Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against Labour Code notifications, state rules and court decisions
Introduction
The non-compete clause in your India employment contract is void. Not weak, not narrowly enforceable, not subject to a reasonableness test. Void.
That single fact accounts for more surprise among foreign employers than anything else in Indian employment law, because it runs directly against the instinct trained by US and UK practice. In those jurisdictions a post-employment restraint is enforceable if it is reasonable in scope, duration and geography. In India there is no such test.
Section 27 of the Indian Contract Act, 1872 does not differentiate between partial and total restraints; any agreement falling within its scope is considered void. The test of reasonableness, which is common in other jurisdictions, does not apply to post-termination employment contracts in India.
Groups discover this when a senior engineer joins a competitor and outside counsel explains that the twelve-month non-compete in the contract cannot be enforced, and never could have been.
The wider point is that an India employment contract is not a translation exercise. The template that works in Delaware or London contains clauses that are unenforceable here, omits clauses that are mandatory, and structures compensation in a way that now breaches a statutory requirement.
This guide covers what actually binds, what does not, what the four Labour Codes changed in November 2025, and how to build a contract that survives a labour inspection and an exit dispute.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Employment documentation is where India’s difference from other jurisdictions is sharpest, and where a group’s global template does the most damage.
Where a rule is settled we state it and cite the source. Where the position is genuinely in transition — and Indian employment law is, following the Labour Codes — we say so rather than present a settled picture that does not exist yet.
Where an obligation is state-specific, we say that too. India does not have one employment law; it has a central framework and twenty-eight sets of state rules underneath it.
Primary sources: the Ministry of Corporate Affairs for the Companies Act; the Ministry of Labour and Employment for the Labour Codes and rules; and reported decisions of the Supreme Court and High Courts.
1. The Labour Codes, and where the transition actually stands
The four Labour Codes — the Code on Wages 2019, the Code on Social Security 2020, the Industrial Relations Code 2020 and the Occupational Safety, Health and Working Conditions Code 2020 — were notified effective 21 November 2025.
Twenty-nine central labour laws were consolidated into four. That is the largest change to Indian employment law in decades.
1.1 Notified is not the same as fully operational
This is the point most summaries skip.
The transition to the four Labour Codes is one in which predecessor statutes continue to apply and state rules were still being finalised.
Labour is a concurrent subject in India. Each Code requires state rules to give effect to it, and states have moved at different speeds. The practical consequence for an employer in 2026 is that the applicable framework depends on which state your establishment is in and how far that state has progressed.
Two things follow. First, do not assume the Codes have displaced everything — check the position for your state. Second, do not assume they have changed nothing — several provisions have immediate effect on how you structure compensation and draft contracts.
1.2 What has changed for contract drafting
| Change | Effect on the contract |
|---|---|
| Wage definition under the Code on Wages | Basic pay cannot fall below 50% of total CTC. Contracts that inflate allowances to reduce PF liability are affected. |
| Model Standing Orders for the service sector under the IR Code | Order 21 imposes secrecy obligations on the employer’s trade secrets; Order 22 mandates exclusive service and prohibits dual employment without prior written permission |
| Consolidated definitions | Terms such as employee, worker and wages now carry Code definitions that may differ from the older statutes your template referenced |
| Social security coverage | Extended in scope under the Code on Social Security, affecting who must be enrolled |
2. The classification that decides everything: workman or not
Before drafting a single clause, establish whether the employee is a workman.
Define the role explicitly, including whether the employee qualifies as a “workman” under the Industrial Disputes Act — a distinction that determines retrenchment protections and termination notice periods.
2.1 Why it matters more than seniority or salary
A workman has statutory protections on termination that a non-workman does not. Those protections include notice and compensation requirements, and in some cases procedural steps that must be followed before employment can be ended.
A non-workman’s employment is governed largely by the contract and by the applicable state Shops and Establishments legislation.
Get the classification wrong and you either apply protections that were not required, or — far more commonly and far more expensively — terminate a workman as though they were not one, and face a challenge in which the employer’s position is procedurally defective from the start.
2.2 The test
The classification turns on the nature of the duties performed, not on the job title, the salary, or what the contract says.
H.R. Adyanthaya v. Sandoz (India) Ltd. (1994) established the four-categories test for workman status.
Broadly, persons employed to do manual, unskilled, skilled, technical, operational or clerical work fall within the definition, while those employed mainly in a managerial or administrative capacity, or in a supervisory capacity above a prescribed wage threshold, fall outside it.
The words that do the work are “mainly” and “in fact”. An employee with a manager title who spends their time on technical delivery may still be a workman. A designation exercise that renames every engineer a “manager” does not change the analysis and looks exactly like what it is.
2.3 What to do about it
Assess the classification role by role, at the point of hiring, and record the basis. Where a role sits close to the line, draft for the more protective outcome. The cost of applying workman protections to a non-workman is a slightly longer exit; the cost of the reverse is litigation.
3. The written contract is not optional
In practice, oral employment contracts are unenforceable for most useful purposes because there is no written record of CTC, notice period, IP assignment, or termination grounds. State Shops and Establishments Acts and the Industrial Employment (Standing Orders) Act effectively require written terms of employment for any establishment with the prescribed minimum employees. Always issue a written appointment letter, even for short-term or intern engagements.
Two practical points for foreign employers.
An offer letter is not an employment contract. Many groups issue a two-page offer setting out salary and start date and never issue anything else. That leaves the terms that actually matter in a dispute — IP assignment, confidentiality, termination grounds, notice — undocumented.
Interns and short-term engagements need documentation too. The absence of a written agreement is exactly what turns a disputed engagement into an argument about whether an employment relationship existed at all.
4. Non-compete: why it is void, and what that means
4.1 The provision
Section 27 of the Indian Contract Act 1872 states that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
Section 27 declares post-employment non-compete agreements void as restraints of trade. Indian courts, including the Supreme Court, have consistently upheld this position.
4.2 Why the reasonableness test does not rescue it
Unlike the UK or the US, India does not recognise the common law reasonableness or partial restraint doctrine for post-termination clauses. The legislature deliberately departed from this flexible standard to protect the fundamental right to earn a livelihood.
This statutory intent is reinforced by the Constitution of India, 1950: Article 19(1)(g) guarantees the right to practise any profession or carry on any business.
Despite recommendations from the Law Commission, no additional exceptions have been incorporated. The overarching principle upheld by Indian courts is the employee’s constitutionally protected right to pursue a livelihood.
This is a structural difference, not a drafting problem. Narrowing the clause to six months, one city and three named competitors does not make it enforceable. There is no threshold below which a post-employment restraint becomes valid.
4.3 The one exception
Section 27 has an explicit exception for agreements made in connection with the sale of goodwill of a business. That is the sole exception explicitly provided.
This matters in an acquisition context. A non-compete given by a seller as part of the sale of a business stands on different ground from one given by an employee in an employment contract — which is why a founder who sells and then joins as an employee may be subject to two different analyses on two different documents.
4.4 The recent authority
Varun Tyagi v. Daffodil Software Private Limited, FAO 167/2025 (Delhi High Court, 25 June 2025) held that post-employment restraints are void except to protect confidential information.
The direction of travel is consistent. Courts protect information; they do not restrain the person.
4.5 So should you include one?
Many employers do, on the basis that a clause with deterrent value costs nothing. That is a commercial judgement rather than a legal one, and there are two arguments against it.
A clause the employer knows to be void, presented to an employee who does not, is a poor basis for a relationship and can colour a court’s view of the rest of the document. And relying on deterrence means the employer has not built the protections that would actually work.
5. What is enforceable instead
The protections that work in India are different in kind. They restrain the use of information and the taking of relationships, not the taking of a job.
5.1 Confidentiality
Confidentiality clauses protect trade secrets, client lists, pricing strategies and proprietary information, are enforceable indefinitely, and are backed by contract law and the Information Technology Act for digital information.
This is the strongest protection available, and the Delhi High Court’s 2025 decision confirms it as the recognised exception. Draft it properly: define what is confidential rather than asserting that everything is, address return and deletion on exit, and cover material held on personal devices.
The IR Code’s Model Standing Orders reinforce this — Order 21 imposes legally binding secrecy obligations regarding the employer’s trade secrets, giving contractual NDAs statutory weight.
5.2 Non-solicitation
Non-solicitation clauses, restricting the ex-employee from poaching clients or colleagues for a defined period, can be enforceable if reasonably drafted and time-bound.
A non-solicit prevents ex-employees from soliciting the company’s clients, customers or employees, and is more likely to be enforced by courts because it protects specific business relationships without restricting the right to work.
Courts distinguish between preventing someone from working in their field, which is void, and preventing active poaching.
Draft it narrowly. Clients the employee actually dealt with, within a defined recent period. Colleagues they actually worked with. A defined duration. A clause that purports to cover every client and every employee of a global group is asking to be read down.
5.3 Restraints during employment
Employers possess a legal entitlement to restrict employees from undertaking competing roles during the course of their active employment.
Section 27 bites on restraints that operate after the relationship ends. While the employee is employed, exclusivity is enforceable.
Order 22 of the Model Standing Orders mandates exclusive service, expressly prohibiting moonlighting or dual employment without prior written permission.
Both Orders validate in-term non-compete and exclusivity protocols but cease to apply upon termination of the employment relationship, fully preserving Section 27 for all post-employment scenarios.
For groups concerned about moonlighting — a live issue in Indian technology employment — this is where the protection sits.
5.4 Garden leave
Where the employee serves the notice period at home, fully paid, but cannot join a new employer, the employee is technically still employed and being paid, so the restriction operates during employment and is valid under Section 27.
This is the closest thing to an enforceable non-compete available in India, and it is materially under-used by foreign employers.
The mechanics: a meaningful notice period, an express right for the employer to place the employee on garden leave, full pay throughout, and an express continuation of the duty of exclusivity during that period. What you cannot do is stop paying and still expect the restraint to hold.
5.5 IP assignment
IP assignment is a non-negotiable clause. Present assignment of work product, an obligation to execute further documents, and a moral rights waiver where relevant. Where the group also licenses IP into India, this interacts with technology licensing agreements.
For a foreign parent, an additional point: be clear whether the IP vests in the Indian subsidiary or is assigned onward to the parent, and whether that onward assignment is documented and priced. An undocumented onward transfer of IP developed in India is both a title problem and a transfer pricing question — see transfer pricing for Indian subsidiaries.
6. Notice periods
There is no single national notice period. What applies depends on three layers.
| Layer | What it does |
|---|---|
| Statutory minimum for workmen | Notice and compensation requirements apply to termination of a workman, with the specifics depending on the establishment and the applicable framework |
| State Shops and Establishments Act | Prescribes minimum notice for employees in commercial establishments; varies by state |
| The contract | May provide for longer notice, but cannot reduce a statutory minimum |
6.1 The asymmetry question
Global templates frequently provide a longer notice period from the employee than from the employer. In India this needs care: a contractual notice period from the employer that falls below the applicable statutory minimum is ineffective to that extent, whatever the document says.
6.2 Payment in lieu
Contracts usually permit the employer to pay in lieu of notice. Two points. The right must be expressly reserved, not assumed. And where the employee is a workman, payment in lieu does not substitute for statutory requirements that are procedural rather than monetary.
6.3 The long Indian notice period
Notice periods of two to three months are common in Indian technology employment, considerably longer than many foreign employers expect. That is a market convention rather than a legal requirement, but it has practical consequences: it slows hiring, it makes garden leave more usable as a protection, and it means an exit process starts long before the departure date.
7. Termination
The route depends entirely on the classification established in section 2.
7.1 Terminating a non-workman
Governed principally by the contract and the applicable state Shops and Establishments Act. The employer gives contractual notice or pays in lieu, settles dues, and the employment ends.
Even here, three things matter. The stated ground should be accurate and consistent with the documentation, and the decision recorded — see drafting and vetting of agreements for exit documentation. Statutory dues must be settled. And the process should be documented, because a termination that is procedurally clean is much harder to challenge than one that is not.
7.2 Terminating a workman
Materially more constrained. Statutory notice and compensation requirements apply to retrenchment, and depending on the establishment and the state, additional procedural steps may be required.
The consequences of getting this wrong are not limited to compensation. A termination that fails the statutory requirements can be challenged, and reinstatement is a remedy Indian tribunals do order.
7.3 Termination for cause
Where the ground is misconduct, the process matters as much as the substance. Where standing orders apply, they will prescribe a procedure — typically a charge sheet, an opportunity to respond, and an inquiry.
Foreign employers accustomed to at-will termination frequently under-document this. A summary dismissal for misconduct without a documented process is vulnerable even where the misconduct is not in doubt.
7.4 Performance management
Terminating for poor performance requires documented performance management: objectives set, feedback given, a documented improvement process, and evidence that the employee was given a genuine opportunity.
A performance improvement plan run over two weeks as a pretext for an already-taken decision is transparent to a tribunal. Run it properly or use a different route.
8. Compensation structure under the Code on Wages
This is the change with the widest immediate effect, and it is not a drafting point — it is a payroll restructuring.
Under the Code on Wages, 2019, basic pay cannot fall below 50% of total CTC. Contracts that inflate allowances to reduce PF liability are affected.
8.1 What the old structure looked like
Indian CTC structures have historically loaded compensation into allowances — house rent allowance, special allowance, conveyance, and a long tail of others — keeping basic pay low. Because statutory contributions are computed on basic, a low basic reduced provident fund and gratuity cost.
8.2 What changes
Raising basic to at least half of total compensation raises the base on which those contributions are computed. The practical effects:
- Provident fund contributions increase for both employer and employee
- Gratuity accrual increases, because it is computed on basic
- Employee take-home may fall even where CTC is unchanged, because more is going into statutory deductions
- Employer cost rises unless CTC is restructured
8.3 What to do
Model the impact across the workforce before restructuring, communicate it before employees see it on a payslip, and update offer letters and contract templates so that new hires are structured correctly from the start.
This runs through payroll processing rather than through the legal function, which is precisely why it is sometimes handled late.
9. Standing Orders
Standing orders set out the conditions of employment for workmen in establishments above a prescribed size, and where they apply, they operate alongside the contract.
The IR Code introduces Model Standing Orders for the service sector, which is a meaningful development for technology and services employers who were often uncertain whether the earlier regime applied to them.
Two provisions have direct contractual consequences, both noted above: Order 21 on secrecy of trade secrets, and Order 22 on exclusive service and dual employment.
Where standing orders apply, the contract should be consistent with them rather than contradicting them. Where they prescribe a disciplinary procedure, follow it.
10. The statutory benefits your contract cannot override
A contract can improve on statutory entitlements. It cannot reduce them, whatever the employee signed.
| Entitlement | Note for foreign employers |
|---|---|
| Provident fund | Applies above prescribed thresholds; contributions computed on wages as defined by the Code — see payroll processing |
| Gratuity | Payable on completion of the qualifying service period; accrues from day one and must be provided for |
| Employees’ State Insurance | Applies below a wage ceiling, in notified areas |
| Maternity benefit | India’s entitlement is longer than in many jurisdictions and includes additional obligations for larger establishments |
| Leave | Minimum entitlements set by state Shops and Establishments legislation |
| Bonus | Statutory bonus applies to eligible employees within prescribed limits |
| Notice and compensation on retrenchment | Applies to workmen; cannot be contracted away |
The gratuity point catches foreign parents specifically. It accrues from the start of employment even though it becomes payable only after the qualifying period, and it should be provided for in the accounts from day one. A subsidiary that has never provided for gratuity has an unrecorded liability that surfaces at exactly the wrong moment — typically in diligence, or on closure.
11. POSH: the compliance nobody remembers until an incident
POSH compliance is a non-negotiable requirement.
The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act requires employers above a prescribed size to constitute an Internal Committee, adopt a policy, conduct awareness and training, and file an annual report.
Three points for foreign employers:
- The Internal Committee has prescribed composition requirements, including an external member
- The obligation is not satisfied by adopting the parent’s global harassment policy — the Indian statutory framework has specific requirements
- The annual report is a filing, and non-filing is a default even where no complaint has been received
The exposure is not only regulatory. In a dispute over a termination, an employer that cannot show a functioning POSH framework is in a materially worse position.
12. What actually belongs in the contract
| Clause | Why, in India specifically |
|---|---|
| Full party identification | Employer’s registered name, CIN, registered office, place of business and PAN — the Indian entity, not the parent |
| Role and classification | Duties described accurately, with the workman assessment recorded internally |
| Compensation structure | Compliant with the Code on Wages basic pay requirement |
| Statutory benefits | PF, ESI, gratuity, leave, referenced rather than omitted |
| Notice period | Consistent with statutory minimums; payment in lieu expressly reserved |
| Garden leave | Express right, full pay, continuing exclusivity |
| Confidentiality | Defined, surviving termination, covering personal devices |
| Non-solicitation | Narrow, time-bound, limited to actual relationships |
| IP assignment | Present assignment, further assurance, moral rights |
| Exclusivity during employment | Consistent with the Model Standing Orders position on dual employment |
| POSH | Reference to the policy and the Internal Committee |
| Termination grounds | Stated, with the disciplinary process referenced where standing orders apply |
| Governing law and jurisdiction | Dispute jurisdiction must be specified to avoid forum-shopping and procedural delays |
| Return of property | Devices, data, access credentials, on or before the last working day |
12.1 Clauses to remove from the global template
- Post-employment non-compete — void, and better replaced with garden leave and non-solicit
- At-will employment language — India has no at-will concept; it is meaningless at best and misleading at worst
- Foreign governing law and jurisdiction for a locally employed Indian employee — impractical and likely to be disregarded
- Compensation structures built for a different statutory base — the Code on Wages requirement applies regardless of what the global grid says
- Arbitration clauses that conflict with the statutory dispute forums for employment disputes
13. State variation: there is no single Indian employment law
Foreign employers routinely underestimate this. India has a central framework and separate state legislation underneath it, and the differences are practical rather than academic.
| What varies by state | Why it matters |
|---|---|
| Shops and Establishments Act | Registration requirement, working hours, leave entitlements, notice periods and record-keeping all differ |
| Professional tax | Levied by some states and not others, at different rates and slabs |
| Labour Code rules | States are notifying rules at different speeds, so the operative framework differs by location |
| Standing orders applicability | Thresholds and certification requirements differ |
| Leave and holidays | Statutory holiday lists are state-specific |
| Registration and filing | Portals, forms and renewal cycles are state-administered |
13.1 The multi-location problem
A group with an office in Bengaluru, a delivery centre in Pune and a small team in Gurugram is operating under three sets of state rules. One employment contract template can serve all three, but the leave entitlements, notice periods and registrations cannot simply be copied across.
The workable approach is a common core contract with a state-specific schedule addressing leave, holidays and any state-mandated terms, and a register of which registrations apply where.
13.2 Remote employees
An employee working from a state where the company has no establishment raises questions that Indian employment law was not designed around: which state’s Shops and Establishments Act applies, whether professional tax is payable in that state, and where the employment is treated as located for dispute purposes.
Groups hiring remotely across India should take a view on this deliberately rather than defaulting to the registered office state without checking.
14. Employer of record versus direct employment
Many foreign groups begin with an employer of record and move to direct employment later. The employment law consequences differ, and the transition point is worth planning.
| Employer of record | Direct employment by the Indian subsidiary | |
|---|---|---|
| Who is the employer | The EOR provider | Your Indian company |
| Contract is with | The provider, on its template | You, on your template |
| Statutory registrations | The provider’s | Yours — PF, ESI, professional tax, shops and establishment |
| Termination exposure | Sits with the provider contractually, but the commercial reality is yours | Yours |
| IP assignment | Needs an express chain from employee to provider to you | Direct |
| Confidentiality and non-solicit | On the provider’s terms unless you negotiate an addendum | On your terms |
| POSH | The provider’s obligation, but incidents happen in your workplace | Yours |
| Permanent establishment | Not eliminated by the arrangement | Determined by conduct, not employment structure |
14.1 The IP chain
This is the item most often missed on an EOR arrangement. The employee assigns IP to the EOR under the employment contract. Whether that IP reaches you depends on the terms of your services agreement with the provider.
Check it. A group that has had engineers building product through an EOR for two years, with no express onward assignment, has a title problem that becomes visible in the first funding round or acquisition.
14.2 The transition
When employees move from an EOR to direct employment, three things need attention: continuity of service for gratuity and other length-of-service entitlements, a fresh employment contract on your terms rather than a novation of the provider’s, and a fresh IP assignment covering both past and future work.
Do not assume service continuity is automatic. Address it expressly, because the alternative — employees discovering later that their gratuity clock restarted — is a retention problem as much as a legal one.
15. Three situations, worked through
Scenario A — The senior engineer who joined a competitor
A US-owned Indian subsidiary loses a principal engineer to a direct competitor. His contract contains a twelve-month non-compete covering India.
The position. The non-compete is void under Section 27. No amount of narrowing would have helped, because India does not apply a reasonableness test to post-employment restraints.
What might have worked. A three-month notice period with an express garden leave right, keeping him employed and paid but away from the business while the competitive advantage decayed. A properly drafted confidentiality clause, with a documented exit process recording what he returned. A narrow non-solicit covering the clients he actually handled.
What is still available. If he takes or uses confidential information, that is actionable. Post-employment restraints are void except to protect confidential information. The claim is about the information, not the job.
Scenario B — The performance termination that went wrong
A European group’s Indian subsidiary terminates an underperforming employee with one month’s pay in lieu. The contract permitted it. The employee challenges the termination.
The first question. Was he a workman? His title was “Senior Analyst” and he did technical work. If the duties were technical rather than managerial, he may well have been, in which case statutory retrenchment requirements applied and were not met.
The second question. What documentation exists? If there is no record of objectives, feedback or an improvement process, the employer is asserting poor performance with nothing behind it.
The exposure. Compensation, and potentially reinstatement, which Indian tribunals do order.
What would have prevented it. Classifying the role at hiring, running documented performance management, and following the statutory route where the employee was a workman.
Scenario C — The CTC restructuring that surprised everyone
An Indian subsidiary of a Japanese group operates a standard CTC structure with basic pay at around 35% and the balance in allowances. Following the Code on Wages requirement, basic must rise to at least 50%.
The effect. Provident fund contributions rise for employer and employee. Gratuity accrual rises. Employee take-home falls even though CTC is unchanged, because more is going into statutory deductions.
What goes wrong. Employees see a lower net salary and conclude they have been given a pay cut. The finance team discovers the increased employer cost after the budget is set.
What would have prevented it. Modelling the impact across the workforce, deciding whether to absorb or pass on the cost, and communicating the change before it appeared on a payslip.
16. Twelve mistakes foreign employers make
- Relying on a post-employment non-compete. Void under Section 27, consistently.
- Assuming a narrower non-compete is enforceable. India does not apply a reasonableness test.
- Not using garden leave, which is the enforceable equivalent and is under-used.
- Not classifying roles as workman or non-workman before hiring.
- Assuming a manager title changes the classification. It turns on duties in fact.
- Importing at-will language into a jurisdiction that has no such concept.
- Terminating for performance with no documentation.
- Ignoring the disciplinary process where standing orders apply.
- Keeping basic pay low after the Code on Wages requirement.
- Never providing for gratuity, creating an unrecorded liability that surfaces in diligence or on closure.
- Adopting the parent’s global harassment policy in place of a compliant POSH framework.
- Issuing an offer letter and nothing else, leaving IP, confidentiality and termination undocumented.
17. Checklist
Before hiring
- Role classified as workman or non-workman, with the basis recorded
- Compensation structure modelled against the Code on Wages basic pay requirement
- State Shops and Establishments position confirmed for the establishment’s location
- Whether standing orders apply to the establishment determined
- Statutory registrations in place: PF, ESI, professional tax, shops and establishment, with ongoing labour law compliance assigned
The contract
- Indian entity identified in full, with CIN and PAN
- Duties described accurately rather than aspirationally
- Notice period consistent with statutory minimums, with payment in lieu expressly reserved
- Garden leave right expressly included, with full pay and continuing exclusivity
- Post-employment non-compete removed or understood to be unenforceable
- Confidentiality defined, surviving termination, covering personal devices
- Non-solicit narrow, time-bound and limited to actual relationships
- IP assignment with present assignment and further assurance
- Exclusivity during employment, consistent with the standing orders position
- POSH policy and Internal Committee referenced
- Governing law and jurisdiction specified as Indian
- At-will and foreign-law clauses removed
Ongoing
- Gratuity provided for in the accounts from day one
- POSH Internal Committee constituted with an external member; annual report filed
- Performance management documented as it happens
- Standing orders complied with where applicable
- Contract templates reviewed against state rules as the Labour Code transition progresses
- Exit process documented: return of property, confidentiality reminder, final settlement, and the ESOP position where the employee holds vested equity
Using your global template in India?
Most India employment disputes we see trace back to a document drafted for another jurisdiction. Send us your current India offer letter and employment contract and we will mark up what is unenforceable, what is missing, and what the Labour Code transition means for your compensation structure.
18. Frequently asked questions
Q1. Are non-compete clauses enforceable in India?
No, not post-employment. Section 27 of the Indian Contract Act, 1872 declares agreements restraining anyone from exercising a lawful profession, trade or business void to that extent, and Indian courts including the Supreme Court have consistently upheld this. The sole statutory exception relates to agreements made in connection with the sale of goodwill of a business.
Q2. What if we make the non-compete shorter and narrower?
It remains void. India does not recognise the common law reasonableness or partial restraint doctrine that applies in the UK and US, and Section 27 does not differentiate between partial and total restraints. Narrowing the duration, geography or scope does not bring a post-employment restraint within an exception, because no such exception exists.
Q3. What can we use instead of a non-compete in India?
Four things: a properly drafted confidentiality clause, which is enforceable and is the recognised exception; a narrow, time-bound non-solicitation clause covering clients and colleagues the employee actually dealt with; exclusivity during employment, which is enforceable; and garden leave, where the employee remains employed and fully paid but away from the business during notice.
Q4. Is garden leave enforceable in India?
Yes. Where the employee serves the notice period at home, fully paid, but cannot join a new employer, the employee remains technically employed, so the restriction operates during employment and is valid under Section 27. It requires a meaningful notice period, an express contractual right, full pay throughout and continuing exclusivity. It is the closest enforceable equivalent to a non-compete and is under-used by foreign employers.
Q5. What is a “workman” and why does the classification matter?
A workman is broadly a person employed to do manual, unskilled, skilled, technical, operational or clerical work, as opposed to someone employed mainly in a managerial or administrative capacity. The classification determines retrenchment protections and termination requirements. It turns on the duties actually performed, not on job title or salary, so renaming engineers as managers does not change it.
Q6. Can we terminate an Indian employee at will?
No. India has no at-will employment concept. A non-workman’s termination is governed by the contract and the applicable state Shops and Establishments Act. A workman’s termination is subject to statutory notice and compensation requirements and, depending on the establishment, procedural steps. At-will language imported from a US template is meaningless in India.
Q7. What notice period applies in India?
There is no single national period. Three layers apply: statutory requirements for workmen, the applicable state Shops and Establishments Act minimum, and the contract, which may provide longer but cannot reduce a statutory minimum. Market practice in Indian technology employment is commonly two to three months, which is longer than many foreign employers expect.
Q8. When did the four Labour Codes take effect?
They were notified effective 21 November 2025, consolidating twenty-nine central labour laws into the Code on Wages 2019, the Code on Social Security 2020, the Industrial Relations Code 2020 and the Occupational Safety, Health and Working Conditions Code 2020. The transition is ongoing, with predecessor statutes continuing to apply in places and state rules still being finalised.
Q9. What does the Code on Wages mean for our CTC structure?
Basic pay cannot fall below 50% of total CTC. Indian structures historically kept basic low and loaded compensation into allowances, reducing provident fund and gratuity cost. Raising basic increases statutory contributions for both employer and employee, so employee take-home can fall even where CTC is unchanged. Model the impact and communicate before it appears on a payslip.
Q10. Can we prohibit moonlighting?
Yes, during employment. Order 22 of the Model Standing Orders under the Industrial Relations Code mandates exclusive service and expressly prohibits dual employment without prior written permission. Exclusivity is enforceable while the employee is employed; the restriction ceases on termination, preserving Section 27 for the post-employment period.
Q11. Are confidentiality clauses enforceable in India?
Yes, and they are the strongest protection available. Confidentiality clauses protecting trade secrets, client lists, pricing and proprietary information are enforceable indefinitely, backed by contract law and the Information Technology Act for digital information. The Model Standing Orders reinforce this by imposing statutory secrecy obligations regarding the employer’s trade secrets.
Q12. Is a non-solicitation clause enforceable?
More likely than a non-compete, if reasonably drafted and time-bound. Courts distinguish between preventing someone from working in their field, which is void, and preventing active poaching of specific relationships. Draft narrowly: clients the employee actually dealt with within a defined recent period, colleagues they actually worked with, and a defined duration.
Q13. Do we need a written employment contract in India?
Effectively yes. Oral contracts are unenforceable for most useful purposes because nothing records CTC, notice period, IP assignment or termination grounds. State Shops and Establishments Acts and the Standing Orders framework effectively require written terms for establishments above prescribed sizes. Issue a written appointment letter for every engagement, including interns and short-term hires.
Q14. Can our global governing law and jurisdiction clause apply?
It is impractical and likely to be disregarded for an employee locally employed in India. Dispute jurisdiction should be specified as Indian to avoid forum-shopping and procedural delays, and employment disputes have statutory forums that a contractual clause cannot displace.
Q15. What is POSH and does it apply to us?
The Sexual Harassment of Women at Workplace Act requires employers above a prescribed size to constitute an Internal Committee with prescribed composition including an external member, adopt a policy, conduct training, and file an annual report. Adopting the parent’s global harassment policy does not satisfy it. The annual report is a filing obligation even where no complaint has been received.
Q16. When does gratuity become payable and when should we provide for it?
It becomes payable on completion of the qualifying service period, but it accrues from the start of employment and should be provided for in the accounts from day one. A subsidiary that has never provided for gratuity carries an unrecorded liability that surfaces in diligence during a transaction, or when the entity is being closed and the balance sheet must be made nil.
Q17. Can we terminate for poor performance?
Yes, but it requires documentation: objectives set, feedback given, a documented improvement process, and evidence that the employee had a genuine opportunity to improve. A performance improvement plan run over two weeks as a pretext for a decision already taken is transparent to a tribunal. Where the employee is a workman, statutory requirements apply regardless.
Q18. What is the single most common drafting error in India employment contracts?
Using the global template unchanged. It contains a post-employment non-compete that is void, at-will language that has no meaning, a foreign governing law clause that will be disregarded, and a compensation structure built for a different statutory base — while omitting IP assignment drafted for Indian law, POSH, and a garden leave right that would actually have protected the business.