THE UNIVERSITY OF TEXAS AT AUSTIN'S SOUTH ASIA INSTITUTE AND CENTER FOR INTERNATIONAL BUSINESS EDUCATION AND RESEARCH MANAGING RISK IN INDIA
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THE UNIVERSITY OF TEXAS AT AUSTIN’S SOUTH ASIA INSTITUTE AND CENTER FOR INTERNATIONAL BUSINESS EDUCATION AND RESEARCH MANAGING RISK IN INDIA “Labor Relations: Avoiding the Common Pitfalls Associated with an Indian Workforce” Authored by: Jackson Walker L.L.P.1 I. Introduction There are a number of legal pitfalls and unexpected sources of trouble that appear for U.S. companies employing or contracting with Indian nationals. Common problems that arise for U.S. companies employing or contracting with Indian nationals include certain prohibitions on the termination of employees, the payment of certain benefits without U.S. equivalents and the non-enforceability of non-competition provisions in employment contracts. This paper will highlight and explain the legal pitfalls most frequently encountered by U.S. companies that make us of the Indian workforce. The Indian workforce is attractive to U.S. employers for numerous reasons. For example, India has a large English-speaking population and one of the world’s largest pool of scientific and technical personnel. Twenty-two million people in India have graduated from college and over seven million of those persons have a degree in science and engineering.2 Due to many factors, including a high rate of domestic unemployment, wages are relatively low for all categories of workers, including managers and skilled labor. The relationship between an employer and employee in India is primarily governed by any written agreement between the parties and applicable employment law. Employment law in India can be characterized as generally in favor of labor and the rights of employees are broadly protected. Because an employer can not contract out of the minimum protections provided to employees under Indian law it is important for any employer to be familiar with the laws applicable to its workforce. Not only is there ample legislation governing the rights of workers in general, but there are also a number of laws aimed at specific industries, including plantations, mines, construction, transportation, and sales.3 This paper addresses the common legal pitfalls encountered by U.S. companies that employ or contract with Indian nationals. We will first address the law applicable to the full or part-time employment of Indian nationals. Employment is not always the most practical solution for U.S. companies that would like to take advantage of the Indian workforce. An alternative to 1 This paper was drafted by Nicole Gewinner, an associate in Jackson Walker L.L.P.’s Austin Office (bio attached), with assistance from Sue Snyder (bio attached). 2 Ames Gross and John Minot, Workforce Issues in India HR Needs to Understand, SHRM India, (2007), at http://www.shrm.org/India/o7_understand.asp. 3 See the Factories Act, 1948, the Plantation Labour Act, 1951, the Mines Act, 1952, the Contract Labour (Regulation and Abolition) Act, 1970, the Building & Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996, the Motor Transport Workers Act, 1961, the Sales Promotion Employees (Conditions of Service) Act, 1976 and the Shops and Establishments Act, 1953. 1 5356544v.3
employment for many U.S. companies is to enter into a relationship with an Indian national as an independent contractor. We address here the law applicable to independent contractors and how best to structure a contracting relationship. II. Employees A. Workman v. Non-Workman Prior to undertaking any discussion of Indian employment law, it is important to note that Indian employees are divided into two categories under the law: workmen and non-workmen. The laws apply differently to these two categories, especially those laws applicable to termination of employment. A workman is defined as a person that is employed to do any manual, clerical, skilled, unskilled, technical, operation or supervisory work. A non-workman is defined as a person who performs managerial, supervisory and administrative work. In the U.S., a workman might be described as a blue-collar worker, while a non-workman might be called a white-collar worker. The employment laws described herein most always apply to workmen. Generally, non-workmen are not provided the same amount of protection under Indian employment law. For the most part, the terms of a non-workman’s employment contract governs his or her employment relationship. B. Pitfall #1: Concurrent Regulation Not only do employment laws differ according to the category or industry of the employee, but Indian employment laws may also differ from state to state. Employment is regulated not only by the Indian central government, but also by the state governments. Pursuant to the Indian Constitution, labor may be regulated by all of the 28 states as well as the central government. Some state’s laws are more protective of employees than others. U.S. companies should consider which states have favorable laws prior to choosing a location in India and should also seek out legal advice specific to the state in which they are doing business. C. Pitfall #2: Termination of Employment The laws applicable to the termination of employees are starkly different from those of the United States. In sum, a system of hiring and firing does not exist in India for a large part of the workforce.4 Instead, a number of different methods of involuntary termination must be delicately navigated by Indian employers, over time and in accordance with law. In some circumstances, employers are restricted from “retrenchment,” which is defined as the termination of an employee for any reason other than punishment for bad behavior. Retrenchment is often prohibited unless an employer has first complied with certain notice and approval requirements. For example, in order to terminate certain factory, mine, plantation or industrial employees, the employer must give notice of the desired termination to the 4 Shardul S. Shroff, Perspectives on Doing Business in India; Issues for U.S. Companies in Practising Law Institute Corporate Law and Practice Course Handbook Series in Doing Business in India 2008: Critical Legal Issues for U.S. Companies, 247, 278-279, (2008). 2 5356544v.3
government, wait for the government’s approval and then provide certain compensation to the terminated employee. There are a number of methods of involuntary termination with different applicable statutory or case law. For example, in a dismissal, an employee loses benefits and it may be difficult for him or her to obtain other employment due to the attached stigma. In a discharge, the employee is entitled to his or her accrued benefits upon termination and no stigma is attached. In the discharge of a probationer, an employer may only terminate the employee on or after the day that the employee’s probationary period ends (usually, a period of six months) and only if the employer is not satisfied with the employee’s performance in that period. An employer may not be able to avoid prohibitions on retrenchment by entering into a written contract with an employee. Depending on the circumstances, the termination provisions of a contract between an employer and employee may even be unenforceable. In the case of an employee with a written employment contract, in Central Inland Water corp. Ltd. v. Brojo Nath Gnaguly, the Supreme Court of India found that an employment agreement that provided for termination of the employee with notice, but without reason, was void under the Indian Contract Act, 1872.5 The holding of the above case, however, does not apply to non-workmen in the private sector. Indian employment law does not, in general, prohibit employers from involuntarily terminating non-workmen. The employment of a non-workman is most often regulated by the employment contract, rather than employment law. Related to restrictions on the termination of employees are laws that restrict businesses from closing their doors and terminating their employees. Indian law, and the Industrial Disputes Act, 1947, in particular, generally requires companies to seek government approval to close a business and terminate its employees, especially in the case of companies with a large number of employees. In summary, before terminating an employee, it is important to ask the following questions: Is the employee a workman or a non-workman? Is there a written contract with the employee? It is also important to consider the laws applicable to the particular industry in which you do business. Keep in mind that Indian law may strictly prohibit the simple termination of an employee, and it is advisable to seek legal advice tailored to the circumstances of the desired termination. D. Pitfall #3: Wages and Benefits6 Indian law provides for payment of certain wages and benefits that do not have counterparts in the U.S., for example, dearness allowances. A number of separate laws regulate the payment of wages and the provision of benefits, including the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976. Indian employees generally receive a basic salary in addition to a “dearness 5 AIR 1986 SC 1571. 6 Again, it is important to note that wage and benefits requirements under Indian law may vary depending on whether the employee is a workman or a non-workman. 3 5356544v.3
allowance.” A dearness allowance is either linked to the cost of living or calculated at a flat rate. The allowance can add up to an additional 60% to an employee’s base salary. In addition to the above, the Payment of Gratuity Act, 1972 provides that certain employers pay their employees a gratuity, a type of bonus, in connection with retirement or disability. Certain other benefits are made mandatory under Indian law, including bonuses, paid vacation, severance pay, sick leave, personal leave, and maternity leave. Employers are also required to contribute to provident funds, pension funds and insurance funds, as applicable. Pursuant to the Employee’s State Insurance Act, 1948, employers must provide enumerated benefits in connection with employee sickness, maternity or work-related injury. Vacation leave includes three national holidays, and can also include certain religious or festival vacation days. In order to determine what wages and benefits are due to employees, an employer must consider the categories of employees, any written agreements and the industry. The above- described laws apply differently depending on the circumstances of employment. Much like determining how to involuntarily terminate an employee, it may be best to seek legal counsel in order to determine wages and benefits due to employees. E. Pitfall #4: Non-Enforceability of Non-Competes U.S. courts tend to scrutinize non-competition provisions in employment contracts closely and do not look favorably on provisions that constitute unreasonable restraints on the employee. U.S. courts therefore generally uphold non-competition provisions with a short time span and narrow geographic scope. Indian courts, on the other hand, have found that non- competition provisions in employment contracts are an unfair restraint of trade and that they are void and unenforceable. 7 As an exception to the above rule, Indian courts have found that non-competes that are effective only during the period of an employee’s employment are enforceable. Non-competes that become effective after an employee’s employment has terminated, however, are void under the Indian Contract Act, 1872. Employers have discovered a way to side-step the un-enforceability of non-competes under Indian law. Some companies require their employees to enter into a bond agreement that acts as a sort of replacement for a non-competition agreement. If the company provides the employee with professional training and the employee subsequently leaves the company after a short period of time, the bond provides that the employee is required to reimburse the company for the cost of his or her training. These bonding arrangements have been held to be enforceable by Indian courts.8 7 Shroff, supra note 4, at 278. 8 Stephen Mathias, Outsourcing and Offshoring to India, in Corporate Counsel’s Guide to Doing Business in India 2D §22:26 (2008). 4 5356544v.3
F. Be Aware There are a number of laws regarding employment that are not addressed above and will not be covered in detail in this paper. Below is a brief description of certain other laws applicable to most employers. Health and Safety. Indian law covers the health and safety of its employees extensively under the Factories Act, 1948, the Mines Act, 1952, and the Dock Workers Act, 1986. The government agencies that direct and supervise employee health and safety are the Directorate General of Mines Safety and the Directorate General of Factory Advice Service and Labour Institutes. While the Mines and Dock Workers Acts are specific to certain industries, the Factories Act has broader application to those businesses that may be loosely defined as factories. Worker’s Rights & Unions. Workers’ rights are generally addressed by the conventions of the International Labour Organization. India is a founding member of this international organization. The conventions are aimed at eradicating and regulating unfair labor practices. The Industrial Disputes Act, 1947 also regulates labor practices and relations and provides for freedom of association and collective bargaining rights. Unions are an active part of the Indian workforce, though not widespread, representing less than 2% of the total work force. The Trade Unions Act of 1926 and the International Labour Organization’s conventions protect and regulate the activities of the unions. III. Independent Contractors In the event that employment of an Indian nationals is not practical, necessary or economical for a U.S. company, a common alternative is the use of independent contractors. In general, Indian law permits the use of independent contractors and also allows the parties to agree to the terms of the arrangement (including termination, etc). The advantage for a U.S. company of having a relationship with an independent contractor rather than an Indian employee is that the Indian employment laws described above generally will not apply. The laws described above apply only to employees and independent contractors are not included in the definition of employees. A. Independent Contractor v. Employee Much like U.S. common law, Indian law employs a number of tests to distinguish an independent contractor from an employee. Traditionally, Indian common law uses a “control test” to determine if an individual is an independent contractor or an employee. As articulated by the Indian Supreme Court in the 1955 decision Shivnandan Sharma v. The Punjab National Bank, Ltd. “the test is the existence of a right of control over the agent in respect of the manner in which his work is to be done.”9 The more control that a company has over the independent contractor, the more likely it is that the independent contractor will be deemed to be an employee of the company. 9 AIR 1955 S.C. 1439 5 5356544v.3
Recently, the Supreme Court of India has lessened the importance of the control test, finding instead that control is one of a number of factors to be considered in distinguishing an employee from an independent contractor. In the 2003 decision Ram Singh and Ors. v. Union Territory, Chandigarh and Ors., the court found that “it is necessary to take a multiple pragmatic approach weighing up all the factors for and against an employment instead of going by the sole test of control.”10 The court held that it would utilize the “integration test” in determining whether an individual is an employee. Under the integration test, a court will examine whether an individual is “fully integrated into the employer’s concern” or if they remain apart or independent from it. Because an individual that is folded into the larger, internal operations of an enterprise may be characterized as an employee, the contractor should not be treated by a U.S. company as they would normally treat an employee. Rather, U.S. companies should deal with the contractors as they would any other outside service provider. Contractors should maintain a separate business operation from the U.S. company and all transactions between the contractor and the U.S. company should be made at arm’s length. In addition to the control and integration tests described above, an Indian court will consider a number of factors, including the following: (a) the terms and conditions of any contract between the parties; (b) where the individual performs the services; (c) who provides the machines and equipment required to perform the services; and (d) a party’s right to reject non- conforming goods or services. As held in the Silver Jubilee Tailoring House and Others decision, a court should consider factors such as the above and “perform a balancing operation weighing up the factors which point in one direction and balancing them against those pointing in the opposite direction.”11 B. Pitfall #5: Avoiding a Permanent Establishment A U.S. company with employees in India and a permanent establishment in India will have to abide by a host of Indian employment and tax laws and will be subject to corporate tax. However, in general, a U.S. company will not have tax issues related to an independent contractor as long as the U.S. company does not have a “permanent establishment” (“PE”) in India. The relevant law to consider here is the Indo-US Double Tax Avoidance Convention -- the main purpose of which is to prevent double taxation of corporate entities operating in the U.S. and India. Pursuant to the convention, corporate entities with a PE in India are subject to Indian corporate tax and are required to make certain tax withholdings. If a U.S. company has enduring, substantial business in India, such that the business and operations of the company are taking place in India, then the U.S. company has a PE in India and its operations will be subject to Indian taxation. A U.S. company is at risk of establishing a PE in India when the U.S. company contracts with an individual that is so dependent on the U.S. company or so integrated into the operations 10 JT 2003(8) SC 345. 11 1974 AIR 37. 6 5356544v.3
of the U.S. company that he establishes an outpost of the U.S. company in India. In general, entering into an independent contractor agreement with an Indian individual will not qualify as a U.S. company having a PE in India, so long as the Indian agent remains independent from the U.S. company. An agent is of independent status if he is independent both legally and economically and if he acts in the ordinary course of his business when acting on behalf of an enterprise. A U.S. company may not have a PE in India if the contractor’s status remains independent and if, in entering into a contracting agreement with the U.S. company, the contractor is acting in the ordinary course of his business. An agent that acts almost exclusively for one enterprise may have difficulty maintaining the independent status required to prevent the establishment of a PE. A U.S. company should make sure that all terms and payment are at market terms and rates (“arms length”) and should be aware that if the contractor does not eventually have other clients, then the independent status of the contractor may be challenged. In summary, if a U.S. company does not have a PE in India, and enters into an independent contractor agreement with an agent in India, the U.S. company will not be subject to Indian corporate tax, nor will it be required to make withholdings from payments made to the independent contractor. In the event that a U.S. company has a PE in India, then the U.S. company will be subject to corporate tax and required to make withholdings. If a U.S. company has a PE in India and an employee in India, then the U.S. company will be subject to corporate tax, required to make withholdings and will also have to comply with Indian labor laws. C. Pitfall #6: Venue and Jurisdiction India recognizes a parties’ right to decide the governing law of an agreement and venue for disputes. While Indian law generally allows parties to decide in which courts a dispute will be decided, there are many exceptions to this rule. For instance, India’s civil procedure codes and other legislation provide that local courts have inherent territorial jurisdiction in some matters that cannot be taken away. For example, in the event that a United States company desired to have a court grant an injunction against a contractor while the contractor was in India, that injunction would have to be obtained from an Indian court. Also, since one of the parties to the contractor agreement is in India, working in India and receiving payments in India, no agreement can exclude the inherent jurisdiction of the Indian courts that is applicable. 12 12 Section 20 of the Civil Procedure Code of 1908 states that: “Every suit shall be instituted in Court within the local limits of whose jurisdiction- (a) the defendant, or each of the defendants where there are more than one, at the time of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain; or (b) any of the defendants, where there are more than one, at the time of the commencement of the suit actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such case either the leave of the Court is given, or the defendants who do not reside, or carry on business, or personally work for gain, as aforesaid, acquiesce in such institution; or (c) the cause of action, wholly or in part, arises. 7 5356544v.3
To avoid the applicability of inherent jurisdictions of respective courts at least in the beginning (as ultimately for the enforcement of the decree that may be passed, parties shall have to approach the courts situated in the jurisdiction of the concerned party), the parties may choose arbitration for resolving any disputes wherein they can choose the jurisdiction, arbitrators, law and venue of their choice. D. Pitfall #7: Maintaining your Intellectual Property Rights Intellectual property rights are of great concern to many U.S. companies that contract with foreign nationals. Most U.S. companies want to ensure that they will have full ownership of any intellectual property created by a contractor or their employees. In India, intellectual property rights are protected under the Copyright Act. Much like U.S. law, the “works made for hire” doctrine in India, which provides that an employer has ownership of any intellectual property made by an employee in the course of his employment, does not extend to intellectual property created by an independent contractor. An independent contractor should therefore execute a separate agreement assigning all intellectual property created in the course of his engagement to his client. There are a few differences in the intellectual property rights protection provided under Indian law. First, unless an intellectual property assignment agreement states otherwise, the term of a copyright assignment is five years and the assignment is confined to India. Assignment Agreements should therefore provide that the assignment is perpetual and worldwide. Second, if the assignee under an intellectual property assignment agreement does not use those intellectual property rights within the first year of an assignment, the assignment lapses. Assignment agreements should therefore provide that the rights shall not lapse if the company does not make use of them within a year. IV. Conclusion A U.S. company interested in working with Indian nationals should first consider whether it is more practical for them to employ an Indian national or to enter into an independent contractor relationship with the Indian national. If the U.S. company plans to employ Indian nationals, the company should consider the location of their business and the category of worker and then obtain specific legal advice regarding wages, benefits, and terminations. If the U.S. company enters into an agreement with an independent contractor, the company should be careful to treat the contractor as a contractor and not an employee and should avoid establishing a permanent establishment in India, if possible. 8 5356544v.3
NICOLE MARIE GEWINNER · Associate · Transactions, Corporate & Securities · B.A., Vassar College · J.D., Tulane University School of Law · ngewinner@jw.com Nicole M. Gewinner is a business transactions attorney. Her practice includes mergers and acquisitions, offerings of debt and equity securities, corporate governance matters and general corporate law. She has represented and advised clients in a number of diverse industries including energy, communications and technology. Her practice includes both domestic and international transactions and legal advice. Ms. Gewinner is admitted to practice in Texas. Memberships Ms. Gewinner is a member of the Austin Bar Association and the Austin Young Lawyers Association. She is also a member of the Planning Committee for the Austin Bar Association's Business, Corporate and Tax Section. Community Involvement Ms. Gewinner serves as a Committee Chair for the Austin Young Lawyers Association's Women's Resource Fair. Education Ms. Gewinner earned her B.A. degree from Vassar College in New York State. Ms. Gewinner also attended Reid Hall in Paris while earning her bachelor’s degree. She earned her J.D. degree from Tulane University School of Law in New Orleans. Languages Ms. Gewinner speaks French. 9 5356544v.3
SUE SNYDER · Partner · International, Transactions, Corporate & Securities, Technology, Environmental, Energy, Regulatory & Legislative · B.S., Cornell University · J.D., University of Texas · ssnyder@jw.com Sue Snyder represents companies with regard to transactions in the domestic and international arena. She specializes in companies involved in technology and energy with general corporate matters and also provides advice for companies sending people, products and monies in the international arena. Ms. Snyder's experience spans regulatory and permitting issues; international legislation; drafting multilateral country agreements; tariff and trade matters; establishing international public/private partnerships; and handling policy issues regarding business and environmental matters in various countries. Ms. Snyder has extensive experience in negotiating with governments around the world regarding incentives, legislation, joint endeavors, standards and trade matters. Her international work includes engaging in matters with the World Trade Organization (WTO), World Customs Organization (WCO), World Intellectual Property Office (WIPO), United Nations, World Economic Forum (WEF), and others. Ms. Snyder's work has encompassed the following countries and regions: Europe, China, Japan, Korea, Taiwan, Singapore, India, Russia, Brazil, Africa, Mexico and many others. Ms. Snyder also has worked extensively in international trade matters including expansion and construction of the Information Technology Agreement. She frequently assists on advisory committees regarding trade matters and guidance. Before joining the firm, Ms. Snyder served as Vice President of International Policy and Relations and Executive Legal Counsel for Advanced Micro Devices, Inc. While at Advanced Micro Devices, Ms. Snyder worked to create a new department for international policy and relations. The department conducted numerous engagements with governments and entities in over twenty countries. She also worked extensively on a wide variety of corporate matters including international transactions, environmental, legislative, policy and trade matters while there. Prior to Advanced Micro Devices, Ms. Snyder worked as a private practice attorney at Vinson & Elkins, where her practice concentrated on environmental, health, and safety matters, including complex administrative, enforcement, and permitting actions. Ms. Snyder also was involved in toxic tort litigation involving environmental matters. 10 5356544v.3
Ms. Snyder is admitted to practice in Texas. Representative Matters · Successfully assisted companies in selling and emerging in the Chinese Market. · Guided companies in India contractor matters. · Created international licensing agreements for technology company in the European Union. · Successfully concluded energy agreements for expansion and entry in the United States. · Assisted in Foreign Direct Investments and federal filings in the United States. · Assisted in the first WTO case the United States brought against China regarding semiconductor products, which concluded successfully. · Successfully negotiation multilateral trade and environmental agreements with the United States, Japan, European Union, Korea and Taiwan. · Successfully worked with others in concluding China’s entry into the World Semiconductor Council. · Successfully modified regulations in European Union and legislation in China. · Assisted in engaging technology in undeveloped countries. Memberships Ms. Snyder is a Texas Bar Foundation Fellows Member and a member of the American Bar Association, State Bar Association, Austin Bar Association and certain International sections within these memberships. Ms. Snyder is previously the chair of the Semiconductor Industry Association's international policy steering committee. She has previously served as a Board Member of the Information Technology Business Council, a Board Member of the Austin Chamber of Commerce and law chair of the Semiconductor Industry Association. Ms. Snyder also was one of the founders of the High Tech Committee of the Travis County Bar Association and coordinated the Austin In-House Counsel group for over five years. Ms. Snyder also has served as a Board Member of the Texas Business Education Coalition, on the Texas Higher Education TETC Committee, and as a member of the Industry Executive Subcommittee of the National Security Telecommunications Advisory Committee for the President of United States. Community Involvement Ms. Snyder is currently serving on the Board of Directors of the Capital Area Food Bank and on the Board of Governors of Lifeworks. She also is on the Leadership Council of Communities in Schools, a member of the Children's Medical Center Foundation, a member of Westlake Circle of Friends, and a member of the National Charities League Capital of Texas Chapter. Ms Snyder 11 5356544v.3
is a founder of Girl Scout Troop 1600 for Girl Scouts with "Mothers Behind Bars" and a past Board Member of the Lone Star Council Girl Scouts. She also is active in pro bono matters including a matter involving children abducted internationally and their return under the Hague Convention. Education Ms. Snyder earned her B.S. degree in Civil and Environmental Engineering, with distinction, from Cornell University, where she was a Cornell Ambassador and a member of Chi Epsilon, Tau Beta Pi, and Alpha Lambda Delta Honor Society. She received her J.D. degree, with honors, from the University of Texas School of Law, where she was Order of the Coif, Phi Delta Phi Honor Society, Teaching Quizmaster, and Associate Editor of the Texas Law Review. Publications & Speaking Engagements Ms. Snyder has been a speaker at numerous events regarding international matters. Ms. Snyder also was a speaker at the Governor's Texas Conference for Women for consecutive years. She has been an adjunct professor at the University of Texas School of Law and a host of the Austin show "Ask an Attorney." Recent publications/speaking engagements include: · “Free Trade is Crucial to Austin” · “Austin’s International Law Practice on the Rise” · “Coming and Going . . . Why Free Trade is Becoming Crucial to Austin Business” 12 5356544v.3
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