and employee in India is primarily governed by
any written agreement between the parties and applicable employment law. Employment law in
India can be characterized as generally in favor of labor and the rights of employees are broadly
protected. Because an employer can not contract out of the minimum protections provided to
employees under Indian law it is important for any employer to be familiar with the laws
applicable to its workforce. Not only is there ample legislation governing the rights of workers
in general, but there are also a number of laws aimed at specific industries, including plantations,
mines, construction, transportation, and sales.3

        This paper addresses the common legal pitfalls encountered by U.S. companies that
employ or contract with Indian nationals. We will first address the law applicable to the full or
part-time employment of Indian nationals. Employment is not always the most practical solution
for U.S. companies that would like to take advantage of the Indian workforce. An alternative to

  This paper was drafted by Nicole Gewinner, an associate in Jackson Walker L.L.P.’s Austin Office (bio attached),
with assistance from Sue Snyder (bio attached).
  Ames Gross and John Minot, Workforce Issues in India HR Needs to Understand, SHRM India, (2007), at
  See the Factories Act, 1948, the Plantation Labour Act, 1951, the Mines Act, 1952, the Contract Labour
(Regulation and Abolition) Act, 1970, the Building & Other Construction Workers (Regulation of Employment &
Conditions of Service) Act, 1996, the Motor Transport Workers Act, 1961, the Sales Promotion Employees
(Conditions of Service) Act, 1976 and the Shops and Establishments Act, 1953.

employment for many U.S. companies is to enter into a relationship with an Indian national as an
independent contractor. We address here the law applicable to independent contractors and how
best to structure a contracting relationship.

II.     Employees

         A.      Workman v. Non-Workman

        Prior to undertaking any discussion of Indian employment law, it is important to note that
Indian employees are divided into two categories under the law: workmen and non-workmen.
The laws apply differently to these two categories, especially those laws applicable to
termination of employment. A workman is defined as a person that is employed to do any
manual, clerical, skilled, unskilled, technical, operation or supervisory work. A non-workman is
defined as a person who performs managerial, supervisory and administrative work. In the U.S.,
a workman might be described as a blue-collar worker, while a non-workman might be called a
white-collar worker. The employment laws described herein most always apply to workmen.
Generally, non-workmen are not provided the same amount of protection under Indian
employment law. For the most part, the terms of a non-workman’s employment contract governs
his or her employment relationship.

         B.      Pitfall #1: Concurrent Regulation

        Not only do employment laws differ according to the category or industry of the
employee, but Indian employment laws may also differ from state to state. Employment is
regulated not only by the Indian central government, but also by the state governments. Pursuant
to the Indian Constitution, labor may be regulated by all of the 28 states as well as the central
government. Some state’s laws are more protective of employees than others. U.S. companies
should consider which states have favorable laws prior to choosing a location in India and should
also seek out legal advice specific to the state in which they are doing business.

         C.      Pitfall #2: Termination of Employment

         The laws applicable to the termination of employees are starkly different from those of
the United States. In sum, a system of hiring and firing does not exist in India for a large part of
the workforce.4 Instead, a number of different methods of involuntary termination must be
delicately navigated by Indian employers, over time and in accordance with law.

        In some circumstances, employers are restricted from “retrenchment,” which is defined
as the termination of an employee for any reason other than punishment for bad behavior.
Retrenchment is often prohibited unless an employer has first complied with certain notice and
approval requirements. For example, in order to terminate certain factory, mine, plantation or
industrial employees, the employer must give notice of the desired termination to the

 Shardul S. Shroff, Perspectives on Doing Business in India; Issues for U.S. Companies in Practising Law Institute
Corporate Law and Practice Course Handbook Series in Doing Business in India 2008: Critical Legal Issues for
U.S. Companies, 247, 278-279, (2008).

government, wait for the government’s approval and then provide certain compensation to the
terminated employee.

         There are a number of methods of involuntary termination with different applicable
statutory or case law. For example, in a dismissal, an employee loses benefits and it may be
difficult for him or her to obtain other employment due to the attached stigma. In a discharge,
the employee is entitled to his or her accrued benefits upon termination and no stigma is
attached. In the discharge of a probationer, an employer may only terminate the employee on or
after the day that the employee’s probationary period ends (usually, a period of six months) and
only if the employer is not satisfied with the employee’s performance in that period.

        An employer may not be able to avoid prohibitions on retrenchment by entering into a
written contract with an employee. Depending on the circumstances, the termination provisions
of a contract between an employer and employee may even be unenforceable. In the case of an
employee with a written employment contract, in Central Inland Water corp. Ltd. v. Brojo Nath
Gnaguly, the Supreme Court of India found that an employment agreement that provided for
termination of the employee with notice, but without reason, was void under the Indian Contract
Act, 1872.5 The holding of the above case, however, does not apply to non-workmen in the
private sector. Indian employment law does not, in general, prohibit employers from
involuntarily terminating non-workmen. The employment of a non-workman is most often
regulated by the employment contract, rather than employment law.

        Related to restrictions on the termination of employees       are laws that restrict businesses
from closing their doors and terminating their employees.             Indian law, and the Industrial
Disputes Act, 1947, in particular, generally requires companies       to seek government approval to
close a business and terminate its employees, especially in the       case of companies with a large
number of employees.

        In summary, before terminating an employee, it is important to ask the following
questions: Is the employee a workman or a non-workman? Is there a written contract with the
employee? It is also important to consider the laws applicable to the particular industry in which
you do business. Keep in mind that Indian law may strictly prohibit the simple termination of an
employee, and it is advisable to seek legal advice tailored to the circumstances of the desired

         D.     Pitfall #3: Wages and Benefits6

       Indian law provides for payment of certain wages and benefits that do not have
counterparts in the U.S., for example, dearness allowances. A number of separate laws regulate
the payment of wages and the provision of benefits, including the Payment of Wages Act, 1936,
the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration
Act, 1976. Indian employees generally receive a basic salary in addition to a “dearness
 AIR 1986 SC 1571.
 Again, it is important to note that wage and benefits requirements under Indian law may vary depending on
whether the employee is a workman or a non-workman.

allowance.” A dearness allowance is either linked to the cost of living or calculated at a flat rate.
The allowance can add up to an additional 60% to an employee’s base salary. In addition to the
above, the Payment of Gratuity Act, 1972 provides that certain employers pay their employees a
gratuity, a type of bonus, in connection with retirement or disability.

        Certain other benefits are made mandatory under Indian law, including bonuses, paid
vacation, severance pay, sick leave, personal leave, and maternity leave. Employers are also
required to contribute to provident funds, pension funds and insurance funds, as applicable.
Pursuant to the Employee’s State Insurance Act, 1948, employers must provide enumerated
benefits in connection with employee sickness, maternity or work-related injury. Vacation leave
includes three national holidays, and can also include certain religious or festival vacation days.

        In order to determine what wages and benefits are due to employees, an employer must
consider the categories of employees, any written agreements and the industry. The above-
described laws apply differently depending on the circumstances of employment. Much like
determining how to involuntarily terminate an employee, it may be best to seek legal counsel in
order to determine wages and benefits due to employees.

         E.     Pitfall #4: Non-Enforceability of Non-Competes

       U.S. courts tend to scrutinize non-competition provisions in employment contracts
closely and do not look favorably on provisions that constitute unreasonable restraints on the
employee. U.S. courts therefore generally uphold non-competition provisions with a short time
span and narrow geographic scope. Indian courts, on the other hand, have found that non-
competition provisions in employment contracts are an unfair restraint of trade and that they are
void and unenforceable. 7

        As an exception to the above rule, Indian courts have found that non-competes that are
effective only during the period of an employee’s employment are enforceable. Non-competes
that become effective after an employee’s employment has terminated, however, are void under
the Indian Contract Act, 1872.

        Employers have discovered a way to side-step the un-enforceability of non-competes
under Indian law. Some companies require their employees to enter into a bond agreement that
acts as a sort of replacement for a non-competition agreement. If the company provides the
employee with professional training and the employee subsequently leaves the company after a
short period of time, the bond provides that the employee is required to reimburse the company
for the cost of his or her training. These bonding arrangements have been held to be enforceable
by Indian courts.8

 Shroff, supra note 4, at 278.
 Stephen Mathias, Outsourcing and Offshoring to India, in Corporate Counsel’s Guide to Doing Business in India
2D §22:26 (2008).

F.     Be Aware

       There are a number of laws regarding employment that are not addressed above and will
not be covered in detail in this paper. Below is a brief description of certain other laws
applicable to most employers.

         Health and Safety. Indian law covers the health and safety of its employees extensively
under the Factories Act, 1948, the Mines Act, 1952, and the Dock Workers Act, 1986. The
government agencies that direct and supervise employee health and safety are the Directorate
General of Mines Safety and the Directorate General of Factory Advice Service and Labour
Institutes. While the Mines and Dock Workers Acts are specific to certain industries, the
Factories Act has broader application to those businesses that may be loosely defined as

       Worker’s Rights & Unions. Workers’ rights are generally addressed by the conventions
of the International Labour Organization. India is a founding member of this international
organization. The conventions are aimed at eradicating and regulating unfair labor practices.
The Industrial Disputes Act, 1947 also regulates labor practices and relations and provides for
freedom of association and collective bargaining rights.

        Unions are an active part of the Indian workforce, though not widespread, representing
less than 2% of the total work force. The Trade Unions Act of 1926 and the International Labour
Organization’s conventions protect and regulate the activities of the unions.

III.      Independent Contractors

         In the event that employment of an Indian nationals is not practical, necessary or
economical for a U.S. company, a common alternative is the use of independent contractors. In
general, Indian law permits the use of independent contractors and also allows the parties to
agree to the terms of the arrangement (including termination, etc). The advantage for a U.S.
company of having a relationship with an independent contractor rather than an Indian employee
is that the Indian employment laws described above generally will not apply. The laws described
above apply only to employees and independent contractors are not included in the definition of

           A.     Independent Contractor v. Employee

        Much like U.S. common law, Indian law employs a number of tests to distinguish an
independent contractor from an employee. Traditionally, Indian common law uses a “control
test” to determine if an individual is an independent contractor or an employee. As articulated
by the Indian Supreme Court in the 1955 decision Shivnandan Sharma v. The Punjab National
Bank, Ltd. “the test is the existence of a right of control over the agent in respect of the manner in
which his work is to be done.”9 The more control that a company has over the independent
contractor, the more likely it is that the independent contractor will be deemed to be an employee
of the company.
    AIR 1955 S.C. 1439

Recently, the Supreme Court of India has lessened the importance of the control test,
finding instead that control is one of a number of factors to be considered in distinguishing an
employee from an independent contractor. In the 2003 decision Ram Singh and Ors. v. Union
Territory, Chandigarh and Ors., the court found that “it is necessary to take a multiple pragmatic
approach weighing up all the factors for and against an employment instead of going by the sole
test of control.”10 The court held that it would utilize the “integration test” in determining
whether an individual is an employee. Under the integration test, a court will examine whether
an individual is “fully integrated into the employer’s concern” or if they remain apart or
independent from it.

       Because an individual that is folded into the larger, internal operations of an enterprise
may be characterized as an employee, the contractor should not be treated by a U.S. company as
they would normally treat an employee. Rather, U.S. companies should deal with the contractors
as they would any other outside service provider. Contractors should maintain a separate
business operation from the U.S. company and all transactions between the contractor and the
U.S. company should be made at arm’s length.

        In addition to the control and integration tests described above, an Indian court will
consider a number of factors, including the following: (a) the terms and conditions of any
contract between the parties; (b) where the individual performs the services; (c) who provides the
machines and equipment required to perform the services; and (d) a party’s right to reject non-
conforming goods or services. As held in the Silver Jubilee Tailoring House and Others
decision, a court should consider factors such as the above and “perform a balancing operation
weighing up the factors which point in one direction and balancing them against those pointing
in the opposite direction.”11

           B.      Pitfall #5: Avoiding a Permanent Establishment

        A U.S. company with employees in India and a permanent establishment in India will
have to abide by a host of Indian employment and tax laws and will be subject to corporate tax.
However, in general, a U.S. company will not have tax issues related to an independent
contractor as long as the U.S. company does not have a “permanent establishment” (“PE”) in
India. The relevant law to consider here is the Indo-US Double Tax Avoidance Convention --
the main purpose of which is to prevent double taxation of corporate entities operating in the
U.S. and India. Pursuant to the convention, corporate entities with a PE in India are subject to
Indian corporate tax and are required to make certain tax withholdings. If a U.S. company has
enduring, substantial business in India, such that the business and operations of the company are
taking place in India, then the U.S. company has a PE in India and its operations will be subject
to Indian taxation.

       A U.S. company is at risk of establishing a PE in India when the U.S. company contracts
with an individual that is so dependent on the U.S. company or so integrated into the operations

     JT 2003(8) SC 345.
     1974 AIR 37.

of the U.S. company that he establishes an outpost of the U.S. company in India. In general,
entering into an independent contractor agreement with an Indian individual will not qualify as a
U.S. company having a PE in India, so long as the Indian agent remains independent from the
U.S. company.

        An agent is of independent status if he is independent both legally and economically and
if he acts in the ordinary course of his business when acting on behalf of an enterprise. A U.S.
company may not have a PE in India if the contractor’s status remains independent and if, in
entering into a contracting agreement with the U.S. company, the contractor is acting in the
ordinary course of his business.

        An agent that acts almost exclusively for one enterprise may have difficulty maintaining
the independent status required to prevent the establishment of a PE. A U.S. company should
make sure that all terms and payment are at market terms and rates (“arms length”) and should
be aware that if the contractor does not eventually have other clients, then the independent status
of the contractor may be challenged.

        In summary, if a U.S. company does not have a PE in India, and enters into an
independent contractor agreement with an agent in India, the U.S. company will not be subject to
Indian corporate tax, nor will it be required to make withholdings from payments made to the
independent contractor. In the event that a U.S. company has a PE in India, then the U.S.
company will be subject to corporate tax and required to make withholdings. If a U.S. company
has a PE in India and an employee in India, then the U.S. company will be subject to corporate
tax, required to make withholdings and will also have to comply with Indian labor laws.

         C.       Pitfall #6: Venue and Jurisdiction

        India recognizes a parties’ right to decide the governing law of an agreement and venue
for disputes. While Indian law generally allows parties to decide in which courts a dispute will
be decided, there are many exceptions to this rule. For instance, India’s civil procedure codes
and other legislation provide that local courts have inherent territorial jurisdiction in some
matters that cannot be taken away. For example, in the event that a United States company
desired to have a court grant an injunction against a contractor while the contractor was in India,
that injunction would have to be obtained from an Indian court. Also, since one of the parties to
the contractor agreement is in India, working in India and receiving payments in India, no
agreement can exclude the inherent jurisdiction of the Indian courts that is applicable. 12

   Section 20 of the Civil Procedure Code of 1908 states that: “Every suit shall be instituted in Court within the local
limits of whose jurisdiction- (a) the defendant, or each of the defendants where there are more than one, at the time
of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for
gain; or (b) any of the defendants, where there are more than one, at the time of the commencement of the suit
actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such case
either the leave of the Court is given, or the defendants who do not reside, or carry on business, or personally work
for gain, as aforesaid, acquiesce in such institution; or (c) the cause of action, wholly or in part, arises.

To avoid the applicability of inherent jurisdictions of respective courts at least in the
beginning (as ultimately for the enforcement of the decree that may be passed, parties shall have
to approach the courts situated in the jurisdiction of the concerned party), the parties may choose
arbitration for resolving any disputes wherein they can choose the jurisdiction, arbitrators, law
and venue of their choice.

        D.     Pitfall #7: Maintaining your Intellectual Property Rights

       Intellectual property rights are of great concern to many U.S. companies that contract
with foreign nationals. Most U.S. companies want to ensure that they will have full ownership
of any intellectual property created by a contractor or their employees. In India, intellectual
property rights are protected under the Copyright Act. Much like U.S. law, the “works made for
hire” doctrine in India, which provides that an employer has ownership of any intellectual
property made by an employee in the course of his employment, does not extend to intellectual
property created by an independent contractor. An independent contractor should therefore
execute a separate agreement assigning all intellectual property created in the course of his
engagement to his client.

        There are a few differences in the intellectual property rights protection provided under
Indian law. First, unless an intellectual property assignment agreement states otherwise, the term
of a copyright assignment is five years and the assignment is confined to India. Assignment
Agreements should therefore provide that the assignment is perpetual and worldwide. Second, if
the assignee under an intellectual property assignment agreement does not use those intellectual
property rights within the first year of an assignment, the assignment lapses. Assignment
agreements should therefore provide that the rights shall not lapse if the company does not make
use of them within a year.

IV.     Conclusion

        A U.S. company interested in working with Indian nationals should first consider whether
it is more practical for them to employ an Indian national or to enter into an independent
contractor relationship with the Indian national. If the U.S. company plans to employ Indian
nationals, the company should consider the location of their business and the category of worker
and then obtain specific legal advice regarding wages, benefits, and terminations. If the U.S.
company enters into an agreement with an independent contractor, the company should be
careful to treat the contractor as a contractor and not an employee and should avoid establishing
a permanent establishment in India, if possible.

                    ·   Associate
                    ·   Transactions, Corporate & Securities
                    ·   B.A., Vassar College
                    ·   J.D., Tulane University School of Law

Nicole M. Gewinner is a business transactions attorney. Her practice includes mergers and
acquisitions, offerings of debt and equity securities, corporate governance matters and general
corporate law. She has represented and advised clients in a number of diverse industries
including energy, communications and technology. Her practice includes both domestic and
international transactions and legal advice.

Ms. Gewinner is admitted to practice in Texas.


Ms. Gewinner is a member of the Austin Bar Association and the Austin Young Lawyers
Association. She is also a member of the Planning Committee for the Austin Bar Association's
Business, Corporate and Tax Section.

Community Involvement

Ms. Gewinner serves as a Committee Chair for the Austin Young Lawyers Association's
Women's Resource Fair.


Ms. Gewinner earned her B.A. degree from Vassar College in New York State. Ms. Gewinner
also attended Reid Hall in Paris while earning her bachelor’s degree. She earned her J.D. degree
from Tulane University School of Law in New Orleans.


Ms. Gewinner speaks French.

                     ·   Partner
                     ·   International, Transactions, Corporate & Securities, Technology,
                         Environmental, Energy, Regulatory & Legislative
                     ·   B.S., Cornell University
                     ·   J.D., University of Texas
Sue Snyder represents companies with regard to transactions in the domestic and international
arena. She specializes in companies involved in technology and energy with general corporate
matters and also provides advice for companies sending people, products and monies in the
international arena.     Ms. Snyder's experience spans regulatory and permitting issues;
international legislation; drafting multilateral country agreements; tariff and trade matters;
establishing international public/private partnerships; and handling policy issues regarding
business and environmental matters in various countries.

Ms. Snyder has extensive experience in negotiating with governments around the world
regarding incentives, legislation, joint endeavors, standards and trade matters. Her international
work includes engaging in matters with the World Trade Organization (WTO), World Customs
Organization (WCO), World Intellectual Property Office (WIPO), United Nations, World
Economic Forum (WEF), and others. Ms. Snyder's work has encompassed the following
countries and regions: Europe, China, Japan, Korea, Taiwan, Singapore, India, Russia, Brazil,
Africa, Mexico and many others.

Ms. Snyder also has worked extensively in international trade matters including expansion and
construction of the Information Technology Agreement. She frequently assists on advisory
committees regarding trade matters and guidance.

Before joining the firm, Ms. Snyder served as Vice President of International Policy and
Relations and Executive Legal Counsel for Advanced Micro Devices, Inc. While at Advanced
Micro Devices, Ms. Snyder worked to create a new department for international policy and
relations. The department conducted numerous engagements with governments and entities in
over twenty countries. She also worked extensively on a wide variety of corporate matters
including international transactions, environmental, legislative, policy and trade matters while

Prior to Advanced Micro Devices, Ms. Snyder worked as a private practice attorney at Vinson &
Elkins, where her practice concentrated on environmental, health, and safety matters, including
complex administrative, enforcement, and permitting actions. Ms. Snyder also was involved in
toxic tort litigation involving environmental matters.

Ms. Snyder is admitted to practice in Texas.

Representative Matters

·       Successfully assisted companies in selling and emerging in the Chinese Market.

·       Guided companies in India contractor matters.

·       Created international licensing agreements for technology company in the European

·       Successfully concluded energy agreements for expansion and entry in the United States.

·       Assisted in Foreign Direct Investments and federal filings in the United States.

·       Assisted in the first WTO case the United States brought against China regarding
        semiconductor products, which concluded successfully.

·       Successfully negotiation multilateral trade and environmental agreements with the United
        States, Japan, European Union, Korea and Taiwan.

·       Successfully worked with others in concluding China’s entry into the World
        Semiconductor Council.

·       Successfully modified regulations in European Union and legislation in China.

·       Assisted in engaging technology in undeveloped countries.


Ms. Snyder is a Texas Bar Foundation Fellows Member and a member of the American Bar
Association, State Bar Association, Austin Bar Association and certain International sections
within these memberships. Ms. Snyder is previously the chair of the Semiconductor Industry
Association's international policy steering committee. She has previously served as a Board
Member of the Information Technology Business Council, a Board Member of the Austin
Chamber of Commerce and law chair of the Semiconductor Industry Association. Ms. Snyder
also was one of the founders of the High Tech Committee of the Travis County Bar Association
and coordinated the Austin In-House Counsel group for over five years. Ms. Snyder also has
served as a Board Member of the Texas Business Education Coalition, on the Texas Higher
Education TETC Committee, and as a member of the Industry Executive Subcommittee of the
National Security Telecommunications Advisory Committee for the President of United States.

Community Involvement

Ms. Snyder is currently serving on the Board of Directors of the Capital Area Food Bank and on
the Board of Governors of Lifeworks. She also is on the Leadership Council of Communities in
Schools, a member of the Children's Medical Center Foundation, a member of Westlake Circle
of Friends, and a member of the National Charities League Capital of Texas Chapter. Ms Snyder

is a founder of Girl Scout Troop 1600 for Girl Scouts with "Mothers Behind Bars" and a past
Board Member of the Lone Star Council Girl Scouts. She also is active in pro bono matters
including a matter involving children abducted internationally and their return under the Hague


Ms. Snyder earned her B.S. degree in Civil and Environmental Engineering, with distinction,
from Cornell University, where she was a Cornell Ambassador and a member of Chi Epsilon,
Tau Beta Pi, and Alpha Lambda Delta Honor Society. She received her J.D. degree, with
honors, from the University of Texas School of Law, where she was Order of the Coif, Phi Delta
Phi Honor Society, Teaching Quizmaster, and Associate Editor of the Texas Law Review.

Publications & Speaking Engagements

Ms. Snyder has been a speaker at numerous events regarding international matters. Ms. Snyder
also was a speaker at the Governor's Texas Conference for Women for consecutive years. She
has been an adjunct professor at the University of Texas School of Law and a host of the Austin
show "Ask an Attorney." Recent publications/speaking engagements include:

·       “Free Trade is Crucial to Austin”

·       “Austin’s International Law Practice on the Rise”

·       “Coming and Going . . . Why Free Trade is Becoming Crucial to Austin Business”

You can also read
Next slide ... Cancel