Employing people in India: the practical legal issues

This article highlights some of the key legal issues in relation to employing people in India.
Sara Catley, PLC

In recent years, India has capitalised on its large pool of educated, English-speaking people to become an important offshoring and outsourcing destination for multinational corporations, as well as a major exporter of financial and technological services.

While last summer’s credit crunch saw project costs squeezed in the short term, longer term attempts to reduce costs are likely to mean that this trend is set to continue, according to Mark Taylor, a partner at law firm Jones Day (www.practicallaw.com/resource.do?item=:20263410).

 

Offshoring or outsourcing?

Outsourcing involves the delegation of a business activity by an organisation to an external supplier. Broadly, in an outsourcing arrangement, the client organisation contracts with the external supplier for the provision of services that it previously carried out in-house.

This may or may not involve an element of offshoring, where work is transferred overseas, usually to a low cost destination.

The two most common offshoring models used by foreign companies in relation to India are captive units (where the client sets up a wholly-owned subsidiary, usually with the help of a local consultant, to which some functions and services are transferred; not technically an outsourcing) and direct outsourcing to third parties.

However, other options include joint ventures, indirect outsourcing to third parties through a joint venture and “build operate transfer” or BOT arrangements, under which the third party supplier sets up and runs the operation for a time before transferring it to the customer. BOT arrangements can also happen in reverse (that is, where the customer sets up and runs the operation for a time before transferring it to the third party supplier).

An increasingly sophisticated market has resulted in variants such as nearshoring (which describes the process of transferring activities to another country that is relatively close by in terms of distance or time zone) and multisourcing (which describes sourcing services through a range of suppliers and jurisdictions).

 

People issues

In addition to addressing employment issues in their home jurisdiction, employers offshoring services would be prudent to address at the outset issues relating to people (and their costs), particularly on exit.

Currently, India has no transfers of undertaking legislation, meaning that employees cannot be automatically transferred to a new establishment except in cases of transfer of ownership of an undertaking (this is likely to occur in BOT transactions). However, this could change over the life of the contract and offshoring arrangements should deal with the possibility of changes in law.

More generally in an outsourcing, employees of the supplier will typically continue to be employed by their employer, even where they provide services directly to the client, unless the arrangement constitutes a “contract of services” (that is, an arrangement under which the client exercises control over the supplier’s employees).

The employer will be responsible for all employment-related obligations for its employees under applicable labour laws, including salary, benefits and social security contributions.

While India has a reputation as a bureaucratic country, employment is less over-regulated that one might expect, according to Anindita Chatterjee, in-house counsel with responsibility for India at MWH Global Inc.

Written contracts of employment are not required. Where there is none, statutory terms and conditions of employment apply.

There are various compulsory requirements relating to blue-collar workers concerning working conditions, pensions and other sensitive matters.

There are also rules that govern periods of notice and compensation for dismissed or redundant individual employees. In addition, an undertaking employing more than 50 employees cannot make an employee redundant without government consent.

Employees are not entitled to management representation or consultation in relation to corporate transactions, although unions are often consulted in practice.

Companies will also need to check whether any specific local employment laws have an impact on delivering the work intended to be offshored.

For example, until relatively recently, for example, many Indian states imposed restrictions on the employment of women at night. The restriction was lifted after lobbying but is reportedly under consideration again.

As a practical commercial matter, the boom in offshoring to India has created upwards pressure on wages and has also increased workers’ expectations in relation to other working terms and conditions. In addition, while India’s talent pool is deep, it is not limitless.

One Indian law firm, Luthra & Luthra, recently increased its base salary for the third time in a year, and by a total of nearly 80%, to keep up with the short supply of good quality lawyers.

For an overview of the practical legal issues in relation to outsourcing in India, see the chapters on India in the PLC Cross-border Outsourcing Handbook (www.practicallaw.com/6-380-8614) and Labour and Employee Benefits Handbook (www.practicallaw.com/6-376-3309).

 
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