Key Takeaways at a Glance:
- Foreign companies can hire employees in India without a local entity by using an Employer of Record, which handles payroll, statutory contributions, and compliance under Indian law from day one.
- Misclassifying an employee as a contractor is a material risk: Indian authorities apply a substance-over-form test, and reclassification triggers back taxes, penalties, and liability for all missed statutory benefits.
- Employer payroll costs extend well beyond gross salary and must include EPF contributions at 12% of basic salary, ESI contributions at 3.25% for eligible employees, gratuity accrual, and statutory bonus obligations.
- Employment contracts must specify compensation, leave entitlements, probation terms, notice periods, and governing law; gaps in any of these create legal exposure that is difficult to remedy after the fact.
- Termination in India is governed by the Industrial Disputes Act, and establishments with more than 100 workers must obtain government approval before retrenching employees, making exit planning as important as onboarding.
What International Employers Need to Know Before Hiring in India
India offers access to a large, skilled talent pool that international companies increasingly want to reach. The legal and compliance framework that governs employment there is more layered than in many other markets, and it applies from the first hire regardless of where the employer is incorporated. A foreign company cannot simply pay an Indian worker on a foreign payroll and call it done.
Indian labour law, statutory benefit schemes, and tax withholding obligations attach to the employment relationship the moment it begins. The framework includes central legislation such as the Factories Act, the Shops and Establishments Act, the Minimum Wages Act, and the Payment of Wages Act, with state-level variations that affect employers differently depending on where their worker is located.
This guide covers the legal routes available to international employers, the compliance obligations that apply, how to structure contracts and payroll, and what the termination rules require. The first decision is the most consequential: before making an offer, the employer must choose how to engage the worker, because that choice determines every obligation that follows.
Hiring Routes: Entity, EOR, or Contractor
Before extending an offer to an Indian candidate, an international employer must decide on a legal structure for the engagement. Three routes are available: setting up a local entity, using an Employer of Record, or engaging the worker as an independent contractor. Each carries distinct setup requirements, compliance burdens, and ongoing obligations.
Entity Setup
Foreign companies can establish a legal presence in India through four structures: a wholly owned subsidiary, a branch office, a liaison office, or a project office. A wholly owned subsidiary is the most common choice for active employment because it permits the full range of commercial activities. Branch and liaison offices carry restrictions on permitted activities. Entity registration involves filings with the Registrar of Companies and the Reserve Bank of India, and the process typically takes several months before the first payroll can run.
Employer of Record
An Employer of Record employs the worker under Indian law on the foreign company's behalf. The EOR manages payroll, statutory registrations, EPF and ESI contributions, TDS withholding, and all compliance filings. The foreign company directs the work but is not the legal employer in India. This is the practical route for companies making their first hires in the country before committing to entity setup. Gloroots offers Global Employer of Record services in India for companies that need entity-free employment from day one. For founders unfamiliar with the model, how EOR works explains the mechanics in detail. Early-stage companies can also review the EOR option built for startups to assess fit.
Independent Contractor
Engaging a worker as an independent contractor is faster to set up but carries meaningful legal risk. Indian authorities apply a substance-over-form test: if the working relationship involves direction and control, a fixed schedule, or exclusivity, the engagement may be reclassified as employment regardless of what the contract says. Reclassification triggers back-payment liability for all statutory benefits the worker should have received from the start.
| Factor | Entity | EOR | Contractor |
|---|---|---|---|
| Setup time | Several months | Days to weeks | Immediate |
| Compliance ownership | Employer | EOR | Employer (if reclassified) |
| Statutory benefit obligations | Full | Full (managed by EOR) | None (unless reclassified) |
| Best fit | Committed, multi-hire presence | First hires, entity-free employment | Genuinely independent, project-based work |
Employee vs. Contractor Classification in India
Getting the classification wrong is not a paperwork problem. Misclassifying an employee as an independent contractor exposes the company to back taxes, penalties, and liability for every statutory benefit that should have been provided from the start: EPF contributions, ESI coverage, gratuity accrual, and statutory bonus. The financial exposure compounds over the length of the misclassified engagement.
Indian authorities do not rely solely on the contract label. They look at the substance of the working relationship. A worker who takes direction from the company, works set hours, operates exclusively for one client, and is economically dependent on that client is likely an employee under Indian law regardless of what the agreement says. The key factors authorities examine include:
- Control: Does the company direct how, when, and where the work is done?
- Integration: Is the worker embedded in the company's operations or treated as an external supplier?
- Exclusivity: Does the worker serve other clients, or only this company?
- Economic dependence: Is the company the worker's primary or sole source of income?
- Fixed schedule: Is the worker expected to be available during set hours rather than delivering defined outputs?
The practical decision rule is straightforward. If the engagement involves direction and control, a fixed schedule, or exclusivity, the worker should be treated as an employee and placed on a compliant employment structure from day one. A contractor agreement does not override Indian statutory obligations if the facts of the relationship point to employment.
Total Employment Cost in India: What to Budget Beyond Salary
The employer's cost of hiring in India is salary plus mandatory statutory contributions. These obligations are not optional, and they must be factored into the compensation offer before it is made. Building a budget from gross salary alone will produce an inaccurate number.
| Contribution | Employer Rate | Employee Rate | Applies To |
|---|---|---|---|
| Employees' Provident Fund (EPF) | 12% of basic salary | 12% of basic salary | All eligible employees |
| Employees' State Insurance (ESI) | 3.25% | 0.75% | Employees earning up to INR 21,000 per month |
| Tax Deducted at Source (TDS) | Withheld and remitted by employer | Rate varies by income slab | All salaried employees |
Gratuity is not a monthly contribution but it is a real liability. Under the Payment of Gratuity Act, an employee who completes at least five years of continuous service is entitled to 15 days' wages for each year of service. This amount should be modelled as a long-term liability in the hiring budget from the point of hire, not treated as a future surprise.
Statutory bonus is an annual cash obligation, not a discretionary payment. The Payment of Bonus Act requires a minimum bonus of 8.33% and a maximum of 20% of annual salary for eligible employees. Finance teams should include this in annual headcount cost projections.
The total employer cost of an Indian hire is meaningfully higher than the gross salary figure. EPF, ESI, and bonus obligations together add a significant percentage on top of base compensation. Compensation bands should be finalised only after these contributions are modelled in full.
Compliance and Labour Law Obligations
India's labour law framework is built on central legislation that includes the Factories Act, the Shops and Establishments Act, the Minimum Wages Act, and the Payment of Wages Act. The Shops and Establishments Act is state-specific, which means compliance requirements differ depending on where the employee is located. An employer with workers in multiple states faces multiple regulatory regimes simultaneously.
India has also passed four Labour Codes that consolidate existing legislation: the Code on Wages, the Industrial Relations Code, the Social Security Code, and the Occupational Safety, Health and Working Conditions Code. Implementation at the state level is not yet uniform. Employers should not assume the Codes have replaced current obligations without verifying the position in the specific state where their employee works. The existing statutes remain operative in most states.
Statutory Registration Checklist
Three registrations must be in place before or at the point of the first payroll run. Missing any of them creates financial exposure, not just an administrative gap.
- EPFO registration: Required for any establishment with 20 or more employees. Employer contributes 12% of each employee's basic salary. Late registration triggers penalties and interest on all unpaid contributions from the date the obligation arose.
- ESIC registration: Required for establishments with 10 or more employees where any worker earns at or below INR 21,000 per month. Employer contributes 3.25% of qualifying wages. The same penalty and back-payment exposure applies for late registration.
- TAN registration (for TDS): Required before any salary payment is made. The employer withholds income tax at source and remits it to the government on a defined schedule. Operating without a TAN is a compliance failure with direct tax consequences.
Employers who discover a registration gap should seek local legal advice immediately to assess remediation steps and quantify the liability. These are not situations where a wait-and-see approach reduces risk.
Drafting a Compliant Employment Contract in India
Employment contracts in India are governed by Indian law. A contract drafted under US or UK law and signed by an Indian employee does not override Indian statutory entitlements. The contract must reflect the obligations that apply under Indian legislation, and gaps in the document make disputes harder to resolve even when the underlying obligation still exists.
A compliant employment contract for an Indian hire should include the following:
- Job title and role description
- Compensation structure: basic salary, allowances, and any variable components stated separately
- Working hours
- Probation period: typically three to six months; notice requirements during probation often differ from those that apply post-confirmation, so both should be stated explicitly
- Leave entitlements: annual leave, sick leave, and public holidays
- Notice period: for termination by either party, stated clearly for both the probation and confirmed employment phases
- Confidentiality obligations
- IP assignment
- Governing law: Indian law
Omitting a statutory entitlement from the contract does not remove the obligation. Indian law applies regardless of what the contract says or does not say. A well-drafted contract reduces the risk of disputes and gives both parties a clear reference point if a disagreement arises.
Payroll, Statutory Benefits, and Leave Entitlements
Running payroll in India involves more than calculating and paying monthly salary. Each payroll cycle requires TDS withholding and remittance to the government, EPF contributions at 12% of basic salary from both employer and employee, ESI contributions for eligible employees, and payslip issuance. Each obligation has a filing deadline, and late payment attracts penalties and interest.
Leave Entitlements
Employees who have worked at least 240 days in the preceding year are entitled to a minimum of 15 days of paid annual leave. This is a statutory floor, not a discretionary benefit. India also has a mix of national and state-level public holidays; the number and specific dates vary by state, which matters for employers with workers in more than one location.
Gratuity and Bonus Payment Timing
Gratuity becomes payable on resignation, retirement, or termination after five years of continuous service, calculated at 15 days' wages for each year of service. It must be paid within 30 days of the employee's last working day. The Payment of Bonus Act requires bonus to be paid within eight months of the close of the accounting year. Late bonus payment attracts interest.
Payroll Filing Obligations
- Monthly TDS withholding and remittance to the Income Tax Department
- Monthly EPF contributions (employer 12%, employee 12% of basic salary) filed with EPFO
- Monthly ESI contributions (employer 3.25%, employee 0.75%) filed with ESIC for eligible employees
- Payslip issuance to each employee each pay period
- Annual bonus payment within eight months of the accounting year close
- Gratuity payment within 30 days of the last working day for qualifying employees
Termination, Notice Periods, and Retrenchment Rules
Termination in India is not simply a matter of giving notice and processing a final paycheck. The rules that apply depend on the size of the establishment, the nature of the role, and the length of service. Understanding these rules before hiring protects the company from disputes that are expensive to resolve after the fact.
For white-collar roles, notice periods of 30 to 90 days are common and should be stated explicitly in the employment contract. The applicable state Shops and Establishments Act may set minimum notice requirements that the contract cannot undercut. Both the employer and the employee are bound by the notice period stated in the contract, so the terms should be set deliberately.
The Industrial Disputes Act adds a further layer for larger establishments. Employers with more than 100 workers must obtain government approval before retrenching employees. This requirement applies regardless of the reason for termination and can significantly extend the timeline for workforce reductions at scale. Companies that anticipate growth beyond this threshold should factor retrenchment rules into their workforce planning from the outset.
On termination, the employer must settle all outstanding obligations before or on the last working day. These include:
- Outstanding salary and any accrued variable pay
- Accrued leave encashment for unused statutory leave
- Gratuity, if the employee has completed five years of continuous service, calculated at 15 days' wages per year of service and payable within 30 days of the last working day
- Any notice pay owed if the notice period is not worked out in full
Employers who want to manage termination risk within a compliant structure can review Gloroots EOR services, which cover Employment Lifecycle Management including offboarding. For cost planning, Gloroots pricing provides country-specific figures before any commitment is made.
How Gloroots Supports Compliant Hiring in India
Gloroots operates as a Global Employer of Record, providing an employment operating layer for international companies that need to hire in India without setting up a local entity. The platform covers the full employment lifecycle: contracts drafted under Indian law, payroll execution with EPF and ESI contributions, TDS withholding and remittance, statutory benefit administration, and offboarding when the engagement ends.
Compliance and Employment Governance is built into the service rather than treated as an add-on. Employers retain control over the work while Gloroots carries the legal employer obligations in India. Pricing is country-specific and transparent, so finance teams can model the total cost of an Indian hire before making an offer. Human Support and Account Ownership means a named contact manages the account, not a ticket queue.
For companies making their first hire in India or scaling a team without committing to entity setup, Gloroots provides local execution with centralized governance across the employment relationship.
Frequently Asked Questions
Can a US company hire employees in India without setting up a legal entity?
Yes. A US company can hire employees in India without a local entity by using an Employer of Record. The EOR employs the worker under Indian law, manages payroll and statutory contributions, and handles compliance obligations including EPF, ESI, and TDS. The US company directs the work but is not the legal employer in India. This is the most practical route for companies making their first one to five hires in the country before committing to entity registration.
What is the difference between hiring an employee and a contractor in India?
An employee in India is entitled to statutory benefits including EPF, ESI, gratuity, and paid leave, and the employer must withhold TDS and make contributions on their behalf. A contractor is engaged for a specific scope of work without these obligations. Indian authorities apply a substance-over-form test: if the working relationship involves direction, control, and exclusivity, the engagement may be reclassified as employment regardless of the contract label, triggering back-payment liability for all missed statutory benefits.
How long does it take to set up payroll compliance in India?
Setting up payroll compliance in India requires EPFO registration, ESIC registration where applicable, and TAN registration for TDS. Each involves government filings with processing times that vary. Entity setup can take several months before the first payroll can run. Using an EOR removes this timeline for the employer: the EOR's existing registrations cover the new hire from day one, and payroll can begin within days to weeks of the engagement being confirmed.
What happens if an employer misses EPF or ESI registration deadlines?
Missing EPFO or ESIC registration deadlines exposes the employer to penalties, interest on unpaid contributions, and liability for back-payment of all contributions that should have been made from the date the obligation arose. These are financial exposures, not administrative warnings. Employers who discover a registration gap should seek local legal advice immediately to assess remediation steps and quantify the liability.
Are the four Labour Codes in effect and how do they change existing obligations?
India has passed four Labour Codes: the Code on Wages, the Industrial Relations Code, the Social Security Code, and the Occupational Safety, Health and Working Conditions Code. These consolidate existing legislation, but implementation at the state level is not yet uniform. The existing statutes remain operative in most states. Employers should not assume the Codes have replaced current obligations without verifying the position in the specific state where their employee is located. Monitor official Ministry of Labour communications for implementation updates.
What are the termination notice requirements for employees in India?
Notice period requirements in India are set by the employment contract and must comply with the applicable state Shops and Establishments Act. For white-collar roles, 30 to 90 days is common. Establishments with more than 100 workers must obtain government approval before retrenching employees under the Industrial Disputes Act. On termination, the employer must pay outstanding salary, accrued leave encashment, and gratuity if the employee has completed five years of continuous service, calculated at 15 days' wages per year of service and payable within 30 days of the last working day.
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