The short version

India does not have at-will employment. You cannot end someone’s job with two weeks’ pay and a polite email.

Here is the shape of it:

• A confirmed employee is usually owed one month of notice, or one month of pay instead of notice.
• Since 21 November 2025, all final wages must be paid within two working days of the last working day. This applies whether the person resigned or you let them go.
• Gratuity is due within 30 days. Five years of service for a permanent employee. One year for a fixed-term employee.
• If the person is a “worker” and you are cutting the role, you owe 15 days of pay for every completed year, plus notice, and you have to release people in last-in-first-out order.
• Firing for misconduct without a written show cause notice and a proper enquiry is the single most common way foreign employers lose in an Indian labour court.

Now the detail.

Why “at-will” does not travel to India

Most of the founders we talk to are American. They are used to a world where employment ends when either side says so, and the only real risk is a discrimination claim.

India works the other way round. Employment is a contract, and on top of that contract sits a stack of statute that the contract cannot undercut. You can promise an employee more than the law requires. You can never promise less.

The stack changed recently. On 21 November 2025, the government brought all four labour codes into force at once and repealed 29 central Acts. The Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code now carry the rules that used to sit in the Industrial Disputes Act, the Payment of Gratuity Act and the Payment of Wages Act.

Central rules followed at the end of December 2025. State rules have been arriving through 2026, and they have not arrived everywhere. Maharashtra, Gujarat, Karnataka, Madhya Pradesh and Delhi have notified rules across all four codes. Some states are still catching up. That matters, because the state where your employee physically sits decides part of what you owe them.

A lot of the advice still floating around online quotes the old Acts. If a page tells you government permission is needed to retrench at 100 workers, it is out of date.

First question: is your employee a “worker”?

Almost every termination question in India resolves to this one.

Under Section 2(zr) of the Industrial Relations Code, a worker is a person employed to do manual, unskilled, skilled, technical, operational, clerical or supervisory work. People in a managerial or administrative role are not workers. People in a supervisory role are workers only if they earn ₹18,000 a month or less.

Why it matters: workers get the protections. Retrenchment notice, retrenchment compensation, last-in-first-out, standing orders, access to labour courts and conciliation. Managers do not. A manager’s exit is governed by the employment contract and the state Shops and Establishments Act, and very little else.

So a ₹40 lakh engineering manager in Bengaluru and a ₹25,000 support executive in the same office are, legally, two different problems. The manager is a contract question. The support executive is a statute question.

Get this classification wrong and you will find out about it in a conciliation hearing, not in your inbox. Misclassification is also why we spend so much time on the contract itself when we onboard someone for a client: the job title, the reporting line and the duty description on paper are what a labour officer reads first.

The four ways an employment legally ends in India

1. Resignation. The employee gives notice as per contract. You are still on the hook for the two-day settlement.

2. Termination for misconduct. Theft, fraud, insubordination, sustained absence, breach of policy. No notice is required if the process is followed. The process is the hard part.

3. Retrenchment. The role is going away. Restructuring, cost cutting, a project ending. This is where notice plus compensation plus LIFO applies.

4. End of a fixed term or failure to confirm after probation. The contract simply runs out, or you do not confirm. Cleanest route, but only if the paperwork was written that way from day one.

Performance is the awkward fifth case. Indian law does not give you a tidy “poor performance” exit. In practice you either document it as misconduct with an enquiry, treat it as retrenchment with compensation, or negotiate a mutual separation. Most companies negotiate. A mutual separation agreement with an ex-gratia payment and a signed release is boring, fast and almost impossible to challenge later. It is usually cheaper than a fight.

Notice periods: what you actually owe

There is no single national notice period. It comes from three places, and the longest one wins.

The contract. Whatever you wrote. Indian IT and services contracts routinely carry 60 or 90 days, which foreign employers find absurd until they try to hire someone who is serving one.

The state Shops and Establishments Act. Most states require one month for a confirmed employee and 7 to 15 days during probation. Karnataka: one month after confirmation, 7 days on probation. Delhi: 30 days. Maharashtra: 30 days once the person has a year of continuous service. Check the state where the employee sits, not where your entity or your EOR is registered.

The Industrial Relations Code, if the person is a worker being retrenched. One month of written notice stating the reason, or wages for that month instead. Three months if the establishment has 300 or more workers.

You can pay in lieu of notice. That is normal and legal. Notice pay is taxable in the employee’s hands and TDS applies.

One thing to be careful about: recovering notice pay from an employee who leaves early. You can adjust it against the final settlement if the contract says so. You cannot hold the relieving letter hostage indefinitely and you cannot withhold statutory dues like gratuity or PF to force it. Courts take a dim view of that, and it is the kind of thing that turns a quiet exit into a complaint.

Terminating for misconduct: the enquiry is not optional

This is where good companies get hurt.

Indian law requires that a dismissal for misconduct follow the principles of natural justice. In practice that means a written sequence:

1. Suspend pending enquiry if the allegation is serious, on subsistence allowance.
2. Show cause notice. Set out the specific allegation, with dates and facts. Not “unprofessional conduct”. Something the person can actually answer.
3. Written reply. Give a real deadline, usually 7 days.
4. Domestic enquiry. An enquiry officer who was not involved in the incident. The employee gets to see the evidence, question the witnesses and bring a colleague or union representative.
5. Enquiry report. Written findings.
6. Termination order that refers to the findings.

Skip the enquiry and the termination is very likely to be set aside, even if the misconduct was real and provable. Indian courts have repeatedly held that a dismissal founded on misconduct cannot bypass natural justice. The employer’s position becomes: we were right, but we did it wrong, so reinstate them with back wages.

If your establishment has 300 or more workers, you also need certified standing orders that define what counts as misconduct. Below that threshold the contract and policy handbook carry the weight, which is another reason to have a real handbook rather than a copied US one.

Retrenchment: the actual arithmetic

If you are cutting a role held by a worker with at least one year of continuous service, Section 70 of the Industrial Relations Code applies.

Notice: one month in writing, stating the reason, or one month’s wages instead. Three months at 300 or more workers.

Compensation: 15 days of average pay for every completed year of continuous service. Any part of a year beyond six months counts as a full year.

Order: last in, first out within the category, unless you record a written reason to depart from it.

Re-skilling fund: a contribution equal to 15 days of the worker’s last drawn wages, payable within 45 days.

Government permission: required only at 300 or more workers, up from 100 under the old Industrial Disputes Act. This is the single biggest change for mid-sized employers. If you have 120 people in India, you no longer need the state’s approval to restructure.

A worked example. A support engineer in Pune, 3 years and 8 months of service, wages of ₹50,000 a month.

• Completed years: 3 years and 8 months rounds to 4.
• Retrenchment compensation: (₹50,000 ÷ 26) × 15 × 4 = ₹1,15,385
• Notice pay in lieu: ₹50,000
• Re-skilling fund: (₹50,000 ÷ 26) × 15 = ₹28,846
• Plus unpaid salary, leave encashment and gratuity if eligible.

None of that is a surprise if you budgeted for it. All of it is a surprise if you assumed two weeks of severance. This is the same category of cost that we cover in the hidden costs of an EOR in India: the money is not hidden, it is just in a place foreign finance teams do not think to look.

The two working day rule: the biggest operational change of 2026

Under Section 17(2) of the Code on Wages, when an employee is removed, dismissed, retrenched, resigns, or becomes unemployed because the establishment closed, all wages due must be paid within two working days of the last working day.

Two working days. Not “with next month’s payroll”. Not 45 days, which is what most Indian companies had quietly settled into.

What has to land in that window: unpaid salary, leave encashment, statutory bonus accrued, and any incentive that has already crystallised. Gratuity sits outside it and follows its own 30-day clock.

Penalties for missing it run to ₹50,000 for a first offence under the Code on Wages, and up to ₹1,00,000 with possible imprisonment for a repeat within five years.

The practical consequence is that your exit process has to move upstream. You cannot start calculating leave balances on the last working day. Attendance has to be closed, leave has to be reconciled, asset recovery and any advances have to be settled, and the F&F sheet has to be sitting ready before the person walks out. Our India payroll operation now runs the F&F calculation from day one of the notice period and locks it three days before exit, purely to survive this rule.

What goes into a full and final settlement

Pay out:

• Salary for days worked in the final month
• Encashment of earned or privilege leave, as per state law and policy
• Statutory bonus, pro-rated, where applicable
• Notice pay in lieu, if you are shortening the notice
• Retrenchment compensation, if applicable
• Reimbursements already approved
• Gratuity, within 30 days

Deduct:

• TDS on the taxable components
• Notice shortfall, if the contract allows and the employee chose to leave early
• Salary advances or loans outstanding
• Unreturned assets, at documented value
• Employee PF and ESI contributions for the final month

If you want the component-by-component logic behind these numbers, we broke down every line of an Indian pay structure in the Indian salary slip explained.

Gratuity: five years, or one

Gratuity is a statutory lump sum for long service, and it survived the labour codes with one significant change.

Permanent employees: payable after five years of continuous service, on resignation, termination, retirement, death or disablement. The five-year condition is waived for death and disablement.

Fixed-term employees: payable pro-rata after one year, under the proviso to Section 53 of the Code on Social Security. This is new, and it quietly ended the practice of using rolling fixed-term contracts to avoid long-service costs. We wrote about it separately when it landed: fixed-term employees in India now earn gratuity after one year.

Formula: last drawn wages × 15 ÷ 26 × completed years of service. Part of a year over six months counts as a full year.

Ceiling: ₹20,00,000.

Deadline: 30 days from the date it becomes payable. Interest is payable on delay.

There is a trap in “wages”. Under the new definition, wages means basic pay, dearness allowance and retaining allowance, and the allowances you exclude cannot exceed 50 percent of total remuneration. Anything above that 50 percent line gets pulled back into wages. Companies that built salary structures with a small basic and a large pile of allowances now have a higher gratuity base than they had budgeted for. If your India cost model predates November 2025, rerun it. Our India hiring cost calculator already uses the new definition.

People you cannot terminate

Some exits are simply blocked, whatever the contract says.

• A woman on maternity leave. The Maternity Benefit Act prohibits dismissal or discharge during maternity leave, and you cannot vary her conditions to her disadvantage.
• An employee who has filed a complaint under the POSH Act, where the termination would look like retaliation.
• An employee on approved leave that they are legally entitled to.
• A worker during a pending conciliation or industrial dispute, without approval.
• Anyone, on the basis of caste, religion, gender, pregnancy or disability.

If a termination lands close in time to any of these, expect it to be read as connected to it. The burden of showing otherwise sits with you, and the contemporaneous paper trail is the only thing that will do it.

Documents you owe on the way out

• Relieving letter. No statute demands it, but no Indian employer will hire your ex-employee without one. Withholding it is the fastest route to a complaint.
• Experience letter, with dates and designation.
• Full and final settlement statement, itemised.
• Form 16, by 15 June following the end of the financial year.
• Date of exit marked in the EPFO portal. This is the employer’s job, and it is the one people forget. Until you mark it, the employee cannot transfer or withdraw their PF, and their next employer cannot link the UAN. It generates more angry ex-employee emails than any other single item.
• ESIC exit, where applicable.

What it costs to get it wrong

An Indian workforce dispute takes somewhere between six months and two years to resolve. That is the number that should shape your thinking, not the size of the eventual award.

The exposure is real: reinstatement with back wages, the compensation you should have paid in the first place, penalties under the Code on Wages, and interest on delayed gratuity. But the bigger cost is the two years, the local counsel, the affidavits, and the founder time spent on a hearing in a city eight and a half time zones away.

Nearly all of it is avoidable with a written process, a real enquiry where one is needed, and paying the statutory amount on time.

A clean exit, day by day

Day minus 30 (or minus 60, or minus 90). Written notice issued, reason stated. F&F calculation begins. Attendance and leave reconciliation starts.

Day minus 7. Asset recovery scheduled. Advances and reimbursements closed. F&F sheet drafted and reviewed.

Day minus 3. F&F locked. Relieving and experience letters drafted. Bank details confirmed.

Last working day. Handover signed. Assets returned. Letters handed over.

Day plus 2 (working days). All wages paid. Not a day later.

Day plus 30. Gratuity paid. Date of exit marked in EPFO. ESIC exit filed.

By 15 June. Form 16 issued.

Where an employer of record fits

Plainly: an employer of record is the legal employer of your India team, so the notice, the enquiry, the settlement and the filings are our problem to execute rather than yours to learn. You make the business decision. We run the process, on the clock, with the paperwork that survives scrutiny.

That is worth something specific in this context. Two working days is not a long time to discover you do not have an India payroll process. Neither is a domestic enquiry a thing you want to be attempting for the first time under pressure.

It is also worth saying what an EOR does not do. It does not let you terminate people the way you would at home. The rules on this page apply to us exactly as they apply to your own entity. What changes is who carries the compliance risk and who does the work.

If you are hiring in India rather than exiting, start with hiring in India or, if you want the country-specific version, hiring in India from the USA and from the UK. Pricing is published, flat and on one page. If you have a live situation, talk to us before you send the email, not after.

Frequently asked questions

Can you fire someone in India without notice? Only for proven misconduct, and only after a written show cause notice, a domestic enquiry conducted fairly, and a written enquiry finding. In every other case you owe notice or pay in lieu of notice, usually one month for a confirmed employee.

Does India have at-will employment? No. Employment in India is governed by the contract, the state Shops and Establishments Act, and the central labour codes. Notice, settlement timelines and, for workers, retrenchment compensation are statutory minimums that a contract cannot reduce.

How long does a company have to pay a final settlement in India? Two working days from the last working day, under Section 17(2) of the Code on Wages, in force since 21 November 2025. This covers unpaid salary, leave encashment and accrued statutory bonus. Gratuity has a separate 30-day deadline.

How much notice period is required in India? One month for a confirmed employee in most states, and 7 to 15 days during probation. Contracts commonly specify 60 or 90 days, and the longer of contract and statute applies. For a worker being retrenched, the Industrial Relations Code requires one month, or three months in establishments with 300 or more workers.

What is retrenchment compensation in India? 15 days of average pay for every completed year of continuous service, payable to a worker with at least one year of service, plus one month of notice or pay in lieu, plus a re-skilling fund contribution of 15 days of wages within 45 days.

When do you need government permission to lay off staff in India? Only in establishments with 300 or more workers. The threshold was 100 under the old Industrial Disputes Act and was raised by the Industrial Relations Code.

Is gratuity payable if an employee resigns? Yes, if they have five years of continuous service. Fixed-term employees earn pro-rata gratuity after one year under the Code on Social Security. It is payable within 30 days, with interest on delay.

Can an employer withhold a relieving letter in India? There is no statute requiring a relieving letter, but withholding one to pressure an employee, or withholding statutory dues such as gratuity or provident fund, exposes the employer to a complaint. Adjusting a contractual notice shortfall against the settlement is permitted where the contract provides for it.

Can you terminate a woman on maternity leave in India? No. The Maternity Benefit Act prohibits dismissal or discharge during maternity leave and prohibits varying her conditions of service to her disadvantage.

What is the difference between a worker and an employee in India? Under Section 2(zr) of the Industrial Relations Code, a worker performs manual, skilled, technical, operational, clerical or supervisory work. People in managerial or administrative roles are excluded, and supervisory staff are excluded if they earn more than ₹18,000 a month. Workers get retrenchment protections, standing orders and access to labour courts. Others are governed by contract and the state Shops and Establishments Act.

Do the 2026 labour codes apply everywhere in India? The central provisions have been in force nationwide since 21 November 2025. State rules have been notified unevenly through 2026, so establishments under state jurisdiction should check the position in the state where the employee works.