Legal and compliance checklist for Employer of Record (EOR) services in India
- Natia Gabarashvili
- Sep 16
- 14 min read
Updated: Sep 26
Table of contents:
Introduction
It only takes one missed PF filing or a wrongly classified “contractor” to turn your India hiring strategy into a liability.
The country’s talent pool is unmatched, but the compliance landscape is unforgiving. Payroll, benefits, contracts, and exits are all governed by state and central laws that don’t leave much room for improvisation.
Plenty of companies still gamble with shortcuts, wire salaries informally, copy-paste contracts from another market, or skip Shops and Establishments registration because “no one will notice.”
They usually don’t get caught right away. But when they do, the bill is brutal: backdated PF and ESI contributions, interest penalties, IP ownership disputes, and, in some cases, losing the right to hire locally again.
An Employer of Record (EOR) is supposed to shield you from all of that. Done right, it ensures every employee in India is hired legally, paid compliantly, and covered under statutory benefits. Done wrong, you’re just outsourcing the risk to someone who isn’t prepared to carry it.
This checklist is about drawing a clear line. If your EOR can’t handle every compliance requirement on this list, you’re exposed.
If they can, you get what you came to India for: world-class talent, without the legal hangover.
What is the entity registration & Shops and Establishments Act in India?
Every Employer of Record in India that claims to be “fully compliant” needs one thing before anything else: registration under the state-specific Shops and Establishments Act. Without it, they can’t legally employ staff, open business bank accounts, or issue valid employment contracts.
This certificate, often called the Shop and Establishment License, isn’t a formality. It’s the legal recognition that allows a business to operate in India.
Banks won’t open current accounts without it. Other registrations (like GST or professional tax) require it. And for your employees, it’s the first proof that their employment is legitimate.
The Act itself covers the essentials of day-to-day employment:
Working hours: Maximum daily and weekly limits, plus mandatory rest intervals.
Leave and holidays: Annual leave, weekly offs, and national/state holiday entitlements.
Wages: Rules for timely salary payments, recordkeeping, and deductions.
Termination: Minimum notice, severance, and dismissal procedures.
Here’s the catch: India doesn’t have one single law here each state has its own Shops and Establishments Act. That means what’s required in Karnataka won’t look identical to Maharashtra or Delhi.
A serious EOR provider in India doesn’t just “say compliant”, they’ve got valid registrations in every state where your employees sit.
If your provider isn’t registered, you’re not just bending the rules; you’re effectively running shadow employment. And in India, that risk lands on you, not the vendor.
Employee classification: Contractor vs full-time in India
In India, the line between a contractor and a full-time employee isn’t blurry; it’s written into law. And if your Employer of Record (EOR) can’t navigate that line, you’re the one left exposed.
The legal framework you can’t ignore
Two laws form the backbone of worker classification in India:
Contract Labour (Regulation and Abolition) Act (CLRA): Governs how businesses can legally engage contract workers, and when a principal employer license is required. In some sectors, hiring contract labour is outright prohibited.
Industrial Disputes Act, 1947: Classifies workers as workmen (skilled/unskilled operational staff) or employees (supervisors/managers). This distinction dictates rights to benefits, termination rules, and dispute resolution.
The government assumes every worker is an employee unless proven otherwise. Which means you can’t just slap the “independent contractor” label on someone and expect it to hold.
Risks of misclassifying employees as contractors
Plenty of global companies make this mistake, hiring engineers or designers as “contractors” to skip payroll and benefits obligations. In India, that shortcut is a compliance nightmare.
Here’s what happens if you get it wrong:
Backdated statutory contributions: You’ll owe years of Provident Fund (PF), Employee State Insurance (ESI), and gratuity payments, plus penalties.
Tax exposure: Contractors pay their own taxes, but employees don’t. If you misclassify, you’re liable for failing to deduct Tax Deducted at Source (TDS) on salaries.
Benefit claims: Misclassified workers can sue for unpaid leave entitlements, maternity/paternity leave, and severance.
IP risk: If your contract isn’t a valid Indian employment contract, intellectual property transfer clauses may not hold up in court.
Reputation damage: Nothing tanks hiring momentum faster than word spreading that your company isn’t compliant with Indian labour law.
This isn’t theoretical. Indian courts rely on two hard tests:
Control Test: Does the employer dictate how, when, and what work is done?
Integration Test: Is the worker integrated into the company’s core business?
If yes, they’re legally an employee, even if your contract calls them a freelancer.
How a strong EOR in India ensures correct classification
A legitimate Employer of Record in India removes misclassification risk entirely by:
Issuing compliant contracts in line with state Shops and Establishments Acts.
Registering employees for PF, ESI, and gratuity from day one.
Managing payroll compliance: calculating gross-to-net, deducting TDS, and filing returns monthly.
Handling CLRA obligations where contract labour is allowed, including principal employer licensing.
Protecting your IP with contracts enforceable under Indian law.
Instead of playing semantics with “contractor” labels, an EOR ensures every worker is classified correctly, employed legally, and protected under Indian law.
Payroll for international employees in India
Hiring international employees in India comes with more moving parts than most companies expect.
You’re not just dealing with salary in INR, you’re navigating tax residency, social security agreements, and dual reporting obligations.
If your Employer of Record (EOR) doesn’t get this right, you’re exposed to back taxes, fines, and angry employees stuck in bureaucratic limbo.
Tax residency and withholding
Expat employees working in India are taxed based on the residency rules under the Income Tax Act. If they spend more than 182 days in India in a financial year, they’re considered tax residents.
Even if they’re not tax residents, Indian-sourced income (salary for work performed in India) is still taxable.
That means your payroll must deduct Tax Deducted at Source (TDS) monthly and file it with the Indian tax authorities. No shortcuts.
Social security and international agreements
India requires contributions to the Employees’ Provident Fund (EPF) for most employees, including expatriates, unless a bilateral Social Security Agreement (SSA) is in place with their home country.
Currently, India has SSAs with countries like Germany, France, and the Netherlands. If the employee is covered in their home system under an SSA, they may be exempt from PF contributions in India.
Without an SSA? Expatriates must contribute to EPF, even if they don’t plan to retire in India.
Salary structuring for expat employees
A compliant payroll structure often includes:
Basic pay (forms the base for PF calculation)
HRA (House Rent Allowance) – tax-efficient if they rent housing in India
Special allowances (fully taxable, but common)
Perks and benefits in kind – car, housing, utilities, which must be valued and taxed as per Indian rules
This isn’t optional accounting. Every component has compliance implications.
How an EOR simplifies global payroll compliance
A strong Employer of Record in India handles all of this complexity so you don’t have to:
Ensures valid employment contracts under Indian law for foreign nationals
Registers expats with the tax authorities and deducts TDS correctly
Manages PF compliance (including SSA exemptions where applicable)
Structures salary packages that are compliant but also tax-efficient
Handles FX conversions, paying in INR while invoicing you in USD/EUR
Instead of setting up an entity, registering with multiple government departments, and risking mistakes, you get one monthly invoice and employees who are legally on payroll in India.
Statutory benefits & gratuity in India
In India, statutory benefits aren’t perks; they’re the law. Every employer, including an Employer of Record (EOR), must provide these benefits to full-time employees from day one. If your provider skips even one, you’re non-compliant, and your employees know it.
Key statutory benefits every employer must provide
Provident fund (PF)
A retirement savings scheme managed by the Employees’ Provident Fund Organisation (EPFO).
Both employer and employee contribute 12% of basic wages each month.
Applies to most establishments with 20+ employees, but many EORs apply it across the board to stay compliant.
Employee state insurance (ESI)
Social security scheme for workers earning below ₹21,000/month.
Provides medical care, sickness benefits, maternity cover, and disability benefits.
Employers contribute 3.25% of wages, employees 0.75%.
Maternity benefit
Female employees are entitled to 26 weeks of paid maternity leave, extendable in certain cases.
Employers cannot dismiss a woman on maternity leave.
Payment of bonus
Employees earning less than ₹21,000/month are entitled to a statutory bonus (8.33% to 20% of wages).
Payable annually, usually within 8 months of the end of the financial year.
Leave and Holidays
Annual leave, casual leave, and sick leave as mandated under the Shops and Establishments Act of each state.
Paid national holidays (e.g., Republic Day, Independence Day, Gandhi Jayanti).
Gratuity in India: Long-term benefit you can’t skip
The Payment of Gratuity Act, 1972 requires employers to pay gratuity when an employee completes five years of continuous service (exceptions apply in case of death or disability).
Formula for gratuity: Gratuity = (15 × last drawn salary × years of service) ÷ 26
Eligibility: Any employee with 5+ years of service in an establishment with 10+ employees.
Tax treatment: Exempt up to ₹20 lakhs for private sector employees.
This isn’t discretionary; it’s a statutory payout. An EOR must track gratuity liabilities from day one to ensure proper settlement at exit.
Why this matters for EOR clients
If your EOR provider doesn’t handle statutory benefits and gratuity correctly, you’re facing:
Backdated liabilities (PF, ESI, gratuity payouts)
Regulatory penalties from EPFO, ESIC, or labour inspectors
Attrition from employees who know they’re being shortchanged
A strong EOR in India builds these obligations into payroll, ensuring employees receive everything they’re legally entitled to, on time, every time.
Leave & holidays in India
In India, leave and holiday entitlements aren’t just company policy, they’re written into state-specific Shops and Establishments Acts and central labor laws. If your Employer of Record (EOR) isn’t tracking these rules, you risk non-compliance, payroll disputes, and employees who feel shortchanged.
Types of leave entitlements
Earned/Privilege Leave (EL/PL)
Typically, 15–20 days per year, depending on the state.
Accumulates with service and can often be carried forward or encashed when employment ends.
Casual Leave (CL)
Around 7–12 days annually.
Intended for short absences like personal matters or emergencies.
Sick Leave (SL)
Usually 12 days per year, though some states mandate more.
May require medical certificates for extended absence.
Maternity Leave
26 weeks of paid leave for female employees under the Maternity Benefit Act.
Additional unpaid leave can be requested in special cases.
Other Special Leaves
Some states include paternity leave, adoption leave, or festival-related leave depending on local regulations.
Public holidays in India
India observes a mix of national holidays and state-specific public holidays:
Compulsory national holidays (3 per year):
Republic Day (January 26)
Independence Day (August 15)
Gandhi Jayanti (October 2)
State and festival holidays:
Vary widely, Diwali in Maharashtra, Pongal in Tamil Nadu, Durga Puja in West Bengal, and Onam in Kerala.
Employers must recognize these based on the state in which the employee works.
Most employees are entitled to 10–15 paid holidays per year in addition to their leave entitlements.
How an EOR helps manage leave and holidays
A strong Employer of Record in India ensures that:
Employment contracts reflect the correct leave quotas by state law.
Leave accruals, carry-forwards, and encashments are tracked and paid correctly.
Employees receive paid time off on national and state holidays.
Payroll filings include correct leave records (a legal requirement during inspections).
Without this structure, it’s easy to under-deliver on entitlements or miscalculate balances, both of which can lead to fines and employee disputes.
Contracts & IP protection in India
In India, contracts aren’t a formality; they’re the foundation of compliance. If your Employer of Record (EOR) is issuing generic, English-only templates, you’re already at risk. Indian courts expect contracts to meet local legal standards, and anything less can leave you exposed on payroll, benefits, or ownership of your own product.
Bilingual contracts are mandatory
Every employment agreement in India must be drafted in English and the local language of the state where the employee works. Why? Because in a dispute, Indian courts prioritize whether the employee fully understood the terms of their contract. If the contract is only in English and the employee argues they didn’t understand it, the clauses can be challenged.
A strong EOR ensures bilingual, state-compliant contracts that actually hold up under inspection or in court.
IP transfer clauses that work in India
One of the biggest risks foreign companies face is intellectual property ownership. If contracts don’t explicitly transfer IP rights under Indian law, your employees could legally retain ownership of code, designs, or data they produce. Investors and acquirers notice this fast during due diligence, and it can tank valuations.
An EOR in India makes sure every contract includes:
Explicit IP assignment to your company.
Recognition of Indian copyright and patent law.
Jurisdiction clauses that stand up under the Indian civil code.
NDAs and confidentiality agreements that stick
Indian law enforces Non-Disclosure Agreements (NDAs) and confidentiality clauses, but only if they’re properly structured. Generic U.S. or EU templates often fail here because they:
Don’t reference Indian statutes.
They are written only in English.
Miss enforcesable remedies under Indian contract law.
A compliant NDA drafted by an EOR protects your roadmap, customer data, and product IP in India without loopholes.
Work permits & immigration (foreign hires in India)
Hiring foreign nationals in India is about making sure their immigration status matches their employment. Without the right permits, both the employee and the company risk fines, denied renewals, or even deportation.
This is where an Employer of Record (EOR) takes on the heavy lifting.
The EOR’s role in immigration compliance
A strong EOR in India doesn’t just handle payroll; it acts as the local sponsor for your foreign hires. That includes:
Drafting compliant employment contracts that serve as the legal basis for visa or residence permit applications.
Registering employees with the Foreigners Regional Registration Office (FRRO) when their stay exceeds 180 days.
Managing renewals and ensuring no gaps in legal status.
Coordinating with government authorities so you don’t have to navigate the bureaucracy yourself.
Residency permits for long-term employees
For foreign staff staying beyond a short-term visa, India requires a residency permit tied to employment. The process involves:
Employment contract issued under Indian law.
Application with the Ministry of Home Affairs, supported by employer sponsorship.
Local registration with FRRO within 14 days of arrival.
Without this permit, employees can’t:
Open local bank accounts.
Register for tax purposes.
Access many essential services.
An EOR ensures that long-term foreign hires transition smoothly from visa-free entry or short-term business visas into fully compliant residency status.
Why it matters
Skipping these steps isn’t a harmless shortcut. Hiring foreigners on the wrong visa category (like a tourist or business visa) can expose you to:
Immigration fines
Denial of future sponsorship rights
Legal claims if contracts are deemed invalid
With an EOR, you avoid the guesswork. Your employees are hired legally, registered correctly, and protected under Indian employment law.
Termination & exit compliance in India
In India, saying goodbye to an employee isn’t as simple as cutting off access to Slack and shutting down their email. Termination is tightly regulated under the Industrial Disputes Act and state-level Shops and Establishments Acts, and every step has to be handled by the book. Get it wrong, and you risk labor disputes, penalties, or even lawsuits.
Notice period requirements
Most contracts in India specify a 30–90 day notice period, depending on seniority and role.
Termination without notice requires pay in lieu of notice, unless it’s for proven misconduct.
The law gives employees significant protection—unjustified “immediate exits” rarely hold up if challenged.
Full & Final Settlement
Every exit must include a clean full and final (FnF) settlement, covering:
Unpaid wages up to the last working day
Encashment of unused leave balances (as mandated by state law)
Statutory benefits such as gratuity (if eligible after 5+ years)
Provident Fund (PF) and Employee State Insurance (ESI) closure or transfer
Bonus payments, if due under the Payment of Bonus Act
The FnF is typically expected within 30–45 days of exit, and delays can trigger legal claims.
Exit documentation
Employees expect, and are legally entitled to, formal exit paperwork, including:
Relieving letter confirming end of service
Experience certificate detailing tenure and role
Clear records of PF/ESI transfers or settlements
Without these, employees can file disputes with labor authorities, slowing down your operations and damaging your reputation.
How an EOR keeps exits compliant
A strong Employer of Record in India ensures:
Notice periods are respected or buyouts are processed legally.
Full & final settlements are calculated accurately and paid on time.
Exit documents are issued promptly and in compliance with state law.
All actions align with the Industrial Disputes Act and Shops and Establishments rules, shielding you from wrongful termination claims.
Recordkeeping & inspections in India
In India, compliance isn’t just about paying people on time; it’s about proving you did. Labor authorities expect meticulous records, and if your Employer of Record (EOR) can’t produce them during an inspection, it’s your business that takes the hit.
What must be recorded?
Every compliant EOR in India maintains:
Attendance registers – daily working hours, overtime, and leave records, often required under state Shops and Establishments Acts.
Wage registers – details of gross pay, deductions, net salary, and mode of payment, updated monthly.
PF and ESI filings – proof of contributions to the Employees’ Provident Fund (EPF) and Employee State Insurance (ESI), along with challans and returns.
Tax records – TDS deductions and filings submitted to the Income Tax Department.
Leave records – mandatory under most state laws for annual, sick, and casual leave entitlements.
Without these, you’re non-compliant, even if employees were technically paid correctly.
How inspections are triggered
Inspections in India aren’t rare; they can be triggered by:
Random audits under the Shops and Establishments Acts.
Employee complaints about unpaid wages, PF/ESI delays, or denied leave.
Data mismatches in PF/ESI filings or tax records.
When inspectors arrive, they don’t ask for spreadsheets; they want official registers, filings, and government challans.
The EOR’s role during inspections
A reliable EOR in India:
Maintains all statutory registers in the format required by state authorities.
Keeps PF/ESI payment challans and tax filings ready for inspection.
Ensures bilingual employment contracts and leave records are available on request.
Provides clear documentation for terminations and full & final settlements.
That preparation is what keeps your company out of disputes and penalties. If your provider can’t show records during an audit, regulators don’t fine them—they fine you.
Red flags: what happens if your provider gets compliance wrong
Hiring in India without airtight compliance is like playing cricket without pads; you might last a few overs, but the hit will come. When an Employer of Record (EOR) cuts corners, the damage doesn’t stop at fines. It hits your finances, your people, and your intellectual property.
Penalties from Indian Tax Authorities
Miss a PF or ESI filing, delay TDS deductions, or underreport payroll, and the Income Tax Department, EPFO, and ESIC will come knocking. Penalties stack up fast: interest, back payments, and fines. Worse, repeat violations can land you on watchlists that complicate future hiring.
Misclassified Employees Filing Disputes
Call a full-time engineer a “contractor” and sooner or later, they’ll test that in court. Under the Contract Labour (Regulation and Abolition) Act and Industrial Disputes Act, misclassification equals liability. Employees can claim back pay, statutory benefits, and even reinstatement. You don’t win these disputes; you settle.
Delayed Payroll = Attrition
In India, employees expect their salary on time, every month, with a proper payslip. When payroll is delayed or benefits don’t appear in their PF account, trust evaporates. And when trust goes, so do your hires. Attrition in India’s competitive market isn’t just a nuisance—it’s a brand killer.
Weak Contracts = Lost IP
If your provider hands out generic, English-only contracts without enforceable IP transfer clauses, your product IP may not even belong to you under Indian law. During due diligence, investors and acquirers flag this as a red alert. Weak contracts can tank valuation faster than bad revenue numbers.
The Real Risk
Compliance mistakes don’t just cost money—they stall growth. Instead of scaling a team in India, you’ll spend months untangling disputes, renegotiating contracts, and rebuilding trust with talent.
Conclusion
India is one of the best places in the world to build a team, but only if you stay on the right side of the law. Every payslip, every PF contribution, every notice period is tracked and regulated. That’s why a strong Employer of Record isn’t just an admin partner. It’s your compliance shield, keeping your business protected while giving your employees the security they expect.
With the right EOR, you don’t worry about Shops and Establishments registration, PF/ESI filings, gratuity settlements, or termination disputes. You get compliant payroll, enforceable contracts, and employees who feel confident working for you.
With the wrong one, you get penalties, disputes, and lost IP.
At TeamUp, we do it the right way. For a flat €199 per employee/month, you get full legal coverage in India, no hidden fees, no percentage-based markups, no compliance shortcuts. Just clean, compliant hiring from day one.
Ready to hire in India without the legal risk? Talk to TeamUp today and start building your team in weeks, not months.
