Unlike some global markets, India does not recognise the “at-will” employment model. Here, employment termination must be backed by cause and prior notice. Most contracts mandate a notice period or payment in lieu, applicable to both employer and employee, making notice clauses a standard fixture in Indian employment arrangements.
A notable trend is emerging, where employers are increasingly relying on extended notice periods, sometimes up to 6 - 9 months, as a tool to retain talent and discourage voluntary exits. Let us explore the tenability of such an approach from both legal and industry practice perspective.
Understanding the law
In India, the notice period requirement is primarily governed by the Industrial Disputes Act 1947 (ID Act) and the state-specific shops and establishments laws (S&E Acts). While these laws set minimum notice periods, employers and employees can mutually agree to longer durations.
The ID Act, applicable to non-managerial employees, mandates one month’s notice (or pay in lieu) along with retrenchment (severance) compensation in case of termination of employment of those employed for at least a year. The S&E Acts, which apply to non-manufacturing establishments, also typically require one month’s notice or payment in lieu for employees completing a specific tenure. Interestingly, a few laws such as the Delhi S&E Act require employees to serve one month’s notice upon resignation (or make payment in lieu) after completing three months of continuous service. Importantly, there is currently no statutory cap on the maximum notice period an employee can be asked to serve before exiting.
Industry practices around notice periods
Notice periods are typically structured based on the individual’s qualifications, market demands and experience. Non-managerial employees usually serve a notice period of 1 to 2 months upon resignation, while senior roles are subject to a notice period of 3 to 6 months, and in each case, the employer also agrees to give an equivalent notice period if it is terminating employment. Though notice period clauses are generally reciprocal, employers often retain the right to buy out an employee’s notice period, though this flexibility may not always be extended to employees.
One-sided lengthy notice periods
While direct judicial precedents in dealing with enforceability of lengthy notice periods are limited, courts have addressed these concerns within broader discussions. The Supreme Court held a termination clause void under Section 23 of the Indian Contract Act 1872 in a particular case. The ruling reinforced that where the contract is executed between parties who are not at the same pedestal (employment relationships are presumed to be so) and the contract unreasonably suits the interests of the stronger party, courts would apply common law principles and may deem the provision invalid.
Accordingly, a lengthy notice period applicable only to employee-initiated resignation and not to employer-initiated termination, may not be considered reasonable, especially where it deviates from industry practice, keeping in view the level of education, experience and qualifications of the employee.
Other alternatives to employee retention
Given that lengthy notice periods remain largely untested in India courts, employers should consider alternative routes without potentially being perceived as one-sided. Options include linking retention bonuses or training costs to a minimum service period or alternatively deferring payouts for annual bonuses / increments by 3 to 4 months (or further), which act as a financial deterrent to early resignation without creating a direct legal restraint on the employee.
Conclusion
While employers continue to devise innovative retention strategies, these must be balanced against common law principles of reasonableness and the need to maintain healthy employee relations. Lengthy notice periods are being viewed unfavorably by the workforce, with some pushback already emerging. Until there is clearer judicial guidance, it is crucial to monitor industry trends and employee sentiments around such clauses to ensure alignment with both legal and practical standards.
