In India from employment laws perspective, employees are broadly categorized into two groups: 'workman' and 'non-workman'. This distinction is crucial, particularly regarding the process of termination. For 'workman' employees, termination is governed by various labour laws, including the Industrial Disputes Act, 1947, the Industrial Employment (Standing Orders) Act, 1946, and local shops and establishment legislation. These laws ensure that certain procedural safeguards are followed before terminating a workman's services.
On the other hand, non-workman employees, typically senior or managerial staff, are not covered under the workmen protective labour legislations. Their termination is largely governed by the terms of their employment contracts, alongside the relevant local shops and establishment legislations ("S&EA") in their respective jurisdictions. Further, in some states like Karnataka and Maharashtra, certain employees in managerial roles are excluded from the applicability of S&EA. This allows employers more flexibility to terminate the services of these employees with written notice (usually of one or two months as per the employment contract) or by paying salary in lieu of notice i.e., termination simpliciter.
Termination Simpliciter
Termination simpliciter refers to the act of ending the employment relationship without assigning any specific cause or fault to the employee. This is often done with notice or pay in lieu of notice as per the employment contract. Senior employees, especially in managerial roles are terminated through this route.
The Delhi High Court, in the case of Shriram Pistons & Rings Ltd. vs. Shri T.S. Mokha1, clarified that a company is entitled to terminate a senior employee without cause, based on the terms and conditions outlined in the appointment letter. The Court held that the termination did not carry any adverse findings against the employee, as it was a termination simpliciter in accordance with the appointment terms, which allowed for termination with notice or pay in lieu of notice. In this case, the Court emphasized that the employer is not obligated to continue the employee's services when there is a complete loss of faith between them. The Court further clarified that the employee, appointed in a managerial capacity, was governed by the terms of his appointment letter. Since the contract allowed for termination with three months' notice or pay in lieu, the employee was only entitled to notice pay and other legitimate dues. The relationship was one of 'Master and Servant', typical of private employment, and the claim for damages beyond notice pay was not upheld.
Termination for Misconduct
Termination for misconduct arises when the employee's behaviour violates company policies or disrupts the organization's functioning. Misconduct can include unethical behaviour, fraud, negligence, insubordination, or any act that adversely impacts the work environment or company's reputation.
While the termination of senior management employees does not require detailed investigations or inquires as required for workmen category employees but to minimise the risk of a legal claim for damages for loss of reputation owing to wrongful termination, it is advisable that termination of even a senior management employee for misconduct undergoes a more rigorous approach. Employers must maintain detailed records of the incidents that led to the termination. This includes documented warnings, performance reviews, and any internal investigations conducted. Courts have consistently held that when an employer seeks to terminate an employee for misconduct, they must provide a clear record of the incident and offer the employee an opportunity to respond to the allegations.
In the recent times there is an increase in claims for compensation by terminated senior employees alleging wrongful termination. In view thereof, when terminating even a senior management employee, it is advisable for employers to ensure the following steps:
1. In case the termination is due to unsatisfactory performance, clearly communicate the evaluation criteria, milestones to be achieved, and the results of the performance analysis to the employee.
2. Allow the employee a reasonable time to improve his/her performance, ideally through a formal performance improvement plan.
3. In case the termination is for grounds of misconduct, undertake an internal investigation into the complaints and allegations raised against the employee and maintain records of such investigation along with a report of the findings of such investigation.
4. While conducting such an internal investigation, principles of natural justice including giving the employee an opportunity of submitting his response to the issues should be followed.
5. Maintaining the records of such investigation along with action taken based on the findings of the investigation will be helpful in case the employee challenges the termination and initiates legal proceedings seeking monetary compensation against such termination.
6. For the purposes of ensuring impartiality and maintaining attorney client privilege, employers may consider engaging an external counsel for forensic assessment and data/evidence analysis and preparing and sharing the report on the findings of such investigation.
7. Post submission of the report and subject to the findings of the report, the employers can exercise the right of termination, for misconduct, in terms of the employer's policies.
8. Maintain detailed records of performance assessments, feedback, instances of misconduct, and the employee's response to the evaluation process and inquiry.
Proper documentation and preservation of these records are essential, as they serve as evidence in case the termination is challenged in the future.
Employment Contracts
As the relationship between the employer and non-workman employees is largely governed by the employment contract, it is imperative that contracts are well-drafted. A detailed contract not only specifies the terms of employment but also outlines the conditions under which an employee's services may be terminated. Without clear and specific clauses, employers may face difficulties in justifying a termination, especially if contested by the employee. Further, termination can be executed more smoothly if the contract includes provisions related to poor or unsatisfactory performance, notice periods, and any necessary compensation. These contracts should explicitly mention that failure to meet performance expectations could result in termination, to avoid ambiguity or disputes.
Further, employers must also ensure compliance with local labour laws and provide any benefits or entitlements stipulated by the contract, such as severance or gratuity, upon termination.
Conclusion
The termination of senior employees, particularly those not classified as workmen, provides employers with more flexibility but still requires careful handling including adherence to the terms of the employment contract and the applicable local labour laws such as payment of gratuity and S&EA wherever applicable. By ensuring that the employment contract is comprehensive and includes clear provisions regarding performance expectations and termination, employers can mitigate the risk of disputes and ensure a smoother exit process. Furthermore, maintaining adequate documentation of performance issues, unsatisfactory conduct etc., and providing fair warnings can assist the employer's position should the termination becomes necessary.
Footnotes
1 2016: DHC:6404
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
