Last updated on November 6th, 2026 at 06:58 pm
By Prakhar Rai, Founder, My Legal Pal. Advocate, Bar Council of India. LL.B, NLSIU Bangalore. Master of Business Laws.
Quick answer: An employment contract in India is governed by the Indian Contract Act plus, since 21 November 2025, the four Labour Codes. The Codes replaced 29 central labour laws. Central rules followed on 8 May 2026, appointment letters are mandatory, fixed-term staff earn gratuity after one year, and final dues are due within two working days of the last day. State rules are still patchy, so a contract drafted before late 2025 needs a check.
Key takeaways
- The Labour Codes are in force. Old Acts such as the Industrial Disputes Act, the Payment of Wages Act and the Payment of Gratuity Act are repealed, so any contract or HR policy that cites them is out of date.
- An appointment letter is now a legal requirement, and the Central OSH Rules introduce a format for it. An offer email does not do the job.
- Final settlement is due within two working days of the employee’s last day, not the old 30 to 45 days. Fix your exit process before you fix your template.
- Fixed-term employees get benefits on par with permanent staff and gratuity after one year of service.
- India has no at-will employment. Termination without notice or process is the most common way an employer loses a dispute.
- A post-employment non-compete is generally void in India. Confidentiality, IP assignment and non-solicit terms do the real work.
- State rules under the Codes are still being notified, so the position differs by state. Treat any “fully settled” claim with suspicion.
Most guides to employment contracts in India were written for the old framework, and a few still describe the Labour Codes as something coming soon. They are not coming. They are in force. This guide is for employers drafting or updating contracts, and for employees checking one before signing. It explains what the law now requires, what a contract should say clause by clause, and where the common mistakes sit. Where a topic has its own page on our site, we link to it once and keep this guide focused on the contract itself.
When founders send us an Indian employment contract to review, the problem is rarely a missing clause. It is usually a template that was copied from an older company, still cites a repealed Act, and has a notice and settlement process that no longer matches the law. The fix is mostly updating the exit mechanics and the pay structure, not rewriting the whole document.
What law governs an employment contract in India now
Four statutes sit at the centre: the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 (the OSH Code). They took effect on 21 November 2025 and replaced 29 central labour laws.
Three points matter for contract drafting.
The contract still comes first, and the Contract Act still applies. An employment contract needs a competent party, lawful consideration and a lawful object, like any other contract. The Codes then set minimums that the contract cannot undercut. A contract can give more than the law requires. It cannot give less.
Central rules arrived in May 2026. The Central Government notified the Wage, Social Security, Industrial Relations and OSH Rules on 8 May 2026. They add the operating detail, including a format for appointment letters.
State rules are not uniform. Labour is on the Concurrent List, so each state frames its own rules for the establishments it regulates. Only some states had notified theirs at the time of writing. State Shops and Establishments Acts also still matter for hours, holidays and leave in many workplaces. If you have staff in several states, check each one.
Offer letter, appointment letter and employment contract
People use these terms loosely, and the difference now matters because the appointment letter is a statutory document.
| Document | What it does | Is it enough on its own? |
|---|---|---|
| Offer letter | Extends the job. Role, pay, start date, conditions such as background checks. | No. It starts the relationship but is not the document the law asks for. |
| Appointment letter | The formal letter the OSH Code requires for every employee. The Central OSH Rules give a format. | It meets the legal requirement, but a short letter rarely covers confidentiality, IP or exit mechanics. |
| Employment agreement | The full contract, usually issued with or as the appointment letter. Covers duties, pay, leave, notice, termination, confidentiality, IP, restrictive terms, governing law and disputes. | Yes, if it also carries the statutory particulars. |
In practice, a good setup is one signed document that works as the appointment letter and the agreement, plus annexures for the pay breakup and policies. The rules reportedly give employers three months to update existing contracts to the new format once they apply, so do not leave this until a dispute.
If you want a document built this way, see our page on employment agreement drafting in India.
Types of employment contract in India
| Type | How it works | Watch for |
|---|---|---|
| Permanent | Open-ended. Ends by resignation, termination or retirement. | Full statutory benefits and notice rules apply. |
| Fixed-term | Runs for a set period or project and ends on expiry. | Benefits on par with permanent staff, gratuity after one year, and courts frown on rolling successive fixed terms into permanent roles. |
| Probationary | Evaluation period before confirmation. | Model standing orders provide for up to six months. Market practice is three to five months. State law may still require notice. |
| Part-time or remote | Reduced hours or work from home. | Still employment. Hours, leave and data-handling terms must be stated. |
| Contractor or consultant | A commercial services contract, not employment. | The label does not decide it. See below. |
Expiry of a genuine fixed-term contract is not treated as retrenchment, so retrenchment compensation does not apply on expiry. That makes a fixed-term contract useful, and it is also why courts look hard at employers who use it for permanent work.
What an employment contract in India should contain
Use this as a checklist. The right-hand column is what changed or tends to go wrong.
| Clause | What to state | 2026 point |
|---|---|---|
| Parties and role | Employer entity, designation, place of work, reporting line | Name the right legal entity. A group brand name is not an employer. |
| Term and type | Permanent, fixed-term, probation, start date | Fixed-term needs a clear end date or project milestone. |
| Pay | Fixed pay, variable pay, each component, payment date | Check the structure against the wage definition (see the next section). |
| Hours and leave | Working hours, weekly off, leave, holidays | Match the applicable state Shops and Establishments Act. |
| Probation | Length, extension right, notice during probation | Do not stretch it beyond what the applicable standing orders allow. |
| Notice and termination | Notice on each side, grounds, process, pay in lieu | The most disputed clause in Indian contracts. State the process, not just the number of days. |
| Final settlement | When dues are paid after exit | Two working days from the last day. Do not write 30 or 45 days. |
| Confidentiality | What is confidential, for how long | Define it. A clause that makes everything confidential is hard to enforce. |
| IP assignment | Work product belongs to the employer | Needs to cover work done outside office hours using company resources. |
| Restrictive terms | Non-solicit, and any non-compete during employment | Post-employment non-competes are generally void (see below). |
| Data protection | How employee data is handled | Connects to the DPDP Act. |
| Governing law and disputes | Indian law, forum | Arbitration is fine, but not if it blocks access to labour authorities. |
Pay structure and the 50% rule
The Code on Wages defines “wages” to include basic pay, dearness allowance and retaining allowance, and excludes items such as HRA, conveyance and employer PF contributions. The key rule is that if the excluded items exceed 50% of total remuneration, the excess is added back into wages. The effect is that you cannot keep basic pay tiny and push everything into allowances to shrink PF and gratuity.
An illustration, not a rule of thumb. Take monthly remuneration of Rs 1,00,000. Basic pay is Rs 40,000. HRA, conveyance and other excluded payments add up to Rs 60,000. The excluded amount is 60% of the total, which is 10 points over the cap, so Rs 10,000 is added back. Wages for statutory purposes become Rs 50,000, not Rs 40,000.
Two cautions. This does not mean basic pay must equal 50% of CTC, and it does not automatically raise PF by the same amount, because PF ceilings and transitional rules still apply. Have each component checked. Our separate guide on salary structure and benefits in Indian employment contracts goes through the components in detail.
Notice, termination and final settlement
India does not follow at-will employment. Courts have treated termination without notice or fair process as an unconscionable bargain. Four rules do most of the work.
Contract notice and statutory notice sit side by side. The contract sets the notice period. For workers in industrial establishments with at least one year of continuous service, retrenchment needs one month’s notice or pay in lieu, plus compensation. Shops and Establishments Acts may add their own requirements.
Misconduct dismissal needs a proper inquiry. Dismissal for misconduct without notice or compensation is possible only after an internal inquiry. An allegation alone is not enough.
Changing terms needs notice. For workers, certain service conditions can be changed only on 21 days’ prior written notice. If the worker challenges the change before the labour authorities in that window, the change is likely to be suspended.
Final settlement is due within two working days. Under Section 17(2) of the Code on Wages, wages are payable within two working days when an employee is removed, dismissed, retrenched or resigns. Commentary reads this as running from the day the resignation takes effect, usually the last working day. A process built on a 30 to 45 day full-and-final cycle is no longer compliant. Fix payroll cut-offs and exit checklists to match.
Retrenchment compensation: a worked example
Retrenchment compensation is 15 days’ average pay for every completed year of continuous service, with a part year over six months rounded up. Take a worker with 8 years and 8 months of service and a recent average daily wage of Rs 1,200. Service rounds up to 9 years, so compensation is 15 x 9 x Rs 1,200 = Rs 1,62,000, on top of the one month’s notice or pay in lieu. The prior-permission requirement for layoff, retrenchment or closure now applies to establishments with 300 or more workers, up from 100. Below that, notice and compensation are required but not government permission.
If an employer has already terminated someone without paying dues or giving notice, the employee’s usual first step is a notice. Our page on a legal notice for wrongful termination and unpaid salary explains how that works.
Gratuity under the new Code
A permanent employee is entitled to gratuity after five years of continuous service, at 15 days’ wages for every completed year. The change is for fixed-term employees, who are now entitled to gratuity after one year of service, in proportion to their service. That closes the old practice of rolling people through short contracts to stay under the five-year mark. Gratuity must be paid within 30 days of becoming due, and the five-year condition does not apply on death or disablement.
You can estimate a figure with our gratuity calculator, then confirm the wage base used.
Non-competes, confidentiality and training bonds
Non-compete. Under Section 27 of the Indian Contract Act, an agreement in restraint of trade is void, and Indian courts have generally applied that to restrictions that operate after employment ends. A clause that bars someone from working for a competitor after they leave is unlikely to be enforced. Restrictions during the employment term are treated differently. If you want protection, build it from tools that hold up: confidentiality, IP assignment, non-solicitation of clients and staff, and notice periods that give you time to hand over.
Confidentiality. Define what is confidential and for how long. Cover trade secrets and client data. Courts are more willing to enforce a defined obligation than a blanket one.
Training bonds. A bond can be enforced where the employer provided real, specialised training and the amount is a reasonable estimate of loss. A bond that works as a penalty for leaving often fails.
Employee or contractor?
Calling someone a consultant does not make them one. If the person works fixed hours, under your control, inside your team, and mostly for you, a tribunal may treat the relationship as employment whatever the paper says. The cost of getting it wrong is back-dated contributions and a dispute about termination. We cover the test and the red flags in employee versus independent contractor in India.
Hiring in India from abroad
A foreign company can hire in India through its own Indian entity, through a contractor arrangement, or through a third-party employer. Each route changes who signs the contract and who carries the liability. The Indian law on notice, wages, gratuity and termination applies to the person working in India regardless of the foreign law chosen in the contract. See our page on hiring in India as a foreign company.
Updating an existing contract: a short checklist
- Remove references to repealed Acts and replace them with the relevant Code.
- Issue or re-issue appointment letters in the new format.
- Rework the pay breakup against the wage definition.
- Change the final settlement clause to two working days from the last day.
- Review fixed-term contracts for gratuity and benefit parity.
- Remove or soften any post-employment non-compete and strengthen confidentiality and non-solicit terms.
- Check state-specific leave and hours rules for each location.
- Add or update the employee data clause. Our guide on DPDP and contracts covers what to say.
- Check stamp duty for your state. Our page on whether a contract is valid without stamp paper explains the principle.
If you are building the wider compliance picture, the legal compliance checklist for startups in India is a useful companion.
Red flags
For employees: a confidentiality clause that covers everything, working hours “as required by the business” with no limit, a training bond with no link to real training cost, arbitration in a distant city with all costs on you, and no mention of provident fund, ESI or gratuity where you qualify.
For employers: a copied template citing repealed laws, a non-compete you cannot enforce, a vague termination clause, a contractor label on someone who works like an employee, and waiting for every state rule to settle before acting. The core duties are already in force.
Get your contract checked
If you want a contract drafted or an existing one brought up to date, our contract lawyers in India can review it against the current rules.
Quick answers
Is a written employment contract mandatory in India? Yes in practice. The OSH Code requires an appointment letter for every employee, and some states need a written contract to establish the relationship. A short letter alone often leaves confidentiality, IP and exit terms uncovered, so most employers issue a full agreement.
Have the Labour Codes replaced the old labour laws? Yes. The four Codes took effect on 21 November 2025 and replaced 29 central laws, including the Industrial Disputes Act and the Payment of Gratuity Act. Central rules were notified on 8 May 2026. State rules are still being notified.
How fast must final dues be paid after someone leaves? Within two working days of the last day, under Section 17(2) of the Code on Wages. It applies to resignation as well as dismissal and retrenchment.
Are fixed-term employees entitled to gratuity? Yes, after one year of service, in proportion to the period worked. Permanent employees still need five years.
Is a non-compete clause enforceable after I leave a job in India? Generally no. Section 27 of the Indian Contract Act makes agreements in restraint of trade void, and courts have applied it to post-employment restrictions. Confidentiality and non-solicit terms are the realistic protection.
Can an employer change my contract terms without telling me? Not safely. For workers, certain service conditions can be changed only with 21 days’ written notice, and a challenge before the labour authorities during that period is likely to suspend the change.
Does the 50% wages rule mean my basic pay must be half of my CTC? No. If excluded allowances exceed 50% of total remuneration, the excess is added back into wages. The effect depends on each component, so the pay breakup needs a component-by-component check.
What happens if my employer terminates me without notice? India does not follow at-will employment, so termination without notice or process can be challenged. The usual route is a notice to the employer, then a complaint to the labour authorities or a civil claim, depending on your role and state.
A note on who we are
My Legal Pal is an international team of contract lawyers with US law experience. We aren’t a US law firm, and we aren’t a local firm in every country mentioned above. This article is general information and not legal advice on your facts. Have a lawyer qualified in the governing jurisdiction check the details before you act.
About the author. Prakhar Rai is an advocate enrolled with the Bar Council of India and the founder of My Legal Pal. He holds an LL.B from NLSIU Bangalore and a Master of Business Laws, and works on contract drafting, review and disputes for founders and businesses across borders. Full profile
