In part III of our series on key legal considerations for establishing global capability centres (“GCCs”) in India,[1] we discuss the various factors that need to be considered to engage workforce for the GCCs.
Introduction
Given that one of the most decisive factors of setting up GCCs in India is accessible diversified ‘human capital’ – evidenced by the fact that as of FY22–23, India’s approximately 1,580 GCCs had 1.66 million employees[2] – it is pertinent to note that for a GCC set up in India, the Indian employment and/or labour laws would govern individuals (irrespective of their citizenship) recruited/ hired to work with the GCC. This would require robust compliance, including but not limited to establishing necessary policies and systems to prevent and redress employee-related grievances at the workplace. Through this blog, we will discuss some key considerations that foreign entities need to keep in mind from an employment and resourcing perspective.
Outsource resourcing: Under the BOT Model and EOR/ PEO service arrangements
There are two strategic models to set up a GCC in India: (1) the traditional or do-it-yourself model (“DIY Model”), i.e., the foreign entity sets up a GCC (by incorporating an entity in India) and retains complete control and ownership (and outsources specialised tasks requiring local support/ advisory); and (2) the build-operate-transfer model (“BOT Model”), i.e., a third-party service provider, either wholly or partly, sets up (builds) the GCC, operates the centre, and gradually transfers ownership and control to the foreign entity.
One of the many hybrid models involves a service arrangement with an employer on record (“EOR”)/ professional employer organisation (“PEO”). Under this arrangement, the foreign entity contracts with an EOR/ PEO to hire personnel, who will remain on the rolls of the EOR/ PEO and perform services that would ordinarily be expected from the GCC, directly for the foreign entity. This is typically for a short duration of time, until the foreign entity incorporates its GCC in India and sets up processes to directly onboard employees.
Key issues with outsourcing models
There are some concerns from a foreign exchange and taxation laws perspective for the PEO/ EOR model. Under the Indian foreign exchange laws, foreign entities are permitted to conduct business in India only through an established ‘place of business’ in the country. A ‘place of business’ may be a branch office, project office, wholly owned subsidiary, etc. Engagement of personnel in India to conduct business operations for an offshore entity that does not have a ‘place of business’ in India may violate foreign exchange laws; and from a tax perspective it may lead to the GCC being constituted as a ‘permanent establishment’ that could lead to tax leakages. It may be worth mentioning here that the PEO/ EOR model is fairly new in India and largely untested before courts.
Transfer of employees in the BOT Model and the EOR/ PEO model
When a foreign entity decides to take control of its GCC’s operations in India through its own incorporated entity, one of the key matters that it will face is the transfer of the employees to its rolls. The market practice/ expectation is that the employment of the employees would transfer on a continuity of service basis (i.e., their employment with the service provider would be taken into account for all purposes, including calculation of terminal benefits, seniority, etc.) and on the same terms and conditions applicable to them prior to the transfer of their employment. Further, if the transfer of employees is effected as a transfer of an undertaking (which is often the case in the BOT Model), then it would be mandatory to provide the above conditions (continuity of service and same terms and conditions of employment) to all employees under the ‘workmen’ category, which would generally include all employees except those in supervisory or management positions.
In terms of the mechanics of the transfer, the transfer may be effected through the issuance of a transfer letter, jointly by the GCC entity and the service provider or the resignation-rehire method, wherein employees resign from their employment with the service provider and are simultaneously hired by the GCC entity. The manner of dealing with employee benefits is a key concern and in order to avoid any ambiguity at a later date, this should be discussed and documented with the service providers and the employees.
Legal and regulatory compliances for recruiting the Indian GCCs workforce
Preparedness for employee onboarding
In a DIY Model, or in case of transfer of employees from a PEO/ EOR, it is important for the GCC entity to be prepared to employ individuals. This would involve having template employment agreements that may be issued to employees in place, adopting statutorily mandated policies (such as prevention of sexual harassment policy and equal opportunity policy to protect persons with disability and transgender persons), adopting other policies which govern employment matters (such as leave policy, confidentiality policy and performance improvement policy), suitably modifying global policies so that they are compliant under applicable Indian laws and also appropriately relevant to individuals working in India, and obtaining relevant licenses and registrations to conduct business as well as to make social security contributions.
It is important to note that the labour and employment law regime in India consists of multiple Central and State/ federal legislations, each reflecting a set of compliances unique to the subject matter covered by that legislation. This could range from obtaining registrations and making periodic filings with the labour authorities to having mandatory policies in place and contributing to social security funds. The documentation put together by the GCC, and its day-to-day practices should take into account the compliance requirements across such legislations. The labour law regime in India is also in the process of undergoing a significant overhaul with 29 central labour laws being consolidated into four Labour Codes (i.e., the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020). These Labour Codes have been passed by the legislators and will come into force once the Central Government provides the specific effective date, which is expected to be later this year.[3]
Further, if a GCC is set up as a public limited company, there are certain caps on the compensation packages that can be offered to its directors and the GCCs should be mindful that the compensation payable to directors and key managerial personnel (which includes inter alia its CEO, CEO, CXO, etc.) would have to be disclosed in regulatory filings.
Additional compliances for the engagement of foreign nationals
A GCC entity may engage foreign nationals, subject to them obtaining a valid business/ employment visa. Foreign nationals, not being a Person of Indian Origin (“PIO”)/ Overseas Citizen of India (“OCI”) card holders, must obtain either a (i) business visa; or (ii) employment visa, to work in India. An employment/ business visa is issued at the discretion of the Indian embassy, subject to certain conditions regarding eligibility, purpose of visit, duration, etc.
- Business Visa: A business visa is issued only to foreign nationals of assured financial standing, who inter alia wish to come to India to, (i) establish/ to explore the possibility of setting up a business venture in India; (ii) provide expertise/ specialist services during a short duration visit, in connection with an ongoing project, with the objective of monitoring the work progress, conduct meetings with Indian customers and/ or to provide technical guidance; and (iii) for recruitment of human resource. A business visa is not issued for full time employment in India.
- Employment Visa: An employment visa on the other hand is granted, inter alia (i) to highly skilled and/or qualified professionals, who are engaged/ appointed by a company/ organization / industry / undertaking in India on contract or employment basis; (ii) for execution of a project in India (as a consultant or on contract); (iii) to engineers/ technicians coming to India for installation and commissioning of equipment/ machines/ tools in terms of the contract for supply of such equipment/ machines/ tools; (iv) for providing technical support/ services, transfer of know-how/ services for which the Indian company pays fees/ royalty to the foreign company. Employment visas are not granted for jobs for which qualified Indians are available or for routine, ordinary or secretarial/ clerical jobs. The applicant for such visa must also draw more than USD 25,000 per annum salary while working in India.
In terms of applicability of employment laws to foreign employees, all Indian employment laws would apply to foreign employees working in India, if they otherwise satisfy the eligibility criteria prescribed under the legislations. In particular, it would be important to analyse the requirement under India’s key social security legislation, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) vis-à-vis foreign nationals. Under the EPF Act, social security contributions for ‘International Workers’ (essentially non-Indian passport holders) are required to be made by the employer without any cap, whereas for Indian employees, employer and employee contributions may each be capped at INR 1,800 (approximately USD 22) per month. In the event India has a social security agreement with a foreign national’s home country and the foreign national has obtained a certificate of coverage stating that they will be covered under the social security laws of such country, it would not be necessary for contributions to be made in respect of the foreign employee under the EPF Act.
Strategies for long-term retention of the GCC’s workforce
One of the newest means used by companies as an employee incentivisation and retention tool is to offer them long-term incentives, which accrue over time and are linked to the shares of the company. These could be in the form ofemployee stock options (“ESOPs”); stock appreciation rights (“SARs”); phantom stocks; sweat equity shares, etc. ESOPs and similar benefits are attractive because the gains from the shares acquired on exercise of such ESOPs are much higher than the exercise price paid for them. ESOPs can be structured in two ways: first the foreign entity can directly offer ESOPs or other similar benefits, which are linked to the foreign entity’s shares[4] and/ or second the GCC can offer ESOPs or other similar benefits that are linked to the GCC’s shares. However, it is pertinent to note that there are separate regulatory regimes in place with regard to who can offer such benefits, eligibility for receiving such benefits, caps on quantum, etc.
Conclusion
India’s skilled and affordable human capital is one of the main reasons why GCCs have flourished here. Of the 1.66 million employees currently working with GCCs in India[5], 5,000 are in global leadership roles. This number is expected to increase to approximately 30,000 by 2030[6], which is a clear indicator of the increased relevance of Indian GCCs and their workforce. Building a workforce from scratch in India can be an intricate process, especially given India’s complex employment law landscape, but with proper planning and getting the basics right, it can be executed seamlessly.
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] You can read part I of the series here – Global Capacity Centres (GCCs) take centre stage in fuelling global growth | India Corporate Law (cyrilamarchandblogs.com) and part II here Strategic structuring and modelling Global Capability Centres (GCCs) in India: How to set up | India Corporate Law (cyrilamarchandblogs.com)
[2] ‘GCC 4.0 | India Redefining the Globalization Blueprint’, NASSCOM-Zinnov, (June, 2023) Accessible here – GCC 4.0 | INDIA REDEFINING THE GLOBALIZATION BLUEPRINT | nasscom
[3] Labour codes may top new govt’s 100-day plan – The Economic Times (indiatimes.com)
[4] You can read a more detailed blog on this here – Employee Share-based Incentives by foreign companies for employees of group companies in India: Should it be an ESOP, RSU, ESPS, SAR or Phantom Stock? | India Corporate Law (cyrilamarchandblogs.com)
[5] ‘GCC 4.0 | India Redefining the Globalization Blueprint’, NASSCOM-Zinnov, (June, 2023) Accessible here – GCC 4.0 | INDIA REDEFINING THE GLOBALIZATION BLUEPRINT | nasscom
[6] These transformative trends are shaping global capability centres in 2024 – BusinessToday and Mushrooming of GCCs to lead to spurt in leadership roles in 2024 – The Economic Times (indiatimes.com)
