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My Artifact, Episode 351
Understanding Employee Contracts in India
Hello, hello. This is episode number 351 of My Artifact.
Today’s date is July 24, 2025, and it’s almost 10:07 p.m. Alright, let’s jump straight into the question.
The question is: What legal rules apply to employee contracts in India?
This question is strongly connected to business, especially startups. I want to establish a business or startup, but I don’t have much knowledge about these things. I haven’t completed graduation, MBA, or anything like that. But if I want to start a business, I need to know everything. So, this question is tied to business, startups, and more specifically, to mistakes that can ruin a business.
You see, about 90% of startups or businesses fail within five years. The reasons are often simple—bad management, lack of proper systems, or poor decisions by the founder. So, if I want to start a business or build a startup, I don’t want to make those mistakes. At the very least, I need to know what can go wrong and how to prevent it.
When you’re running a business, you’re not doing it alone; you need a lot of people. And once a lot of people are involved, things can get complicated. You don’t want the business to shut down, but sometimes situations get out of hand. I don’t want that to happen to me, so I want to be prepared.

Why Contracts Matter
This question is specifically about employee contracts. From an Indian perspective, hiring someone isn’t just about paying their salary and moving on. It’s much deeper.
If I want to hire someone as a chairman or CEO, I need to make sure they’re right for the job. It sounds simple, but it involves a lot of paperwork—and the most important part is the employment contract.
A contract is a legal document that defines the relationship between a company and an employee. It spells out everything:
Who the person is


What job they’ll do


Their designation


Salary and benefits


Casual leaves, sick leaves, maternity leaves, and more


These contracts legally bind both sides, protecting the company and the employee.
Now, in day-to-day life, nobody carries their contract around. It comes into play when hiring or when an employee resigns. But here’s my question: How exactly do you make this legal document? What clauses should it include?

Legal Rules in India
In India, if you want to hire someone, you need to follow proper rules. Let’s go step by step.
Who can you hire?


You can’t just hire anyone. For example, if I run a tea stall and I hire a kid to serve tea, do I need a contract? Probably not. But here’s the catch—child labor is banned in India. Anyone working for you must be 18 or older. If it’s your own son or family member helping, that’s different. But hiring underage workers is prohibited because kids should be in school, not working.


Working hours


As an employer, can I make employees work 24 hours if I give them food and shelter? No, absolutely not.


By law, working hours are fixed—8 hours a day, sometimes 9. Anything beyond that must be occasional and mutually agreed upon. You can’t force people to work 12–15 hours every day.


Leaves and holidays


Employees are entitled to leaves:


Casual leave (around 10–20 days per year)


Sick leave (around 15 days)


Maternity leave (2–3 months for women, and 15–20 days paternity leave for men)


Sundays are usually off.


Companies cannot cut salaries when employees take these approved leaves.


Job security


You can’t just hire people for 6 months and throw them out unless it’s a project-based role.


In India, contracts are usually long-term, ensuring stability for employees and their families.


Salary increments


Companies must give at least a 5% annual increment to keep up with inflation. For example, if someone earns ₹30,000 in 2025, that same ₹30,000 won’t be enough in 2045.


Provident Fund (PF)


A part of the salary goes into the provident fund, like a savings account. After years of service, the employee gets the money with interest.


Taxes


If an employee earns a high salary, say ₹2 lakhs per month, the company deducts taxes before paying. The employee receives the rest.


Insurance


Companies must cover basic medical expenses if an employee gets injured on the job. For risky jobs like mining, companies often add life insurance.



Employer of Record (EOR)
In India, an Employer of Record (EOR) can handle all these things for you—contracts, salaries, PF, taxes, insurance, and compliance. As a company, you provide the funds, and the EOR manages everything.

Resignation and Firing
Resignation


Employees must serve a notice period of 15–30 days.


During this time, the EOR finalizes paperwork, PF settlement, and contract termination.


Firing


You can’t fire someone instantly.


The HR team first reviews performance, provides training, and gives 1 month to improve.


If nothing changes, the company gives 10–15 days’ notice.


The entire process takes 1–2 months to ensure fairness.