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02 March 2005
Under the Industrial Disputes Act 1947 workers are protected against the wrongful or "at will" termination of their employment. The employer is obliged to give a worker:
Workers of an industrial establishment employing more than 100 workers enjoy greater protection compared to other workers, in that the employer is obliged to (i) give at least three months written notice or wages in lieu thereof, and (ii) obtain prior permission (not intimation) of the appropriate state government. Further, such an industrial establishment is deemed to be a factory as defined under the Factories Act 1948. Under the act a 'factory' is any premises where more than 10 workers are working or were working on any day of the preceding 12 months and in any part of which a manufacturing process is being carried on with the aid of power. A 'manufacturing process' is defined as "any process for making, altering, repairing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal".
Whether large software companies employing over 100 workers fall under this protection depends on whether they can be classed as factories carrying out manufacturing processes. The Supreme Court has currently considered this question, along with a related question in another case - whether software is a 'good' and therefore is liable for sales tax under the Sales Tax Act.
Both issues were referred separately to larger benches of the Supreme Court for final determination. While the former question is still under consideration by the larger bench, on the latter question the Supreme Court held recently that:
"In India the test to determine whether a property is a 'good' is not whether it is tangible or intangible, but whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. In the case of software, both canned and uncanned, all of these are possible."
It also held that the contention that the intellectual input is the subject of the taxation is a misconception.
In view of the inclusion of software in the definition of "goods" under the Sales Tax Act, it is likely that software development will be considered a manufacturing process - the essential characteristics of both being similar (eg, use, transfer/sale, disposal). Accordingly large software companies will, in all likelihood, fall under the applicability of the termination, closure and lay-off protection provisions of the Industrial Disputes Act.
For further information on this topic please contact Anand Prasad or Biraj Tiwari at Trilegal by telephone (+91 11 5163 9393) or by fax (+91 11 5163 9292) or by email (firstname.lastname@example.org or email@example.com).
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