Terminating an Employee the Right Way, Without Inviting a Legal Claim

Terminating an employee correctly in India starts with checking the contract's notice period and pay-in-lieu terms. For cause, build a documented paper trail; for misconduct, follow natural justice with a show-cause notice. Pay full and final settlement within two working days under the Code on Wages, 2019, confirm gratuity eligibility, and always communicate the termination in writing, never over a phone call.

Start With What the Contract Actually Says

Before anything else, pull out the offer letter or employment agreement and read the termination clause carefully. Most Indian employment contracts specify a notice period, commonly somewhere between 15 and 90 days depending on seniority, along with a pay-in-lieu option that lets either side skip the notice period by paying (or forfeiting) the equivalent salary. If your contract says 60 days' notice or pay in lieu, that is the deal you signed up for, and going below it opens you to a straightforward breach of contract claim. There is no shortcut here. If the contract is silent or vague, the relevant state Shops and Establishments Act usually fills the gap, and notice requirements do vary from state to state, so it is worth having someone confirm the specific number for your state and category of employee rather than assuming a national default.

One more distinction that trips up founders: if the person falls under the definition of a "worker" under the Industrial Relations Code, 2020 (broadly, non-supervisory or lower-level roles), separate retrenchment rules kick in, including notice to the labour department in some cases. Most startup employees in tech, sales, or management roles do not fall into this bucket, but do not assume, check.

If It's a For-Cause Termination, Build the Paper Trail First

Firing someone for poor performance without any documentation is where most founders get burned. Courts and labour authorities in India generally expect an employer to show a pattern, not a single bad week. That means performance improvement plans, written feedback, email trails, appraisal records, or at minimum a couple of documented conversations where the employee was told clearly what was falling short and given a real chance to fix it.

If the termination is for misconduct rather than performance (fraud, harassment, insubordination), the standard is even stricter. Natural justice principles expect a show-cause notice, a chance for the employee to respond, and a decision based on that response, not a decision made first and justified later. Skipping this sequence is exactly what turns a routine exit into a wrongful termination dispute.

The Money Part: Full and Final Settlement

Once the exit is decided, the F&F settlement covers unpaid salary, encashment of unused leave as per policy, any pending reimbursements, bonus if contractually owed, and deductions for notice period shortfall if applicable. Under Section 17 of the Code on Wages, 2019, wages due must be paid within two working days of the last day, and this timeline now applies whether the employee resigns or the employer terminates the employment, not just when the employer initiates the exit. That is a real, enforceable timeline, not a courtesy. Delaying F&F for weeks because HR is "processing it" is a common practice but a poor one, and it is often the first thing an aggrieved ex-employee's lawyer points to.

Gratuity: Who Actually Gets It

Under the Code on Social Security, 2020, an employee becomes eligible for gratuity after completing five years of continuous service with an establishment that employs ten or more people. The standard formula is 15 days of wages for every completed year of service, calculated on the last drawn basic plus dearness allowance. If someone resigns or is terminated before hitting five years, gratuity generally does not apply, with exceptions like death or disability, and a separate carve-out under Section 53 of the Code on Social Security, 2020 that entitles fixed-term employees to pro-rata gratuity after just one year of service. If you have fixed-term employees or anyone close to the five-year mark, get that number confirmed rather than relying on a general rule.

The Retaliation and Discrimination Trap

A termination that follows soon after an employee raises a POSH complaint, takes maternity leave, or reports a compliance issue looks retaliatory even if your actual reason is unrelated, and the burden of explaining the timing falls on you. The Code on Social Security, 2020 specifically bars dismissal during maternity leave, and the POSH Act, 2013 protects complainants from retaliation. If a termination overlaps with any of these situations, slow down and get it reviewed before acting, because the optics alone can trigger a legal claim even when the underlying decision was fair.

Never Fire Someone Over a Phone Call

A verbal termination, even a clear and polite one, leaves nothing on record. It creates confusion about the actual last working day, delays F&F and relieving letter processing, and if the employee later disputes what was said, you have no proof of what was communicated or when. Every termination, regardless of reason, needs a written communication that states the last working day, the basis for the decision, and the settlement timeline.

Every company's situation differs by state, employee category, and contract terms, and getting this wrong can be expensive. Note that India's four labour codes, the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the OSH Code, came into force nationwide on 21 November 2025, replacing the older labour laws cited above. The codes themselves are already the operative law, though the implementing rules are still being finalized state by state through mid-2026, so confirm the current state-level rules for your situation rather than assuming they are settled everywhere. Vaksy can connect you with a verified advocate on the platform who can review your specific termination case and draft the right notices and settlement documents in your own language.

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