Legal Implications of Using an EOR in India

What are the key legal implications of using an EOR in India?[toc=Key Legal Implications]

When you hire employees in India through an Employer of Record (EOR), a third party organization becomes the legal employer of your workforce on paper. You retain day-to-day control over the work, but the EOR takes on the legal, tax, and compliance responsibilities under Indian labor laws.

From our experience helping 300+ global companies hire in India, here are the legal implications that matter most:

1. The EOR is the Legal Employer, Not You

Under Indian employment laws, the EOR is the official employer. They sign the written employment contract, handle payroll processing, manage statutory deductions, and own compliance with local labor laws. Your company doesn't need a local legal entity or a local bank account.

But this also means you're trusting the EOR to get every detail right. If there's a wrongful termination claim or a compliance gap, the EOR bears the initial legal exposure. That's protective for foreign companies, but only if your EOR actually knows what they're doing.

2. Compliance with India's New Labor Codes

India consolidated 29 older labor laws into four Labour Codes, all of which became effective on November 21, 2025. The final Central Rules are expected to be fully notified by April 1, 2026. This is the biggest regulatory overhaul since independence, and it directly impacts how your EOR manages employees.

What this means for you:

• Wage restructuring: Basic pay must now be at least 50% of total remuneration. This changes how Employees Provident Fund contributions, gratuity, and severance pay are calculated. If your EOR hasn't restructured compensation to align with this, you're exposed.
• Statutory benefits are mandatory: The EOR must enroll employees in the Employees Provident Fund (12% contribution from both employer and employee), Employee State Insurance, and professional tax. These are non-negotiable statutory deductions under Indian labor laws.
• Fixed-term employee protections: Fixed-term workers now get identical wages and benefits as permanent employees, and gratuity eligibility starts after just one year (down from five). Your EOR needs to comply with this from day one.

3. Payroll Tax and Tax Compliance

The EOR handles all income tax obligations, including TDS (Tax Deducted at Source), monthly and quarterly tax filings with the income tax department, and issuing Form 16 to employees. India's progressive income tax system has two regimes, and the EOR must calculate deductions correctly based on each employee's salary and chosen regime.

Professional tax rates also vary by state, so an EOR managing employees across multiple locations needs to handle different local regulations for each one. Getting payroll wrong doesn't just frustrate employees. It creates real legal risks.

4. Employment Contracts Must Be Locally Compliant

A legally compliant contract in India must clearly cover compensation, working hours, notice periods, leave entitlements, public holidays, and termination conditions. Under the new codes, contracts also need to reflect updated definitions of "wages" and "employee."

We've seen too many companies try to use generic global templates. They don't hold up. Indian employment regulations require contracts to account for state-specific rules on minimum wage, leave policies, and statutory benefits. If your EOR uses a one-size-fits-all approach, that's a red flag.

5. Permanent Establishment (PE) Risk

Even when using an EOR, Indian tax authorities could argue your company has a permanent establishment in India, triggering corporate income tax obligations. An EOR reduces this risk because they're the legal employer, not you. But PE risk doesn't disappear entirely.

If your India-based employees make strategic decisions, sign contracts on your behalf, or generate revenue locally, authorities may look beyond the EOR structure. The safest approach: keep decision-making authority outside India and ensure your EOR agreement clearly separates employment from business operations.

6. Termination and Severance Laws

Letting someone go in India requires strict compliance. The Industrial Relations Code mandates notice periods (typically 30 to 90 days), and workers are entitled to retrenchment compensation of 15 days' average pay per completed year of service.

Government approval is now required for retrenchment of 300+ workers, and eligible female employees on maternity leave cannot be terminated except with specific government permission under the Maternity Benefit Act.

7. Intellectual Property (IP) Ownership

Most EORs use an indirect IP assignment model: the employee assigns IP to the EOR, which then assigns it to your company through the master services agreement. This creates a clean ownership chain while reducing co-employment and PE risks. Without explicit assignment clauses, Indian copyright law can create ambiguity around who owns what.

Using an EOR in India is one of the fastest ways for an international company to hire employees without setting up an own legal entity. But Indian labor laws are complex, state-specific, and evolving rapidly with the 2026 labor code rollout.

The right EOR provider handles payroll management, statutory benefits, tax regulations, and legal compliance end to end, so you can focus on building your team instead of navigating compliance risks.

What are the common pitfalls of using an EOR in India (and how to avoid them)?[toc=Common Pitfalls]

An EOR is one of the smartest ways for foreign companies to hire employees in India without a local legal entity. But that doesn't mean it's foolproof.

From what we've seen helping 300+ international companies manage employees in India, these are the pitfalls that trip up even experienced teams:

1. Assuming "Remote = Contractor"

The most common mistake. If your worker follows a fixed schedule, uses your tools, and works exclusively for you, Indian labor laws will treat them as an employee regardless of what the contract says. Misclassification triggers back taxes, unpaid Employees Provident Fund (EPF) and Employee State Insurance (ESI) contributions, and penalties.

An EOR eliminates this by placing workers on a legally compliant employment contract from day one.

2. Choosing an EOR Aggregator Without Realizing It

Some EOR providers don't own their Indian entity. They subcontract employment to a third party organization, adding risk of payroll errors, delayed support, and unclear liability.

Always ask for the EOR's Corporate Identification Number (CIN) and verify it on the Ministry of Corporate Affairs portal.

3. Using Global Contract Templates

Indian employment laws require state-specific provisions for minimum wage, working hours, notice periods, and statutory deductions. Under the new Labour Codes (effective November 2025), basic pay must be at least 50% of total remuneration. A generic US or UK template won't hold up during audits, terminations, or disputes.

4. Ignoring State-Level Compliance Differences

India's labor laws operate at both central and state levels. Professional tax rates, leave policies, and minimum wage thresholds vary across states. If you're hiring in Bangalore, Mumbai, and Delhi, your EOR needs to manage three separate compliance environments.

Always ask how your EOR handles multi-state payroll processing and tax filings.

5. Overlooking IP Assignment

If employment contracts don't explicitly assign intellectual property to the employer, your employees could retain legal ownership of code and designs they create. This gets flagged during fundraising due diligence.

Make sure your EOR uses an indirect IP assignment model with explicit clauses that hold up under Indian law.

6. Not Verifying Statutory Benefits Administration

Employees Provident Fund, Employee State Insurance, professional tax, gratuity, and statutory bonus are all mandatory under Indian labor laws. Some EORs cut corners on benefits administration for smaller teams.

If your employees aren't receiving proper statutory benefits, it directly hits employee satisfaction and retention.

7. Underestimating Termination Complexity

India has no at-will employment. The Industrial Relations Code requires notice periods (30 to 90 days), severance pay of 15 days' wages per year of service, and government approval for mass layoffs of 300+ workers.

Eligible female employees on maternity leave cannot be terminated without government permission. Wrongful termination claims can lead to reinstatement and back pay.

8. Hidden Costs in EOR Pricing

Some providers advertise low monthly fees but charge extra for employee onboarding, benefits administration, or year-end tax filings.

Get a full pricing breakdown upfront so you can budget accurately and avoid compliance gaps from underfunded services.

You can check out our article on the cost of EOR in India.

9. Letting PE Risk Creep In

An EOR reduces permanent establishment risk but doesn't eliminate it. If your Indian employees gradually start signing contracts, negotiating deals, or making strategic decisions on your behalf, tax authorities can still argue your company has a taxable presence. Keep decision-making authority outside India.

10. Treating EOR Employees as Outsiders

Your employees work for you, even if the EOR is the legal employer on paper. Companies that exclude EOR-employed team members from Slack channels, all-hands meetings, and recognition programs see higher attrition.

From our experience managing 2,000+ employees, the best retention comes from treating your India team as fully part of the company.

Get Started With Wisemonk EOR[toc=Choose Wisemonk EOR]

Hiring employees in India shouldn't mean spending months setting up a local legal entity, decoding complex labor laws, or worrying about compliance risks every payroll cycle.

That's exactly why 300+ global companies trust Wisemonk as their EOR in India.

What You Get With Wisemonk EOR

Hire in days, not months: We onboard your India employees in 7 to 14 days with fully compliant employment contracts, payroll setup, and statutory benefits from day one. No entity required.

• Full legal compliance, handled end to end: From Employees Provident Fund and Employee State Insurance to professional tax, income tax filings, and the 2026 Labour Code updates, our team manages every layer of Indian employment regulations so you don't have to.
• Your own Indian entity backing you: Wisemonk owns its local legal entity in India. No aggregators, no third party middlemen. You get direct accountability, faster issue resolution, and complete transparency.
• India-first expertise: Unlike global EOR platforms that treat India as one of 150+ countries, we specialize in it. We manage $20M+ in payroll, support 2,000+ employees, and understand the nuances of state-level compliance, tax regulations, and local labor laws that most foreign companies miss.
• Beyond just payroll: We handle employee onboarding, benefits administration, IP protection, equipment procurement, visa support, and even help you source top engineering talent in India.

Skip the legal complexity. Avoid the common pitfalls. Start building your India team with a partner that has a proven track record of managing EOR services in India for global companies.

Talk to our EOR experts today and get your first employee onboarded within days!