Designing a Compliant Employee Compensation Plan for Indian Tech

The Indian IT sector is transforming fast. IT retrenchment is now common due to AI, skill shifts, and project changes. When jobs are cut, your company faces a crucial test: compliance with labour laws. A correct, fair severance plan protects your business from lawsuits and maintains trust.

Getting employee compensation right isn’t just about money. It’s a strategic act. For HR leaders and executives, a compliant severance plan turns a difficult decision into an ethical, legally sound exit strategy. We show you how to build a plan that works.

Why Employee Compensation Compliance is Your Best Defense

Sloppy severance records lead to litigation. When an employee feels unfairly treated, they can use India’s complex labour laws against your company.

A compliant severance plan delivers clear business advantages:

• Avoids Legal Risk: You meet all statutory mandates, sharply cutting the risk of costly disputes.
• Ensures Fairness: Consistent, documented plans treat all employees equally, preserving your employer brand.
• Boosts Reputation: A fair exit strategy, even during IT retrenchment, strengthens morale among remaining staff.
• Provides Clarity: It standardises the offboarding process, making transitions faster and smoother.

The Problem: Statutory vs. Contractual Dues

India’s labour laws distinguish between ‘workmen’ (mostly non-managerial staff) and ‘non-workmen’ (executives/managers).

• Statutory Dues: These are mandatory by law (e.g., Gratuity, Retrenchment Compensation). You must pay them regardless of the employee’s contract.
• Contractual Dues: These are based on the employee’s specific employment agreement (e.g., notice period defined as 90 days, or performance bonuses).

A compliant plan must meet the statutory minimum while honouring the contractual agreement.

The Four Essential Payouts for Compliant Employee Compensation

A legally sound severance plan in India consists of four mandatory components for eligible employees.

• Retrenchment Compensation (The IDA Minimum)

This is the non-negotiable floor for ‘workmen’ who have completed at least one year of continuous service.

1. The Rule: Pay 15 days’ average pay for every completed year of service.
2. Action: You must calculate this minimum first.

• Gratuity (The Long-Term Payout)

This benefit rewards long-term service and is mandatory for all employees (workmen and non-workmen).

The Rule: Pay 15 days’ wages for every completed year of service, but only if the employee has completed five years of continuous service. The maximum tax-exempt limit is currently ₹20 lakhs.

• Notice Period Pay

You must provide notice before termination.

The Rule: Give the required notice in writing (often 30–90 days, depending on the contract or state law) or pay the salary for the unserved period. This ensures compliance with state Shops and Establishments Acts.

• Accrued Leave Encashment

The company must clear all owed holidays.

The Rule: Compensate the employee for all unutilised earned leave (leave encashment) as per company policy and state labour laws.

IT Retrenchment Data and Expert Strategies

The sheer scale of change in the tech sector makes legal clarity essential.

• The Scale: Tata Consultancy Services cut about 12,200 jobs in 2025 as part of restructuring. Over 50,000 tech jobs faced potential cuts in 2025 amid silent layoffs.
• The Future: Experts predict AI could eliminate up to 500,000 jobs in the Indian IT sector by 2030. This accelerating trend demands a stable employee compensation framework.

Expert Insights: Going Above the Minimum

“Meeting the statutory minimum is necessary compliance, but it’s rarely sufficient to prevent lawsuits in the high-stakes IT world,” notes an HR Analyst. “Offering a generous Ex-Gratia amount a goodwill payment above the legal minimum is a standard strategy for securing a legal release.”

• PwC India confirms that structured severance plans reduce legal disputes in over 70% of IT retrenchment cases.
• Real-World Example: During their 2025 workforce cut, TCS offered a tiered package: six months’ pay minimum, rising to two years’ salary for long-tenured staff. This extra layer drastically reduced litigation risk.

Actionable Takeaways for Designing Your Compliant Severance Plan

Leaders should follow these steps to build a bulletproof plan that blends legal compliance with ethical practice.

• Define and Document Eligibility: Clearly set eligibility rules (e.g., tenure, redundancy of role). Maintain documentation for every decision.
• Calculate the Statutory Floor First: Always calculate the minimum Retrenchment Compensation and Gratuity. This is non-negotiable.
• Build the Ex-Gratia Top-Up: Determine a consistent, generous Ex-Gratia payment to act as a buffer. Tie this benefit to a signed Release and Waiver of Claims from the departing employee.
• Leverage Technology: Use HRMS and payroll systems to automate severance calculations and payment tracking. Deloitte highlights that integrating HR technology improves accuracy and ensures complete legal compliance.
• Provide Support: Offer outplacement services, career counselling, or re-skilling funds. This preserves the employer brand and supports staff during IT retrenchment.
• Ensure Timely Payment: Disburse the entire final settlement, including all employee compensation, on or before the last working day. This is a crucial rule under labour laws.

Future Trends: The Evolution of Employee Compensation

By 2030, India’s new Four Labour Codes will standardise benefits, changing the landscape of employee compensation.

• Digital Compliance: Predictive Compliance using AI systems will flag risk areas before managers even initiate a cut.
• Gig Worker Inclusion: New codes will recognise gig workers in the tech sector, potentially extending social security and benefits to this growing workforce.
• Re-skilling as Severance: As the World Economic Forum predicts a 39% skill shift, severance plans will increasingly include dedicated re-skilling funds alongside monetary payouts.

Leaders must adapt their plans now to meet these evolving standards of legal compliance and social responsibility.

FAQs

Q1. What is employee compensation in severance plans?

It includes all financial and non-financial benefits provided to employees upon termination.

Q2. How do Indian labour laws affect severance?

Laws such as the Industrial Disputes Act regulate notice periods, gratuity, and other termination benefits.

Q3. Can technology help manage severance?

Yes. HRMS and payroll systems automate calculations, track approvals, and maintain audit trails.

Q4. What is compliance risk in layoffs?

It is the risk of legal penalties or lawsuits due to improper termination or severance practices.

Q5. How can companies reduce litigation risk?

Maintain documented policies, standardised calculations, and signed acknowledgements for every employee.

Q6. Are outplacement services necessary?

They are optional but help maintain morale and improve employer brand post-retrenchment.

Q7. How long should severance records be kept?

Typically 3–7 years, in line with statutory limitations and internal compliance policies.

Conclusion

As India’s tech landscape continues to change, compliant employee compensation is the ultimate tool for sustainable growth. Envision severance not as a cost, but as a critical investment in your company’s integrity and future talent pool. Leaders who establish fair, documented plans

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