There is no general definition of the term "outsourcing" although it has been defined contextually under various sectorial regulations. An outsourcing is generally understood to mean the engagement by one party (the customer) of a third party (the service provider) to provide services previously performed within the customer's establishment. Companies are free to outsource their requirements either within the same territory or even outside India. However, certain sectoral regulations may apply (see Questions 1 to 4 of Country Q&A: Outsourcing: India Overview) alongside requirements to provide statutory notice periods in certain scenarios (see Question 14).

Indian law does not provide for the automatic transfer of employees. Section 25FF of the Industrial Disputes Act, 1947 (IDA) refers to the transfer of employment. Under the IDA, the term "workmen" is defined to mean any person employed in any industry for manual, unskilled, skilled, technical, operational, clerical or supervisory work. As this provides a broad definition, a large majority of the workforce employed in individual contributor roles (typically, junior and mid-level employees) would fall within the definition of "workmen". However, the term excludes employees who predominantly work as supervisors (earning INR10,000 per month or more) and/or managers.

Section 25FF applies only if three conditions are met:

If these conditions are met, it could be argued that a workman's consent is not required to transfer employment.

It should be noted, however, that section 25-FF serves only as an enabling provision: there is no obligation or automatic right to transfer. There are also conflicting judicial precedents on whether employee consent is required in a section 25-FF transfer. Therefore, even if all three conditions are met, a transfer that is effected (without obtaining consent) could still be challenged. Given the conflicting judicial position under section 25-FF, it is common practice for the parties to effect an employee transfer by commercial agreement (see Question 4).

The IDA will soon be subsumed by the Industrial Relations Code, 2020 (IR Code) (one of the four new labour codes which been proposed for implementation in India). The IR Code applies to "workers" (a term similar to a workman under the IDA). A worker would also include all employees in junior and mid-level individual contributor roles and would exclude supervisors (earning INR18,000 per month or more) and/or managers. The IR Code also contains corresponding provisions on a transfer of "undertakings", which would apply if the three conditions set out above are met. The existing judicial principles would also be applicable under the IR Code, and therefore transfers made under the IR Code without worker consent could also be questioned.

Persons excluded from the purview of workmen or workers under the IDA or IR Code can only be transferred by obtaining their consent.

Statutory notice requirements may also be triggered in an outsourcing (see Question 14).

Outsourcing transactions can also come under the purview of the Contract Labour (Regulation & Abolition) Act, 1970 (CLRA) if the service provider deploys contract labour/workers at the customer's establishment or any other premises (over which the customer has supervision and control).

While outsourcing, both the outsourcing customer and the service provider will both have registration/licensing obligations if the work is carried out at the customer's premises. Furthermore, if the service provider deploys the transferred employees to the outsourcing customer employer, the employees could raise misclassification claims against the customer. This risk could be intensified by factors such as:

To mitigate such risks, it is advisable that outsourcing or services contracts are carefully structured to impose obligations on service provider to comply with all applicable employment laws and to indemnify the customer where claims are raised against it.

A change of service provider or supplier does not automatically result in a transfer of employees. Only if the conditions of section 25FF of the IDA are met could it be argued that employees have automatically transferred (see above, Initial Outsourcing of Service Provision). This position is not affected by whether the outsourcing is an initial/first generation outsourcing or a second generation/subsequent change of service provider.

Termination of an outsourcing contract will not result in employments being transferred back to a customer unless this is specifically agreed. Employees would remain employed by the service provider (even after the outsourcing contract expires or is terminated) and the service provider would continue to have all obligations as "employer". The customer and the service provider could, however, agree to transfer the employees back to the customer by commercial agreement. If the service provider (to whom the employment was initially transferred) intends to terminate employment, compliance with the retrenchment (that is, redundancy) provisions under the IDA, including those on notice and severance payments should be ensured.

There is no provision for the automatic transfer of employees in India. Section 25-FF of the IDA provides an enabling provision under which consent may not be required if the three necessary conditions are met (see Question 2, Initial Outsourcing of Service Provision). Even when the required conditions are met, there is conflicting judicial precedent in India in relation to whether employee consent is required. Therefore, even if all three conditions are met, a transfer that is effected without obtaining consent could still be challenged (see, for example, Sunil Kr Ghosh v K Ram Chandran 14 SCC 320 (2011)). In the case of a non-workman (that is, a person not falling within the definition under section 25-FF of the IDA), transfers can be effected only by obtaining the consent of the individual employees.

If past length of service with the transferor is to be recognised upon transfer, then the transferee would also assume these liabilities (such as the employee's accrued gratuity, bonus, annual leave and so on). This will also be the case when the transfer is structured under section 25-FF of the IDA, as one of the conditions for section 25-FF to apply is the recognition of past length of service.

Where the transaction is structured as a section 25-FF transfer under the IDA, the transferee will need to offer employment terms that are no less favourable than those provided by the transferor. If the employment terms and benefits are not mirrored, then the transferor would need to provide statutory severance and notice to the impacted workmen.

To incentivise employees to either consent to the transfer or accept employment (on fresh terms), transferees typically guarantee similar employment benefits under the transfer letters or employment contracts.

Depending on what the transferee wants from the transaction, the transferee could also be made responsible for any historical statutory bonuses, unpaid salary and so on. The typical approach in is to apportion liabilities, by making the transferor responsible for any liabilities arising up until the transfer date.

Social security contributions, including provident fund payments (PFs) and pensions, are generally made into to a government fund. The PF and pension accumulations of employees are mapped to the transferor's code. As with any change of job, in the case of an employment transfer, contributions mapped under the transferor's code must be mapped to the transferee's code. Employees would need to apply to the PF authorities to facilitate the transfer of accumulations from the transferor's code to the transferee's code.

If the transferor maintains a private PF trust, any PF accumulations accrued in the trust will need to be transferred to either the transferee's code (maintained with the government) or to the transferee's private trust (if any). This procedure would be slightly more elaborate and would require the PF authorities' approval.

Furthermore, Indian law also holds the transferor and transferee jointly and severally liable to pay contributions and other amounts due from an employer under the PF law for the period up to the date of transfer. However, the liability of the transferee would be limited to the value of the assets obtained by such transfer.

The terms of any collective bargaining agreements (CBAs) with trade union(s) should be assessed to identify any impact or impediment on the proposed transfer. However, in practice, it uncommon for companies in the fields of IT, IT enabled services (ITeS) and financial services to have CBAs with trade unions (although CBAs are relatively more common in the manufacturing sector).

If employment is transferred by way of a commercial agreement, no statutory regulations apply and the parties are free to decide the terms of the transfer. If the transferee does not intend to recognise past service, the transferor could terminate employment (or the employees resign) and a fresh employment agreement could be signed with the transferee.

However, if the transferee intends to recognise past service, a more common approach is to enter into a tripartite agreement (among the transferor, transferee and employee), where the employees' consent and the terms of the transfer are documented. Other accumulated benefits (such as accrued gratuity, bonus, annual leave and so on) would also be transferred.

Even when transferring employees under a commercial agreement, it is common for the transferee to offer the same or substantially similar employment terms (to those currently enjoyed by the employees with the transferor) to incentivise the employees to consent to the transfer (see Question 5).

If past length of service with the transferor is to be recognised upon transfer, then the transferee would also assume these liabilities (such as the employee's accrued gratuity, bonus, annual leave and so on).

Although there is no obligation to match the employees' existing benefits, it is common for transferees to offer comparable benefits (if not provide better benefits) to incentivise the transferor's employees to accept the new employment offer. The typical approach for the parties is to apportion liabilities, by making the transferor responsible for any liabilities arising up until the transfer date.

As with transfers conducted under section 25-FF of the IDA, the obligation to make social security contributions (including PF and pension contributions) are transferred to the transferee entity. Certain procedural requirements must be completed when transferring the employer name in the employees' social security accounts (see Question 3, Pensions).

The transferee is under no obligation to harmonise the transferring employees' terms and conditions with those of its existing workforce. However, if the terms and conditions of employment enjoyed at the transferor were more beneficial and the transferee has guaranteed as favourable terms to the transferring employees, then such beneficial terms should be provided. Some companies opt to harmonise (or at least closely align) the employment terms of the two groups with a view to avoid any discrimination claims and to achieve their integration. Such harmonisation is done either at the time of the transfer or soon after the transfer date.

Employers are prohibited from discriminating against genders when employees carry out the same or similar work. Therefore, transferees must be wary of any discrimination claims being raised if differential employment terms/benefits are provided to similarly placed transferring and existing employees. If the intent is to redefine the existing workforce's service conditions, the transferee will also need to consider whether a statutory notice requirement has been triggered.

See Question 5.

Employment cannot be terminated freely and at-will in India and any termination must be substantiated with reasonable cause. In the context of an outsourcing, employment can be terminated prior to the transfer date for reasons of redundancy, if the employee's role (which is proposed to be outsourced) will no longer be available at the transferor entity after the outsourcing. In such case, the transfer must comply with both:

After the transfer date, the employment of the transferred employees can be terminated (for a reasonable cause) by the transferee in the same manner as any other employee in the existing workforce. However, employment cannot be pre-emptively terminated by the transferor (that is, the customer) based on a future redundancy expected at the transferee's establishment. The cause of the termination with the transferor can only be legally made in relation to current employment.

If the transferor intends to make dismissals prior to the transfer date, it will need to demonstrate that:

These processes would not be required in the case of an amicable exit (voluntary resignation) prior to the transfer date, although the transferor would still have an obligation to provide redundancy payments (see Question 10) and other applicable statutory payments (such as compensation for any unpaid salary, unused annual leave, due bonus and so on)

Failure to follow applicable processes or make the relevant payments could result in employees raising claims against the transferor for wrongful dismissal and/or for any shortfalls in due payment. Liability for such matters cannot be contractually imposed or transferred to the transferee. Even if the parties agree to transfer these as part of a commercial agreement, the risk of employees raising a claim against the transferor cannot be subverted.

If the transferee intends to make dismissals after the transfer date, it will need to:

If the transferee had agreed to recognise the employees' continuity of service, the tenure based statutory payments (in relation to compensation, accrued gratuity, leave encashment, redundancy pay and any due bonus) should be calculated according to the date the employee began working for the transferor. The parties typically agree to apportion liability in the outsourcing or transfer agreement such that:

In cases where the transferee intends to dismiss employees following transfer and has communicated its intention to do to the transferor, the parties can agree for the liability in relation to these payments to be borne by the transferor, or can be adjusted against the overall transaction price.

However, if the transferee fails to follow the proper procedure or fails to provide the relevant payments to the employees upon termination, the employees may bring claims against the transferee for wrongful dismissal and/or for any shortfalls in due payment. Such liability cannot be contractually imposed upon or transferred to the transferor by the transferee.

If any payments made by the transferee to the employees on dismissal do not adhere to what was due to them based on their tenure with the transferor, there may be a risk of the employees bringing claims against both the transferee and the transferor to recover any sums due to them.

Redundancy pay (known under the IDA as "retrenchment compensation") is payable at the time of retrenchment (only) to workmen/worker level employees who have completed one year of continuous service (interpreted as 240 days of service). This is calculated as 15 days of average pay for every completed year of continuous service or any part of a year in excess of six months.

Under the IDA, "average pay" means the average amount of wages drawn in the previous three complete calendar months (for employees paid on a monthly basis). "Wages" would generally include all guaranteed salary components.

Retrenchment compensation must be paid on or before the date of termination. Non-compliance with this requirement could result in the termination being invalidated.

If the service provider recognises past service with the customer in the transfer arrangement, then the customer would not have an obligation to pay retrenchment compensation.

There are no restrictions in relation to secondments and the parties can structure employee arrangements in an outsourcing as a secondment. For this purpose, a specific secondment agreement should be issued, and the provisions under it must be carefully designed to avoid any risks of the secondment being perceived as a permanent transfer to the customer and the employee(s) raising claims to continue their employment with the outsourcing customer. The parties should also agree on the entity responsible for paying salary, making social security contributions and providing general employment benefits (such as, annual leave) during the secondment.

Specifically, in case of international secondments, social security coverage would be a key consideration (specifically, PF), and both entities' obligations to make PF contributions would depend on factors such as (among other things):

If the employment relationship with the seconding entity in India continues during the secondment (and is not suspended), the seconding entity could continue to have obligations to make other statutory payments and contributions.

Furthermore, if a foreign entity's employee is seconded to India, it would also be relevant to assess (from a tax law perspective) whether a permanent establishment has been or could be created in India.

There is no legal obligation on a transferor to provide any specific information to a transferee in relation to any employees.

In the case of a section 25-FF transfer, to avoid triggering payment of retrenchment compensation and notice, the workmen should be provided with no less favourable employment terms by the transferee and their past service will need to be recognised (among other things) (see Question 2).

In the case of a general (non-section 25-FF) employee transfer, the parties typically agree that the transferee would provide as favourable or similar/substantially similar employment terms (as provided by the transferor).

Therefore, the parties generally exchange:

If the employees' personal data (including sensitive personal information) is being shared, it is important to assess whether the employees' consent has been obtained for the transfer and if the transferee has fully complied with all requirements under data protection laws (see Question 10 of Country Q&A: Outsourcing: India Overview).

See Question 12, Question 7 and Question 10 of Country Q&A: Outsourcing: India Overview.

If the outsourcing activity is likely to lead to redundancies, then a section 9-A notice should be provided to the impacted workmen-level employees (for the definition of a workman, see Question 2, Initial Outsourcing of Service Provision). This is because the potential workforce reduction would constitute a "change" to the prevalent "conditions of service" under section 9-A of the IDA).

In such a scenario, the transferor must provide the section 9-A notice 21 calendar days (in some locations, 42 days) prior to implementing the proposed outsourcing activity. A copy of the notice should also be forwarded to the applicable jurisdictional labour authorities.

Whether the obligation to provide the notice has been triggered before the outsourcing agreement has been executed will need to be analysed on a case-by-case basis. In some cases, the outsourcing is contemplated across jurisdictions and outsourcing agreements are executed at a global level. It may therefore not be feasible to issue a section 9-A notice and wait for the completion of the notice period before the execution. In such cases, if the intent is to issue the notice in India after the execution of the agreement, it is advisable for the outsourcing agreements to have robust clauses to make the transaction conditional on compliance with all local laws in all relevant jurisdictions.

The proposed change can be implemented if no objections are received from the workmen during the 21-day (or 42-day) notice period. However, if formal dispute(s)/objection(s) are brought before the labour authorities, implementation must be deferred until the dispute(s) are resolved.

Under the IDA, failure to issue the section 9-A notice may be punishable with a nominal fine (less than USD5). However, there is a greater risk that the workmen will challenge the ability for the proposal to be carried forward and the authorities will set aside the change (essentially cancelling the outsourcing activity).

The transferor will need to obtain employee consent for effecting the employment transfer.

Failure to obtain consent could be challenged before the labour authorities or could lead to a civil suit and the transferor could be directed to pay damages (along with other statutory severance payments).

If the transferor establishment has any employee unions, it is advisable to assess whether any consultation requirements would be triggered in relation to any settlements or awards and follow the applicable process. Breach of a settlement/award can be punished with monetary fine and/or imprisonment. Failure to consult may also constitute an unfair trade practice (also punishable with fine and/or imprisonment).

If workmen-level employees raise formal objections before the labour authorities against the proposed outsourcing when a section 9-A notice is issued, the customer would not be able to outsource the activities until the formal dispute(s) has been resolved (see Question 14, Notice).

If any objections are raised after the expiry of the section 9-A notice, employment cannot be transferred without the employees' consent, unless it can be classified as a section 25-FF transfer. Even in the case of a section 25-FF transfer, the transfer could be challenged if employee consent has been obtained (see Question 3). If employees refuse to the transfer, they will continue to be employed by the transferor.

If a transfer is effectuated without employee consent, or despite their refusal to provide consent, the employees could raise a constructive dismissal claim against the transferor and there would be a risk of the transfer being deemed as void. In this scenario (or litigation), the claim may be brought against both the transferor and the transferee.

Where a claim of constructive dismissal is successful, the courts can order for the reinstatement of the workmen back being employed by the transferor (with or without payment of back-wages or may order compensation in the case of non-workmen).

However, in the event that an employee refuses to transfer, they can agree to an amicable exit from the transferor (by way of a voluntary resignation). In this case, the likelihood of claims being raised (against both the transferor and transferee) is low. However, the exit discussion with the employee should be carefully structured so as to not allow for any arguments or claims for coerced resignation.