Employee Termination: Balance Due Process with Humane Considerations

February 2022

1.          Introduction

Regulation of Indian employment matters is a concurrent subject and covered by both central and states’ laws. The relationship between an employer and employee is regulated by contract law. Generally speaking, the framework of Indian labor law differentiates between an employee and workman, the latter is equated to a blue-collar worker. The provisions relating to working conditions also vary depending upon whether the establishment in question is a factory, a shop or other kind of commercial establishment. A key component of managing relations well is to strike a balance between terms of employment and conditions of labor of the workmen and employees versus management expectations. Given the socialist leanings in India, discontented workforce (blue or white-collar) can potentially become a powerful and a disruptive force. Thus, Indian labor law involves balancing complex relationships between the employees, employers and government, while looking at both central and state law.

In the last two years with the world going into a remote working mode, COVID-19 pandemic has stretched everyone and organizations have had to (and still do) juggle multiple issues, be it business continuity, profitability and the pressure to reduce headcount. In India, a report published by the Centre for Monitoring Indian Economy pointed out that the white-collar professionals witnessed the biggest job losses.[1] While these white-collar jobs may have been in the direct firing line, yet it is necessary to ensure that termination occurs in the right way, for all involved. Unlawful termination remains a highly contentious issue.  

This newsletter focuses on termination of white-collar employees generally (and not as a result of downsizing for any reason) and considerations to make the exit smooth in accordance with due process, while mitigating risks that may arise from wrongful termination. Reference to employees below is only for white-collar.

2.         Different Terminations

There is no standard process to terminate an employee in India. The key document that governs the employee relationship is the contract. It is also necessary to keep in mind the provisions of state specific Shops and Establishments Act enacted across India with some differences in implementation.[2] This statute prescribes minimum working hours and payment for overtime plus employees’ right regarding various kind of leaves – casual, sick, privilege and others. Now, termination can either be steered as voluntary (like resignation) or for cause (such as misconduct, poor performance), discussed briefly below.

2.1       Termination by resignation: When an employee resigns to pursue other opportunities, and both sides part ways amicably, there is no problem in getting to the finishing line smoothly. But often times when an employee engages in unacceptable conduct or performance is bad without any improvement, and despite opportunities to rectify, managements come to a reasoned conclusion that termination is essential. In such cases, when the conversations occur about parting ways, employees may determine that resignation is the best way out as it is easier to justify to potential future employers. This is also an acceptable route provided parties are aligned on the severance payments, agree and sign on the full and final agreement and, in case of senior employees, agree on complying with contractual post-termination obligations. Here it is important that managements do not obtain resignations through fraud or coercion.

2.2       Termination for cause: A proper termination clause should be a key element of the contract and generally employment contracts contain specific provisions on the termination process. Termination for cause can include misconduct, non-performance or unsatisfactory performance, behavioral or even attitude issues that cause trouble at the workplace, loss of confidence, non-compliance with the organizational policies and with a defined notice period, between 30-90 days.

Then, in certain cases, contracts contain clauses which permit a company to terminate immediately. Usually, the reasons for such extreme steps can be willful insubordination, any act of gross misconduct, including without limitation refusal to accept lawful and reasonable instructions from the company, or repetitive conduct (after written warning) or any other serious breach of obligations listed in the agreement. In some cases, where the positions are for top leadership, contract provisions can include immediate termination where the employee (a) is guilty of any wilful conduct which in the opinion of the board brings, the company or any group companies into disrepute; or (b) willfully commits any act of dishonesty relating to the company or group companies or other employees; or (c) if representations and warranties made by the employee are found to be misleading and untrue; (d) taking illegal gratification.

It is clear from the above that there should be sufficient cause or reason to take the step of termination, and in no situation, there should be a nexus with discriminatory grounds like caste, race, color, gender, religion.[3]

An employee who has been terminated and feels wronged could seek recourse to a court because (a) there was no specific reason for termination; (b) the employee disagrees with the company’s finding of misconduct; or (c) feels the dismissal was based on unfair grounds. The overarching judicial trend is that courts do not like to rewrite a mutually agreed contract which is understood and accepted by the employee. But an employer may be held responsible for wrongful termination as employees have the right to legal protections. Where a company does not follow due process and wrongfully terminates, it can be exposed to punitive consequences under state and central laws. If the matter is litigated, courts may order the company to pay fines and award additional compensation to the terminated employee. While this is not the norm and is always fact specific, but India being a socialist nation, the tendency is to be pro-employee.  Courts have passed orders of reinstatement along with back-wages and continuity of service, in cases where the employees were successful in establishing that termination was unlawful or an unfair labor practice.

3.         Considerations for Specific Termination(s)

The starting point for the process should be a review of the employee agreement and the company’s HR policies. The communication should be unambiguous that the decision is final. Every company and its HR department knows the organizational termination playbook: keep it short, get the paperwork done, reclaim company property, walk the employee out the door, shut down access to e-mail etc. But where both parties conduct themselves professionally, both move on easily.

Where termination is due to non-performance, due process requires ample opportunity should have been given to improve with clear tangible goals and by putting a defined performance improvement plan in place. This means the onus should be on the company to provide guidance, feedback about the performance and clearly explain the potential consequences of both non-performance and under-performance. Most importantly, it is crucial to document discussions surrounding performance and maintain a record in the employee file as that will enable the company to see the curves in the evolution and come to a considered decision. A performance management system ensures the employee is clear about the objectives, expectation and details that would enable effective performance. Such approach means companies follow due process as part of their standard operating procedure and know they can terminate, within a stipulated period, after the needed improvement did not materialize.

Dismissals due to misconduct should only take place after they are preceded by an enquiry conducted in accordance with the principles of natural justice and where the employee is given a reasonable opportunity to be heard as part of the enquiry process.

Sometimes, a change in the top leadership may be necessary, when in the opinion of decision-makers, someone exercises poor judgment with potential risk for the company and there is consequential loss of trust. The triggers can be several as the expectations for the CEO and similar top roles are completely different than those of junior functions. Where there is loss of trust, usually there is a trigger which may come within the broad purview of willful negligence. Sometimes the employment contract allows termination for disqualification without compensation, where disqualification includes moral, ethical or other breach of agreement reasons. In such cases, the employee obligations often provide that the person shall not commit any act or misbehave in a manner that would be construed as being in violation of the rules and regulation of the company under the employee handbook. In such cases, organizations may be within their rights to withhold compensation while they pay with the benefits due.

If situations arise that warrant a change in the top leadership, it is necessary to be mindful of steps, both in the process and internal communications. The organizational changes have to be communicated to different stakeholders (from customers to suppliers) so that the transition is smooth, service delivery to customers does not get impacted and employees continue to focus on the growth momentum. And, at the same time it is necessary to continue the search for a replacement, provide interim leadership and create the environment for the new leader(s) to smoothly transition into the organization. For such top-level exits, consider, plan and implement as follows:

3.1       Take a considered decision on the basis of specific facts with full discussion on how there is a determination of loss of trust. Once a decision is taken, prepare for the termination meeting with the employee.[4]

3.2       Execute a separation agreement or a full and final settlement agreement, which is common in India, which should include, amongst others, anti-defamation provisions, an acknowledgement of non-compete and other confidentiality obligations that survive termination in accordance with signed contract of the employee.

3.3       Pay attention to what access the exiting individual has regarding bank accounts, signature authorities, access codes, access to systems and proprietary information or authority to bind the company which needs to modified at the time of termination. Additionally, chances are there would be a need to remove the exiting senior employee from the Board of Directors. The easiest way to accomplish this would be voluntary resignation. Otherwise, the Board will need to pass a resolution post-termination.

3.4       Communicate the decision to the concerned employee, identify the specific failure and how that is within his domain of responsibility. Script (if necessary) the key discussion points. These could be reiteration of how (a) the company takes complaints and allegations, coming from both inside and outside the company, very seriously; (b) policies and procedures are designed to ensure fairness which means give the benefit of doubt to the individuals involved and execute an unbiased fact-finding process; (c) the employee exhibited mismanagement and poor judgment that placed the company at risk and that did not meet the high standards expected of the leadership team, (d) there was a fiscal impact (where there is one) of the action or omission of the employee along with potential reputational loss, and loss of credibility. Underscore such matters are not trivial and regardless of the origin i.e., whether the outcomes occurred due to lack of oversight or otherwise, they reflect poor judgment which is an unacceptable trait in a senior employee. Additionally, in the discussion provide a recommended course of action, which could be as follows:

  • Leave the company effective immediately and return all company properties right away
  • Resign voluntarily else termination will be for cause
  • Resign from the Board (if applicable)
  • No compensation will be paid other than what is due which will be paid in the coming days as per company policy

3.5       Communicate to the other employees, often done by means of a town hall, by gathering everyone together so that the messaging is clear and nothing is lost in translation. At this meeting clearly (a) describe the purpose which is to announce necessary leadership changes, (b) underscore that the reputation and long-term success are driven by core values and behaviors which includes the right way to conduct business (c) repeat that none are allowed to deviate from these standards, particularly senior leaders since the processes and actions cut across levels, (d)  make the point that implications are the same regardless of whether someone is a senior leader or a frontline employee; state unambiguously that leaders are held to a higher standard, and (e) explain the path forward.

4.         Conclusion

The key objective should be to smoothen the process of termination and avoid litigation. Several Indian courts have upheld terminations where they are consistent with the contractual terms, and backed with proper documents and evidence in respect of the termination. The overarching principle while terminating an employee should be that the task is executed with compassion and it should not be acrimonious or adversarial. This way companies can minimize exposure to both legal and reputational risks that may arise from alleged wrongful termination. Follow due process, for sure, but ensure that the process is a humane one.

Author

Priti Suri


[1] From May-August 2019, the white-collar employees were about 18.8 million, but in the corresponding period a year later, in 2020, it dropped to 12.2 million, the lowest ever since 2016, and largely attributable to the virus and the need for companies to make tough decisions

[2] The S&EA regulates labor and employment in premises where a trade, business, or profession is carried out

[3] According to Article 16 (2) of the Constitution, no citizen can be discriminated against, or be ineligible for any employment or office under the state, on the grounds only of religion, race, caste, sex, descent, place of birth or residence or any of them. Additionally, the Supreme Court ruled that LGBTQ (lesbian, gay, bisexual and transgender queer) shall not be shown discrimination or derogate them in any manner

[4] Depending on the level of seniority, sometimes it is prudent to do this on a weekend in order to minimize embarrassment and avoid the chance for departure becoming a scene or a distraction for other employees

 

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