How to Terminate an Employment Contract?

Last revision: Last revision:November 16, 2021
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Terminating an employee from the organization is not easy as you may think. Indian laws are very stringent about employee welfare and rights. Wrongful or unreasonable termination may end up in endless legal disputes and you may have to pay a huge amount as compensation to the employee. If you are a big organization like a company with hundreds of employees or a small establishment with few employees, you may be under the hood of the employment laws. Thus, in this guide, we will discuss the termination or resignation of the employees without facing any legal consequences or penalties.

The employment matters in India are governed under various central and state laws. To avoid entanglement with legal disputes, it is pertinent to follow due legal process and have properly drafted agreements with each employee of the organization at the time of joining itself.

The termination of employment ends all the employee-employer relations. The termination may be either voluntary (employee resigning from the organization at her/his will) or involuntary (termination of employment by the organization due to various reasons).

There is no laid out rules with regard to the termination of employment. The contracts entered into between you and the employee plays a vital part in deciding whether the termination is in accordance with the agreed terms or not. The above-mentioned laws including the Shops and Establishment Acts of the concerned state where your organization is registered or having a presence play a more crucial role in deciding the legality of the termination of employment. If there is a conflict between the rules mentioned under the employment agreements and the applicable laws, the rules specified under the applicable laws will supersede the agreements.

Termination of an employment contract by an employee

Voluntary Resignation

This is when the employee wishes to resign from the current position by sending a resignation letter to the organization. The resignation by the employee may be due to various personal issues including changing the job, moving out of the city, etc. Even in this case, the employee may have to give a notice period to the employer as mentioned under the applicable state or central laws or as mentioned under the employment agreement (whichever is higher) or payment in lieu of such notice period. The employer may waive such notice period and release the employee before the notice period is over at their sole discretion. Once the resignation letter is received, the employer may object to such resignation by sending a reply notice or accept the resignation of the employee by sending a reliving letter.

Resignation due to other reasons

The employee may resign due to some adverse situation persisting at the employment location including delay in payment of salary, harassment, insecure or substandard working conditions, and so on. In this situation, the resigning employee may not require to serve the notice period and may also be eligible to get compensation for such faults on the parts of the employer.

Termination of an employment contract by an employer

Employee not keeping the employment standards

This is a typical issue faced by many organizations. Due to various reasons, the employee may not be keeping up to the standards of work required for his/her position at the organization. Instead of terminating the employee directly, as a first step you can send an employee warning letter to the employee and seek a response from the employee regarding the performance. Having all these documented will help you to submit this as proof in case if the terminated employee files a complaint with the labour department. Even after giving the warning, if the performance level is not up to the standards, you can send a termination letter by citing the reasons for such termination in detail.

Gross misconduct on the part of the employee

Often the employees are terminated for gross misconduct on their part. When an employee commits gross misconduct you have two options either to send a warning letter to such employee to correct his actions and not repeat it in the future or directly terminate the employment by sending a termination letter. It is always better to get this documented on your part for future reference and record. If the employee goes and files a complaint against you, you will be able to submit the proof of misconduct and warning letter given to the employee.

Termination without notice

There are multiple factors on the happening of which you can terminate the employee without giving any notice period or following other formalities including the following:

  • misconduct from the part of the employee
  • theft
  • fraud
  • dishonesty
  • loss of goods from the employee
  • habitual late attendance
  • habitual negligence at the workplace
  • giving bribes or influencing any authorities with illegal methods

Applicable laws when it comes to termination of employment

If you do not have a valid employment contract in hand, the termination procedures will be as per the applicable laws. For example under the Delhi Shops and Establishment Act, 1949, if you have appointed an employee for more than three months, either party may have to give 30 days of notice to the other party. Thus, if you are terminating the employee who has worked for more than three months at your organization, you may have to give a minimum of 30 days notice (or payment of salary for 30 days). In case if the termination is due to gross misconduct on the part of the employee, the employee can be terminated without giving any notice period. The notice period of 30 days is also applicable for the employee who is resigning from the organization.

The above-mentioned notice period of 30 days is the minimum requirement. If the notice period mentioned under the employment agreement is more than that of 30 days, then such a higher notice period will be applicable to the respective employees.

Under the Karnataka Shops and Establishment Act, 1961 and the Tamilnadu Shops and Establishment Act, 1947, the minimum notice period for the employee who has completed 6 months of service is either 30 days of notice or payment of salary for 30 days. On other hand, under the Industrial Disputes Act, 1947, the notice period may vary from 30 to 90 days. Thus, it is always better to refer to the applicable state and central laws before taking any such decisions.

If the employee is terminated during the maternity period, the rules under the Maternity Benefits Act, 1961 have to be followed or else you may face legal actions taken against you by the concerned authorities, including labour courts. Generally, an employee under maternity leave cannot be terminated unless there is gross misconduct on the part of the employee.

Termination of an employment contract by virtue of other reasons

Project completion

The employment may get terminated due to the completion of the project as mentioned under the employment agreement entered into between the employee and the organization. Thus, it is important to include the period of project and termination clause under the employment agreement. Thus not having a properly drafted employment agreement including these clauses will end up in legal disputes with the employees and may consume a major portion of your time and resources on such unwarranted legal battles.

Discontinuation of the position

Discontinuation of the position for various reasons like closing down of such unit of business is a valid reason to terminate the employment. Even in this case, you may have to give a notice period as mentioned under various laws or payments instead of such a notice period.

Closing down of the business

Closing down or winding up of the business due to various reasons including business running at a loss, regulatory changes, reasons beyond the control of the employers and so on is a valid reason for termination of employment.

Other reasons

The employee may also get terminated by virtue of inability on the part of an employee due to illness, disability or even death of the employee.


Thus, it is always better to include a suitable period of employment and termination clause in the employment agreement itself to avoid any disputes in the future.

Thus whenever you appoint or terminate an employee, make sure that you have a proper employment agreement in place and in case if you are planning to terminate an employee, try to send a warning notice before sending a termination letter unless it is unavoidable. Always make sure that the termination of employment is in compliance with the employment agreement and applicable state and central laws.

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