What Severance Pay Rules Must Employers Follow in India?

Which Employees Qualify for Severance Pay?

• Employees classified as “workmen” under the Industrial Disputes Act, 1947 who are retrenched for reasons other than misconduct.
• Employees in shops and commercial establishments covered by state Shops and Establishments Acts where local law mandates notice and severance on termination.
• Full-time employees with at least one year of continuous service when their role is made redundant, the business is closed, or there is a layoff or retrenchment.
• Employees terminated due to closure or transfer of undertaking, where continuity of service is not preserved with the new employer.
• Employees dismissed without proven misconduct or without following due domestic enquiry procedures, where termination is effectively treated as retrenchment.
• In practice, senior managers and executives who are not “workmen” but receive contractual or negotiated severance as part of their employment or separation terms.

What Are the Legal Timelines for Paying Severance?

In India, you should aim to pay statutory retrenchment compensation, notice pay, and all final dues on or before the employee’s last working day. The Industrial Disputes Act expects retrenchment compensation to be paid at the time of retrenchment, along with notice or wages in lieu of notice. Many state Shops and Establishments Acts also require wages and earned leave encashment to be settled within a few working days of termination. To stay safe, your company should target full and final settlement within 2 to 7 days from the termination date, unless a stricter state rule applies. Always document the payment breakdown and obtain written acknowledgment from the employee.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in India, you risk legal disputes, government inspections, and financial exposure. Non-compliance can trigger claims before labour courts or industrial tribunals, orders to reinstate employees with back wages, and statutory fines. You may also face interest on delayed payments and reputational damage that complicates future workforce changes.

• Labour courts can order reinstatement with continuity of service and back wages.
• Authorities may impose fines and, in serious or repeated breaches, criminal penalties on responsible managers.
• Courts can direct payment of unpaid severance, notice pay, and other dues with interest.
• Non-compliance can delay business closures, restructurings, or transfers of undertaking.
• Disputes can lead to union action, employee unrest, and negative scrutiny from regulators.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record does not remove the need to follow Indian severance rules, but it can shift day-to-day compliance work. In a typical EOR model, the EOR is the legal employer on paper and is responsible for calculating and paying statutory retrenchment compensation and final dues. However, your company, as the client, usually bears the commercial and contractual cost of severance under the service agreement. If you direct an unlawful or unfair termination, you can still be drawn into disputes or reputational risk even though the EOR is the formal employer. A well-structured EOR relationship should clearly allocate severance cost, decision-making authority, and risk management responsibilities.

Be 100 Percent Compliant in Offering Severance with Playroll

Managing severance in India means juggling central laws like the Industrial Disputes Act, state-specific Shops and Establishments rules, and individual contracts. Playroll helps your team translate these rules into clear, repeatable processes so you know exactly when severance is due, how to calculate it, and what documentation to keep. You get structured workflows for notice, consultation, and payment approvals, reducing the chance of last-minute mistakes.

With Playroll, you can also centralize severance practices across multiple Indian states while still respecting local variations. Our platform and experts help you benchmark market-standard severance for non-statutory roles, align it with your global policies, and coordinate timing with payroll cutoffs. That way, your company can handle restructures, role eliminations, and business closures with confidence that severance is accurate, timely, and fully compliant.