One of the most critical needs of India’s burgeoning software industry and other outsourcing service providers is having the flexibility and independence to hire the most decent workforce and fire unproductive employees. There is also a growing need to strike a delicate balance between the employer’s hiring and firing policy and the rights of workers. This article sets out to discuss Indian downsizing laws, employee compensation law, and the applicability of these laws to the Indian information technology industry (the “IT”).
Termination of employment must be in accordance with the Shops and Premises Act applicable to the jurisdiction where the IT company is located and the Industrial Disputes Act 1947 (hereinafter the “ID Act”). The Stores and Establishments Act generally permits an employer to discharge its employee, other than an employee hired for a specified period or on a vacancy of leave, from service by providing the employee thirty (30) days advance notice or a longer period as may be required under the terms of employment or salary in your place.
The Law of Stores and Establishments does not usually apply to employees who occupy positions of a confidential, managerial or supervisory nature, that is, all non-workers can be fired at will in terms of the employment contract concluded with the respective employee.
The ID Law, which is applicable to all industrial and commercial establishments, defines employees/workers and both qualified and unqualified persons can be considered as ‘workers’. However, a person employed primarily in a managerial or administrative capacity or if the nature of the services provided by an employee is supervisory, the employee may not be considered a worker. In view of this, the Head, Project Managers, Manager (business development) of project teams in an IT or outsourcing company cannot be called “workers” subject to an actual assessment of their roles and responsibilities. However, it is likely that other team members, associates, trainees, etc. employed by an IT company may be considered ‘workers’ subject to assessment of their specific job profiles, roles and responsibilities.
The termination of a worker’s service (other than for the specified reasons discussed below) is known as a “reduction in force.” In terms of section 2(oo) of the ID Act, downsizing “means the termination by the employer of a worker’s service for any reason, other than as a punishment inflicted by disciplinary action, but not includes –
(a) voluntary retirement of the worker; Prayed
(b) the worker’s retirement upon reaching retirement age if the employment contract between the employer and the worker contains a provision to that effect; Prayed
(bb) termination of the worker’s service as a result of the non-renewal of the employment contract between the employer and the worker in question at its expiration or the termination of said contract by virtue of a stipulation in that name contained therein;
(c) termination of a worker’s service due to continuing ill health.”
In view of the definition above, it is clear that employees who have been employed during a specific training period may be asked to leave at the end of that period without being provided with an offer of employment by the IT company. If the company needs to extend its training period, it can extend the specified period and reserve the right to offer employment at the end of the extended training period, otherwise the training period of each of these employees will be deemed to have ended.
Legal requirements regarding termination of services are more onerous once a company employs more than 100 workers. In terms of the ID Law, if an industrial establishment employs more than 100 workers, a company cannot dismiss, that is, terminate the services of any worker who has been in continuous service for not less than one year unless (i ) the worker has received three (3) months’ written notice indicating the reason for the reduction and the notice period, and (ii) prior permission has been obtained from the state government concerned for the reduction (Section 25N of the ID Law).
If permission is not obtained, the dismissal will be considered illegal from the date the notice was given and the worker will be entitled to all the benefits of law as if he had not been given notice. From a practical point of view, obtaining state government approval for the reduction is considered almost impossible due to the implications of the resulting unemployment. Therefore, companies rarely apply to the state government for downsizing. The penalty for contravening the aforementioned retrenchment provisions is imprisonment for up to one month or a fine which may extend to Rs 1,000, or both. Assuming state government approval is obtained, workers’ services can be terminated with three months’ notice and payment of 15 days’ average salary for each full year of service in excess of six months.
Courts have not interpreted the term ‘workers’ within the meaning of the ID Act with specific reference to data processors or software workers. However, the courts have addressed the question of whether a company engaged in the development of computer software is an ‘industrial establishment’ within the meaning of the ID Act. In the matter of Cholamandalam Software Ltd. v/s. Madras Additional Labor Court [(1995) (S) LLJ 78 Mad], the Hon’ble Single Judge of the Madras High Court considered whether Cholamandalam Software, a company that provides computer services related to the collection and maintenance of information and develops computer software applications for the requirements of its clients, was a ‘computer establishment’. industrial’ in the sense of article 25L of Law ID. In order to resolve this issue, the Honorable Judge addressed the question of whether the company was a ‘factory’ and engaged in any ‘manufacturing process’. The Honorable Judge pointed out that Explanation II of article 2(m) of the Factories Law is clearly intended to exclude from the scope of application the premises in which computer or electronic data processing units are installed and in which no carry out any other manufacturing process. the definition of ‘factory’.
The Honorable Judge therefore essentially found that electronic data processing units had been specifically excluded from the definition of ‘factory’ in Explanation II. Therefore, Cholamandalam Software cannot be considered a factory under section 2(m) of the Factories Act and, in turn, cannot be considered an “industrial establishment” within the meaning of section 25L of the ID Act. This sentence was subsequently upheld by the Divisional Chamber of the Madras High Court, after which the company’s workers filed an appeal with the High Court. The Supreme Court, while distancing itself from the interpretation provided by the Madras High Court, recognized that the key issue is whether the data processing and software preparation activity would constitute a “manufacturing process” and referred the matter to a higher court. broad Supreme Court. Court for consideration, whose decision is still awaited.
In light of pending consideration by the Supreme Court, the question of whether software companies or other outsourcing service providers would constitute an ‘industrial establishment’ under the ID Act remains unanswered to date and it is unclear whether a software company software can fire your employees without complying with the ID Law if you have more than 100 employees.
From a practical standpoint, the IT industry is not considered an “industrial establishment” within the meaning of section 25L of the ID Act and follows the “hire and fire” policy without complying with the ID Act of seeking approval prior to the state government. , supported by the judgment of the Madras High Court Trial Chamber, which has held that software companies are not an “industrial establishment” and are therefore not covered by the strict abatement provisions mentioned in Chapter VB of the ID Law.
Despite the above flexibility, software companies will be required to comply with the downsizing provisions of section 25F of the ID Act which applies to all industries (and not just industrial establishments) and requires that ” No worker employed in any industry who has been in continuous service for not less than one year under an employer shall be laid off by that employer until –
(a) the worker has been given one month’s notice in writing indicating the reasons for the dismissal and the period of notice has expired, or the worker has been paid in lieu of such notice, the wages corresponding to the period of notice;
(b) the worker has been paid, at the time of the reduction, a compensation that will be equivalent to fifteen days of average salary for each full year of continuous service or part of it that exceeds six months; Y
(c) the notice in the prescribed manner is served on the relevant Government or such authority as may be specified by the relevant Government by notice in the Official Gazette.
In view of the foregoing, an Information Technology Company may terminate the services of those employees who have not completed a year of employment under the terms of their respective employment contract, that is, with a minimum notice of one month without complying with the aforementioned reduction provisions. .
For employees who qualify as ‘blue collar’ and have completed one year’s continuous service, in cases other than misconduct, the IT company may terminate their services with a minimum of one month’s notice (or the prior notice agreed) in writing indicating the reasons for dismissal together with severance pay equivalent to 15 days of average salary for each completed year of continuous service that exceeds six months and the necessary notification is given to the corresponding labor authority.
My next article will deal with situations where termination of services is necessary due to employee misconduct and compliance with procedures required by Indian labor laws.
Seema Jhingan