India Recruitment Compliance Guide 2026 (Complete Checklist)

The 5 Core Labour Laws Every Recruiter Must Know

Most hiring decisions in India touch these five laws at some point. Knowing them well is non-negotiable for HR leaders, recruiters, and founders hiring in India.

Contract Labour Act 1970

Contract workers, especially when deployed through staffing agencies. Client companies employing 50+ contract workers must register under the Act. Key risk: unregistered staffing agencies.

Employees' Provident Fund Act 1952

PF contributions for employees earning up to Rs 15,000 per month in basic wages. Employee + employer each contribute 12%. Missing deposits trigger interest, penalties, criminal liability.

ESIC Act 1948

Medical insurance contributions for employees earning up to Rs 21,000 per month. Employee 0.75%, employer 3.25%. Mandatory monthly deposits and annual returns.

Shops and Establishments Act (state-wise)

Each state has its own Act covering working hours, leave, termination, and overtime. Karnataka, Maharashtra, Tamil Nadu, Delhi, and Telangana all have meaningfully different rules.

Payment of Gratuity Act 1972

Gratuity payout (15 days salary per year of service) for employees completing 5+ years. Applies to establishments with 10+ employees. Often forgotten during contract-to-permanent transitions.

Industrial Disputes Act 1947 (legacy)

Protects workers against retrenchment, layoff, and unfair termination. Being replaced by the Industrial Relations Code but the 240-day rule and termination protections still apply.

The Four Labour Codes (2020 to 2026)

Between 2019 and 2020, Parliament consolidated 29 older central labour laws into four new Codes. Implementation has been slow and phased, with different states notifying rules at different times. Full central enforcement is expected through 2025-2026.

Code on Wages 2019

Covers: Minimum wages, payment of wages, bonus, equal remuneration. Consolidates Payment of Wages Act, Minimum Wages Act, Bonus Act, and Equal Remuneration Act.

Key impact: Universal minimum wage, standardized wage definition including basic pay, dearness allowance, and retaining allowance. Affects PF and gratuity calculations.

Industrial Relations Code 2020

Covers: Trade unions, standing orders, industrial disputes. Consolidates Industrial Disputes Act, Trade Unions Act, and Industrial Employment (Standing Orders) Act.

Key impact: Raises the threshold for retrenchment approval from 100 to 300 workers. Introduces fixed-term employment officially. Changes to dispute resolution and layoff procedures.

Social Security Code 2020

Covers: PF, ESIC, gratuity, maternity benefit, employee compensation. Consolidates 9 older social security laws.

Key impact: Extends social security to gig workers and platform workers for the first time. PF and ESIC frameworks largely retained but with updated wage ceilings and contribution rules.

Occupational Safety, Health & Working Conditions Code 2020

Covers: Factory safety, contract labour, migrant workers, safety standards.

Key impact: Replaces 13 older laws including Contract Labour Act. Updated compliance requirements for contract staffing, inter-state migrant workers, and safety audits.

Practical note on timing

Several states (Gujarat, Jharkhand, Madhya Pradesh, Bihar, Uttar Pradesh, Uttarakhand) have notified rules and begun partial enforcement. Others are slower. As of April 2026, the full central enforcement date has slipped multiple times. Until full rollout, companies should maintain compliance under both the old laws and the new Codes, and track state-specific notifications on the Ministry of Labour and Employment portal.

Background Checks & Candidate Verification

Background verification protects against fraud, misrepresentation, and liability. It is also one of the most common places Indian hiring runs afoul of the new DPDP Act 2023, which requires explicit consent for processing personal data.

Check	Typical scope	Legal note
Identity verification	Aadhaar, PAN card, passport	Standard. DPDP Act requires explicit consent.
Address verification	Current and permanent address	Physical verification often skipped; digital checks common.
Educational credentials	Direct confirmation with university	Always ask for written consent before contacting institutions.
Employment history	Past employer confirmation of role, dates, reason for leaving	Past employers cannot share defamatory information; stick to factual confirmations.
Criminal record	Police clearance certificate or court records	Required for regulated sectors (finance, pharma, public services).
Reference checks	2 to 3 professional references	Structured, role-specific questions only; avoid demographic queries.
Credit check	CIBIL score	Lawful only for financial roles with explicit consent. Not permitted as general screening.
Social media screening	Public profiles only	Disclose upfront. Accessing private accounts without consent is a DPDP Act violation.

Discriminatory screening based on religion, caste, gender, marital status, or pregnancy is prohibited by the Indian Constitution, state anti-discrimination laws, and the Maternity Benefit Act. This applies equally to AI-driven screening tools. Any platform you use must provide bias audit trails, skill-based scoring, and documentation of how decisions were made.

Offer Letters & Appointment Letters

No central law makes an offer letter mandatory, but in practice every legitimate Indian employer issues one. The offer letter is enforceable evidence of employment terms. A weak offer letter is one of the fastest ways to end up in a labour dispute.

Offer letter must cover:

• Job title, reporting manager, and functional area
• Fixed and variable compensation components (basic, HRA, special allowance, bonus, ESOPs if applicable)
• Probation period (typically 3 to 6 months) and confirmation criteria
• Notice period during probation and after confirmation (typically 30 to 90 days)
• Non-compete and non-solicit clauses (enforceable in India only for defined periods and reasonable scope)
• Intellectual property assignment clause (critical for product and tech roles)
• Working location, working hours, leave policy
• Benefits (PF, gratuity, insurance, meal cards, other perks)
• Conditions of offer (background verification, document submission, health check for some roles)
• Governing law and jurisdiction

Notice Periods, Gardening Leave & Full and Final Settlement

The end of employment in India is just as regulated as the start. Notice periods, gardening leave, and Full and Final (FnF) settlement are all legal instruments where companies commonly make small mistakes that add up to large liability.

Notice periods are governed by the offer letter terms (typically 30, 60, or 90 days). Employers cannot unilaterally extend notice, and employees cannot unilaterally shorten it, though both can mutually agree to modify. Notice-period shortfall is usually deducted from FnF.

Gardening leave is when an employee is asked to stay home during notice while still being paid. Valid under Indian law if written into the employment contract. Useful for roles where the employee would have sensitive information or customer relationships the company wants to protect during transition.

Full and Final Settlement should be completed within 30 to 45 days of the last working day. It covers: unpaid salary, encashment of unutilized earned leave, gratuity if applicable (5+ years of service), statutory bonuses, pending reimbursements, and deduction of any advances or notice-period shortfall. Delays invite interest under the Payment of Wages Act and labour commissioner complaints.

EU AI Act Reach into Indian Hiring

The EU AI Act classifies AI-assisted hiring decisions as high-risk. If your Indian company hires for positions in the EU, processes EU resident candidate data through AI tools, or operates through EU subsidiaries, you are within scope. The reach is broader than most Indian HR leaders expect.

4 ways the EU AI Act reaches Indian companies

1. Direct EU hiring. If you hire for roles based in the EU, you must comply with the Act regardless of where your company is headquartered.
2. Processing EU candidate data. If your AI screening tool processes applications from EU residents, GDPR and the AI Act both apply to that processing.
3. EU subsidiary or branch. An Indian parent company with an EU subsidiary must ensure its hiring tools meet EU AI Act requirements for EU-originated processing.
4. Vendor compliance flow-down. If you sell to EU companies, they will require your platforms (including hiring platforms) to be AI Act compliant as a vendor requirement.

Practical requirements: bias audits of AI screening, explainability on AI-driven candidate scoring, human-in-the-loop controls on automated decisions, documented decision logs, and a Data Processing Agreement aligned to EU GDPR. Any vendor you use for AI hiring should provide audit trail exports on demand. If they cannot, that is a material compliance risk.

10 Most Common Compliance Mistakes

From reviewing thousands of hiring workflows across mid-market Indian companies, these ten mistakes repeat most often. All are avoidable with basic process discipline.

Missing PF or ESIC deposits for contract workers (both agency and client can be held liable).

Breaching the 240-day rule and accidentally granting permanent-employee rights to long-term contractors.

Using outdated standard offer letters that do not reflect current labour code requirements or IP assignment language.

Skipping background verification to hire faster, then dealing with fraud or resume misrepresentation post-hire.

Processing candidate data through AI screening tools without explicit DPDP Act consent capture.

Running discriminatory screening filters (age, marital status, pregnancy, caste) that violate constitutional equality provisions.

Delaying Full and Final settlement beyond 45 days, triggering Payment of Wages Act interest and labour commissioner complaints.

Over-broad non-compete clauses in offer letters that Indian courts have consistently refused to enforce.

Using AI hiring platforms without bias audit documentation, which becomes a liability if challenged.

Ignoring state-specific Shops and Establishments variations when hiring remotely across Karnataka, Maharashtra, Tamil Nadu, Delhi, and Telangana.

The 2026 India Hiring Compliance Checklist

For every hire, work through this 15-point checklist. It maps to the five core laws above and the new Labour Codes, and works for permanent, contract, and contract-to-hire roles.

Written offer letter covering all 10 required elements (see section 4).
Explicit DPDP Act consent for background verification and AI screening.
Role-appropriate background checks, documented and signed.
PF registration set up within 7 days of joining if wages are below Rs 15,000 basic.
ESIC registration set up within 10 days of joining if wages are below Rs 21,000.
Appointment letter issued on day 1, repeating and expanding offer letter terms.
Employee exit clauses reviewed: notice period, gardening leave, IP assignment.
For contract staffing: agency is registered under Contract Labour Act.
240-day tenure tracking enabled for contract workers.
State-specific Shops and Establishments compliance verified for employee\'s work location.
AI screening tool provides bias audit trails and explainability.
If hiring for EU or processing EU candidate data, EU AI Act compliance verified with vendor.
No discriminatory screening on protected attributes (religion, caste, gender, marital status).
FnF settlement process documented for eventual exit.
All HR documentation retained for the statutory retention period (typically 3 to 7 years).

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Frequently Asked Questions

What are the main labour laws governing hiring in India?

Five laws shape most recruitment decisions in India. The Contract Labour (Regulation and Abolition) Act 1970 covers contract workers. The Employees' Provident Fund and Miscellaneous Provisions Act 1952 governs PF contributions. The Employees' State Insurance Act 1948 covers ESIC contributions. Each state's Shops and Establishments Act regulates working hours, leave, and termination. The Payment of Gratuity Act 1972 sets gratuity rules after 5 years of service. Starting 2025-2026, these are being consolidated and updated under four new Labour Codes (Wages, Industrial Relations, Social Security, Occupational Safety) with phased enforcement.

What is the 240-day rule in Indian hiring?

Under several state Shops and Establishments Acts and the older Industrial Disputes Act, a worker engaged continuously for more than 240 days in a calendar year may gain permanent-employee rights (notice periods, retrenchment compensation, and protection against casual termination). This mainly applies to contract staffing. Companies running long contract engagements must track tenure carefully and either convert workers to permanent status before day 240 or terminate the contract cleanly. Getting this wrong is the single most common compliance mistake in Indian contract staffing.

Do I need to provide an offer letter under Indian law?

There is no central law that makes an offer letter mandatory, but in practice every legitimate Indian employer issues one. The offer letter becomes enforceable evidence of the employment terms (salary, role, start date, notice period, benefits). It should cover: job title and reporting manager, fixed and variable compensation, probation period (usually 3 to 6 months), notice period (typically 30 to 90 days), non-compete and non-solicit terms, intellectual property assignment, location and working hours, and conditions for termination. Appointment letters (issued on joining) carry similar legal weight.

What background checks are legal in India?

Standard checks that are legal and common: identity verification (Aadhaar, PAN), address verification, educational credential verification (via direct university confirmation), employment history verification (via past employer confirmation), criminal record checks (police clearance certificate or court records search), and reference checks. Special checks for regulated industries: credit checks for finance roles, database checks for healthcare, CIBIL checks for banking. What you must NOT do: access a candidate's social media without disclosure, check medical records without consent, or conduct discriminatory screening based on religion, caste, or marital status. The DPDP Act 2023 requires explicit consent for processing personal data during background checks.

When do the new Labour Codes actually take effect?

The four Labour Codes (Code on Wages 2019, Industrial Relations Code 2020, Social Security Code 2020, Occupational Safety and Health Code 2020) received Parliament approval in 2019-2020 but implementation has been phased. Several states have notified rules and begun partial enforcement from 2022 onward. Full central enforcement is expected to roll out through 2025-2026, but timelines have slipped multiple times. Practical advice: update your employment contracts and HR policies to be compliant with both the old and new regimes, and track your state's specific notifications on the Ministry of Labour and Employment portal.

Does the EU AI Act apply to Indian companies?

If your Indian company hires for positions in the EU or processes EU resident candidate data through AI-based screening tools, yes. The EU AI Act (phased enforcement 2025-2026) classifies AI-assisted hiring decisions as high-risk, requiring bias audits, explainability on AI scoring, human-in-the-loop controls, and documented decision logs. Even Indian companies serving EU candidates indirectly (through global hiring workflows or EU-based subsidiaries) are being pulled into compliance. Indian domestic hiring is not directly covered, but the trajectory of Indian regulation is moving toward similar requirements, so building for EU AI Act compliance now tends to future-proof your Indian hiring stack too.

What are the PF and ESIC thresholds for 2026?

EPF contributions are mandatory for any employee earning up to Rs 15,000 per month in basic wages (higher-paid employees can also join voluntarily). The contribution is 12% of basic wages from the employee and a matching 12% from the employer. ESIC applies to employees earning up to Rs 21,000 per month (wage ceiling reviewed periodically) with employee contributions at 0.75% and employer contributions at 3.25% of wages. Both must be deposited monthly with the respective authorities, and annual returns filed. Missing PF or ESIC deposits triggers interest, penalties, and in serious cases criminal liability for the designated officer.

Can I use AI to screen candidates in India legally?

Yes, AI-assisted candidate screening is legal in India as of 2026. There is no central law restricting AI hiring decisions yet. However, four considerations apply: (1) The Digital Personal Data Protection Act 2023 requires explicit consent for processing personal data, including AI analysis. (2) Anti-discrimination provisions in the Constitution and state laws prohibit screening based on protected attributes (religion, caste, gender). (3) Platforms operating in regulated sectors (finance, public services) face additional scrutiny. (4) If you hire for EU positions, the EU AI Act applies. Best practice: use AI platforms that provide bias audit trails, skill-based (not demographic) scoring, and explainability on ranking decisions. TheHireHub.AI includes all three as built-in features.

What is a Full and Final (FnF) settlement in India?

Full and Final Settlement (FnF) is the final payment and paperwork a company issues when an employee leaves. It typically includes: unpaid salary up to the last working day, encashment of unutilized earned leave, gratuity (if applicable), statutory bonuses, pending reimbursements, and deduction of any advances or notice period shortfall. Legally, FnF should be settled within 30 to 45 days of the last working day in most states. Delays trigger interest under the Payment of Wages Act and can lead to labour commissioner complaints. Companies running contract staffing should ensure the agency settles FnF for contract workers; the client can be held jointly liable in some cases.

What are the biggest hiring compliance mistakes Indian companies make?

Five recurring mistakes: (1) Missing PF/ESIC deposits for contract workers (agency blames client, client blames agency, both are liable). (2) Breaching the 240-day rule and accidentally granting permanent-employee rights to long-term contractors. (3) Using outdated standard offer letters that do not reflect current labour code requirements. (4) Skipping background verification to hire faster, then facing fraud or resume misrepresentation post-hire. (5) Processing candidate data through AI screening tools without explicit DPDP Act consent. All five are avoidable with basic process discipline and the right platform.