Severance pay in the event of termination of employment in India

The Industrial Disputes Act 1947 and, in some states, the applicable Shops and Establishments Act, provide for severance upon termination. Employees (workers in continuous service for a period of not less than one year) are entitled to the following severance pay in the event of termination of employment:

Notice pay:

• one month’s notice or salary in lieu thereof if the employee is employed in any establishment (such as a factory) with less than 100 employees and has completed one year of continuous service. This would also apply with respect to an establishment in the service sector (with up to 100 workers); or
• Three months’ notice or salary in lieu thereof if the employee is employed in a manufacturing unit (and certain other establishments) with 100 or more employees and has worked for a continuous period of one year;

Retrenchment compensation: this is only payable to employees in the worker category who have completed one year of continuous service. It is payable at the rate of 15 days’ salary for every completed year of service or any part thereof in excess of six months;

Gratuity: every employee who has completed five years of continuous service is entitled to payment of gratuity at the rate of 15 days’ salary for every completed year of service. Statutorily, gratuity payments are capped at 2 million rupees;

Leave encashment: every employee should be paid for the leave that has accrued but that has not been availed of; and

Other benefits: employees are entitled to any other benefits (including any bonus that may be payable or payment for overtime work) as may be agreed upon between the parties or that are part of any agreement.