Hiring in India: PF, ESI, and the four new labour codes.
The world's largest offshore engineering market, a regulatory landscape mid-overhaul, and a payroll stack with more acronyms than most founders can spell. Here's the working operator's view of hiring in India in 2026.
India is the default offshore market for a reason — depth of talent, a mature services ecosystem, English fluency, and time-zone overlap with both Europe and the US west coast. It is also the most acronym-heavy payroll environment most founders will ever touch: PF, ESI, PT, LWF, TDS, gratuity, bonus, leave encashment. None of it is hard once you know what each one is. All of it is unforgiving if you skip a filing.
The four labour codes — what's changing, what's still old
Between 2019 and 2020, India consolidated ~29 central labour laws into four codes: the Code on Wages, the Industrial Relations Code, the Social Security Code, and the OSH Code. They have been passed by Parliament but their full implementation has been rolling and state-by-state. In practice, for most founders in 2026, the legacy regime still applies day-to-day — Payment of Wages Act, Industrial Disputes Act, EPF & MP Act, ESI Act, Shops & Establishments Acts of each state. Build to the legacy stack, watch the codes for state notifications.
EPF and ESI — the two contributions you cannot get wrong
- EPF (Employees' Provident Fund): mandatory for establishments with 20+ employees. Employee contributes 12% of basic salary; employer contributes 12% (split between EPF and EPS pension). The statutory wage ceiling for mandatory coverage is ₹15,000/month basic — above this, coverage is optional but typically continued.
- ESI (Employees' State Insurance): mandatory for employees earning up to ₹21,000/month gross, in establishments with 10+ employees. Employee 0.75%, employer 3.25%. Above the ceiling, employees are not covered.
- Professional Tax (PT): state-level, ranges from ₹0 to ~₹2,500/year per employee depending on state.
- Labour Welfare Fund (LWF): small state-level contribution in most states.
- TDS (Tax Deducted at Source): monthly income tax withholding per IT Act slabs.
- Gratuity: 15 days of last drawn wages per year of service, payable after 5 years of continuous service.
Employment contracts and the offer letter that holds up
There is no single 'Employment Act' in India — the contract is governed by the Indian Contract Act plus the relevant state's Shops & Establishments Act, plus the EPF/ESI/Payment of Wages/Industrial Disputes statutes. A well-drafted offer letter should specify base + allowances breakdown (HRA, special allowance, etc.), PF/ESI applicability, probation (typically 3–6 months), notice period (1–3 months is standard for white-collar), confidentiality and IP assignment, and a clear non-solicitation clause. Non-competes are largely unenforceable post-employment under Section 27 of the Indian Contract Act — do not rely on them.
Termination — easier than Europe, harder than the US
For 'workmen' (the legal category covering most non-managerial roles) under the Industrial Disputes Act, retrenchment requires 1 month's notice + 15 days' wages per completed year + (in establishments with 100+ workers in some states) prior government permission. For managerial and supervisory employees, terminations are governed primarily by the contract and Shops & Establishments Act — 1–3 months' notice is standard. Document poor performance with written warnings before any performance-based termination.
Contractor vs. employee — the genuine grey zone
India has a vast freelance and consultant economy, and the test (control, integration, economic dependence) maps to the global pattern. Engaging Indian engineers as 'consultants' invoicing monthly is common; doing it while requiring fixed hours, your laptop, your Slack, and exclusivity will eventually be reclassified — by EPFO, by the IT Department, or in a labour tribunal. If the relationship is full-time and ongoing, employ them properly through an entity or an EOR.
Operating models for foreign companies
- Register a Pvt. Ltd. with MCA; appoint at least one resident director.
- PAN, TAN, GST, EPF, ESI, Shops & Establishments registrations.
- Best for 20+ hires and long-term presence.
- FDI in IT/ITES is under the automatic route up to 100%.
- Hire 1–25 people without an entity (Deel, Remote, Multiplier, Skuad, Rippling EOR).
- Faster to first hire — 1–2 weeks.
- EOR handles PF, ESI, TDS, payroll, compliance.
- Higher per-head cost but no setup risk.
Take this home — the founder's India hiring checklist
- Decide entity vs. EOR before your first offer letter.
- Build an offer letter with clean base + allowance structure, PF/ESI clauses, IP assignment, and 1–3 month notice.
- Register for EPF and ESI before crossing the 20/10 employee thresholds — backdated registration triggers penalties and interest.
- Use a competent local payroll provider (Zoho Payroll, RazorpayX Payroll, greytHR, or your EOR) — manual monthly filings are not worth the risk.
- Treat the four labour codes as 'coming soon' — track state notifications, but build to legacy regime today.
Before you act — read this
Official sources to verify (keep this list bookmarked)
HR & Operations leader scaling global remote teams across Nepal, the Philippines, Australia, and the US. Tech-leaning writing lives on Medium.