Termination & Exit in India: Advisory Services

Employment termination in India is governed by the employment contract, the Labour Codes of India, the applicable standing orders for industrial establishments, the Industrial Relations Code 2020, and state-specific Shops and Establishments Acts for commercial establishments. The process and cost of exit depend on three variables: the nature of the exit (for cause, mutual, or retrenchment); the establishment size relative to the statutory thresholds; and whether the employee falls within the definition of a workman under the applicable law. Getting the categorisation wrong at the outset produces a defective process– and a defective process produces a dispute.

Termination for Cause– Misconduct and Performance

Termination for cause requires a process that gives the employee a fair opportunity to respond before the decision is taken. For employees classified as workmen under the Industrial Relations Code 2020, the domestic inquiry process is mandatory: a charge sheet, an opportunity to be heard, a formal inquiry, and a reasoned finding before a termination order is issued. Shortcutting this process– issuing a termination letter without a prior inquiry, or conducting an inquiry without following the prescribed procedure– renders the termination procedurally defective even where the substantive case for dismissal is strong. For poor performance exits, a documented performance improvement process with clear timelines and written warnings is the procedural foundation. ATB Legal advises on structuring the domestic inquiry and performance exit process correctly, prepares documentation from charge sheet through to termination order, and advises on the evidentiary standards required at each stage.

Retrenchment– Workforce Reduction

Retrenchment requires one month’s notice or pays in lieu, retrenchment compensation of 15 days’ wages for every completed year of continuous service, and prior government approval for establishments employing 300 or more workmen. The Industrial Relations Code 2020 raised this threshold from 100 to 300 workers, giving smaller establishments greater flexibility. A Reskilling Fund contribution of 15 days’ last drawn wages per retrenched workman is also payable. For non-workman employees, the contractual notice period applies, and statutory retrenchment compensation does not. The exit of senior and management-grade employees is typically managed through a negotiated separation agreement rather than formal retrenchment. Our firm advises on the applicable process for each employee category, prepares retrenchment documentation, and manages the government approval process where the threshold is crossed.

Negotiated Separation Agreements

A separation agreement provides a documented, consensual exit that reduces dispute risk and is less confrontational than formal termination. A well-drafted agreement covers: the termination date and notice period treatment; financial terms including severance, unpaid compensation, and ESOP or equity treatment on exit; a mutual release of claims; confidentiality and non-disparagement obligations; and any agreed reference language. For senior employees where post-termination obligations are commercially important, the separation agreement reaffirms those obligations and, where necessary, supports them with additional consideration. Our team drafts separation agreements that achieve a clean, documented exit and that are enforceable if the departing employee subsequently seeks to challenge the terms.

Full and Final Settlement

Full and final settlement is the financial close of the employment relationship. A complete FnF settlement covers: salary and allowances through the last working day; leave encashment; gratuity where the qualifying period has been met (five years for standard employees, or proportionate for fixed-term employees under the Code on Social Security 2020); any pro-rated performance bonus; the value of earned but untaken benefits; and any agreed severance. For employees with ESOP participation, the settlement must also address the vesting and exercise position at termination. An FnF issued without a proper calculation or without a written receipt and release from the employee leaves the employer exposed to subsequent claims for unpaid dues. ATB Legal prepares FnF calculations, drafts settlement documentation, and advises on the tax treatment of exit payments.