Employee termination is one of the highest-risk HR actions an organisation can take in India. Done correctly, it protects the organisation legally and treats the departing employee with dignity. Done incorrectly, it results in reinstatement orders, back wages, reputational damage, and prolonged litigation before labour tribunals.
This guide covers the types of termination in India, the legal framework under the new Labour Codes, the process HR must follow, and the common mistakes that create liability.
Types of Employee Termination in India
1. Termination for Cause (Misconduct)
Termination for proven misconduct — theft, fraud, insubordination, sexual harassment, wilful damage to company property, or any other act defined as misconduct in the Standing Orders or company policy. Requires a formal domestic enquiry before action is taken.
2. Termination for Poor Performance
Termination based on documented, consistent underperformance after a formal Performance Improvement Plan (PIP) has been issued and adequate opportunity has been given. Requires strong documentation throughout.
3. Retrenchment
Termination due to business reasons — redundancy, restructuring, downsizing, or closure of a department. Governed by specific statutory provisions including notice, compensation, and government approval requirements.
4. Termination During Probation
The most straightforward termination — during the probation period, either party can typically terminate with shorter notice. However, even during probation, the termination must not be arbitrary, discriminatory, or in violation of applicable law.
5. Constructive Dismissal
Not a formal category but a legal concept — where the employer makes working conditions so unbearable that the employee is effectively forced to resign. Indian courts treat this as termination by the employer, with all associated liabilities.
The Legal Framework — Industrial Relations Code 2020
The Industrial Relations Code 2020, being implemented in 2026, consolidates the Industrial Disputes Act, Trade Unions Act, and Industrial Employment (Standing Orders) Act. Key provisions HR must know:
Who is a "Workman"?
The Code defines workmen as employees engaged in manual, unskilled, skilled, technical, operational, clerical, or supervisory work — earning up to a threshold notified by the government. Workmen have significantly stronger termination protections than non-workmen (managers and executives).
Notice requirement for workmen:
— Establishments with fewer than 300 workers: one month's notice or pay in lieu
— Establishments with 300 or more workers: government approval required before retrenchment (this threshold was raised from 100 under the old law)
Retrenchment compensation:
15 days' average pay for every completed year of continuous service, payable at the time of retrenchment.
Domestic Enquiry for misconduct:
Before terminating a workman for misconduct, a formal domestic enquiry must be conducted. The enquiry must follow the principles of natural justice — the employee must be informed of the charges, given an opportunity to present their case, and the enquiry must be conducted by an impartial officer.
The Termination Process — Step by Step
For misconduct termination:
Step 1 — Charge Sheet: Issue a written charge sheet to the employee clearly stating the specific allegations of misconduct. Give the employee a minimum of 48-72 hours to respond.
Step 2 — Suspension (if necessary): If the employee's presence during the enquiry would prejudice the process or endanger other employees or company property, suspend them pending enquiry. Suspension must be with pay unless the Standing Orders specifically allow suspension without pay pending enquiry.
Step 3 — Domestic Enquiry: Appoint an Enquiry Officer — ideally someone senior who was not involved in the incident. Conduct the enquiry with both parties present, record proceedings in writing, and allow the employee to present their defence and cross-examine witnesses.
Step 4 — Enquiry Report: The Enquiry Officer submits a written report with findings — whether the charges are proved or not proved — and recommendations.
Step 5 — Show Cause Notice: Even after the enquiry finds the charges proved, issue a show cause notice to the employee asking why the proposed punishment (termination) should not be imposed. Give adequate time to respond.
Step 6 — Termination Order: After considering the show cause response, issue the termination order in writing. State the charges, the enquiry findings, and the decision. Serve it on the employee personally or by registered post.
Step 7 — Full and Final Settlement: Process F&F within two working days of the last working day as per the Code on Wages — including all dues, leave encashment, and gratuity if applicable.
For performance-based termination:
Step 1 — PIP: Issue and complete a formal Performance Improvement Plan with documented reviews.
Step 2 — Final Warning: Issue a formal final warning letter after PIP failure.
Step 3 — Termination Letter: Issue the termination letter citing the documented performance history, PIP, and failure to meet targets.
Step 4 — F&F: Process within two working days.
What Every Termination Letter Must Include
— Date and reference number
— Employee name, designation, and employee ID
— The specific reason for termination — factual and precise
— Reference to prior warnings, PIP, or domestic enquiry findings
— Last working day
— F&F settlement timeline
— Instructions for return of company assets
— Whether a relieving letter and experience letter will be issued
Termination and the POSH Act
If the termination follows a POSH Act complaint where the Internal Committee has found the charges proved and recommended termination — the employer must implement the IC's recommendation within 60 days. Failure to act on the IC's recommendation is itself a compliance violation.
Common Termination Mistakes HR Must Avoid
Terminating without a domestic enquiry: For workmen, this is the single most common and costly mistake. Labour courts routinely order reinstatement with full back wages when termination is found to be without a proper enquiry.
Vague or emotional termination letters: "We are terminating your services as your attitude has been poor and you are not a team player" is not a valid termination reason. Termination letters must cite specific, documented, factual grounds.
Not processing F&F on time: Under the Code on Wages, F&F must be settled within two working days. Withholding F&F as leverage is a compliance violation.
Terminating without prior warnings: Even for non-workmen, a termination without any prior documented warnings or PIP is difficult to defend legally and creates reputational risk.
Discriminatory termination: Terminating an employee because of pregnancy, POSH complaint, whistleblowing, union activity, or any protected characteristic is illegal and exposes the organisation to significant liability.
Frequently Asked Questions
Q: Can we terminate an employee during maternity leave?
A: No. Terminating a woman during maternity leave is illegal under the Maternity Benefit Act. She is entitled to her full maternity benefit regardless of termination, and the termination itself can be challenged.
Q: What is the notice period for termination?
A: For workmen, one month's notice or pay in lieu is the statutory minimum. For non-workmen, the notice period in the appointment letter governs. Many organisations provide one to three months depending on the seniority of the role.
Q: Can an employee be terminated by email?
A: A termination letter via email can be legally valid if it is sent to the employee's official email and there is a record of delivery. However, best practice is to serve it in writing personally, with a copy sent by registered post to the employee's last known address.
Q: Is gratuity payable on termination for misconduct?
A: Gratuity can be forfeited wholly or partially if the employee is terminated for misconduct involving wilful omission or negligence causing damage or loss, or for an act of moral turpitude — but this must be backed by a proper domestic enquiry finding.
Q: Can we ask an employee to resign instead of terminating them?
A: Asking an employee to resign under pressure can be treated as constructive dismissal. If the employee later claims coercion, the "voluntary" resignation may be treated as termination by the employer. Proceed with a proper termination process instead.
For ready-to-use termination letter formats, domestic enquiry templates, and complete HR documentation, visit our Stores and Services page.
Related reading: How to Write a Warning Letter to an Employee — Format, Sample and Legal Guidelines India 2026
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