First 10 Hires: Employment Contracts Under the New Labour Codes (2026 Update)

The first ten hires set the legal template for every subsequent employee a startup ever brings on. Get the employment contract architecture right at hire #1, and it scales cleanly to hire #100. Get it wrong, and the company spends year two migrating fifty existing employees off an incorrect structure — while simultaneously managing the first employment dispute.

This guide is the 2026 update: employment contract design for Indian startups under the new Labour Codes, current POSH obligations, salary structure constraints, and the non-compete reality under Section 27 of the Indian Contract Act, 1872.

The Regulatory Map

An Indian employer of the first ten people operates under a stack of statutes:

| Statute | What it governs | Threshold | |---|---|---| | Code on Wages, 2019 | Minimum wages, bonus, equal remuneration | All employers | | Code on Social Security, 2020 | PF, ESI, gratuity, maternity | Thresholds vary by component | | Industrial Relations Code, 2020 | Standing orders, termination | >100 workers for some provisions | | Occupational Safety Code, 2020 | Safety, working conditions | >10 workers for most provisions | | Payment of Gratuity Act, 1972 | Gratuity on 5 years of service | >10 employees | | EPF Act, 1952 | Provident fund contributions | >20 employees | | ESI Act, 1948 | Medical and social insurance | >10 employees, wage-based | | POSH Act, 2013 | Prevention of workplace harassment | All; Internal Committee at >=10 women | | Maternity Benefit Act, 1961 | Paid maternity leave | >=10 employees | | Shops and Establishments Acts (state-specific) | Working hours, leave, registration | All commercial establishments |

The new Labour Codes subsume several legacy statutes (e.g., the EPF Act, ESI Act and Payment of Gratuity Act are being reorganised under the Code on Social Security, 2020), but notification is incremental. As of April 2026, startups need to track state-level notification status for each Code.

The 50% Basic Rule: The Biggest Change in 15 Years

What the Code on Wages says

Section 2(y) of the Code on Wages, 2019 defines "wages" and includes a critical provision: any allowances paid in excess of 50% of the total remuneration must be added back to "wages" for the purposes of various statutory calculations.

Practical translation: basic salary must be at least 50% of gross compensation. Allowances (HRA, conveyance, special allowance, LTA, etc.) cannot collectively exceed 50%.

Why this matters for startup compensation design

Before the Code on Wages, Indian employers commonly structured compensation as:

• Basic: 30–40% of gross.
• HRA: 40–50% of basic.
• Conveyance, special allowance, other: balance.

This minimised Provident Fund contributions (PF is calculated on basic salary) and reduced gratuity liability (gratuity is calculated on basic + DA).

Under the Code on Wages:

• Basic must be ≥50% of gross.
• PF contributions rise proportionately.
• Gratuity liability rises proportionately.
• Take-home pay decreases unless offset elsewhere.

For a startup offering ₹10 lakh annual CTC, the Code compliant structure looks like:

• Basic: ₹5 lakh (50%).
• HRA: ₹2 lakh.
• Special allowance: ₹1.5 lakh.
• Employer PF: ₹60,000 (12% of ₹5 lakh).
• Other allowances and retirals: balance.

Vs. the pre-Code structure where basic could have been ₹3–4 lakh with smaller employer PF obligations.

What founders should do

• Design new offer letters from the start with 50% basic structures.
• For existing employees on non-compliant structures, transition at the next compensation review cycle — forced mid-year restructuring is a minefield of disputes.
• Model the higher PF and gratuity costs into unit economics before committing to senior hires.

PF, ESI and the Employer's Contribution Math

Provident Fund

Under the EPF Act, 1952 (now being reorganised under the Code on Social Security):

• Applicable when the establishment has 20 or more employees.
• Voluntary for employees with "basic + DA" over ₹15,000 per month. In practice, most white-collar startups offer PF as a default for all employees.
• Employer contribution: 12% of basic + DA (capped at ₹15,000 wage ceiling for statutory calculations, though most employers contribute on actual basic).
• Employee contribution: matching 12%.

Employee State Insurance

Under the ESI Act, 1948:

• Applicable at 10 or more employees.
• Applies to employees earning ₹21,000 per month or less.
• Employer contribution: 3.25% of wages.
• Employee contribution: 0.75% of wages.
• For most software and white-collar startups, ESI is not applicable to the majority of the workforce because wages exceed the ₹21,000 threshold. Support staff, office assistants, interns, and very early-stage employees may fall under the threshold.

Gratuity

Under the Payment of Gratuity Act, 1972:

• Applicable to establishments with 10 or more employees.
• Entitlement: employees with five years of continuous service (with exceptions for death and permanent disability).
• Quantum: 15 days' wages for each completed year, capped at ₹20 lakh.
• Funded via employer contributions (typically 4.81% of basic + DA, accrued as a liability on the balance sheet).

Professional tax

Professional tax is a state subject. Applicable in Maharashtra, Karnataka, West Bengal, Tamil Nadu, Telangana, Andhra Pradesh, Gujarat and others. Not applicable in Delhi, Haryana, UP, Uttarakhand and a few others. Typically ₹200 per month deducted from employees, with employer registration and monthly/annual remittance.

Offer Letter vs Employment Contract: Both Are Needed

A common mistake is to rely on the offer letter as the full contract. A well-run startup issues two documents:

Offer letter (2–4 pages)

• Title, reporting relationship, start date.
• Compensation summary (CTC break-up).
• Conditions precedent (background check, document verification).
• Probation period (if applicable).
• Place of work, work hours.
• Key company policies referenced.
• Acceptance mechanism.

Employment contract (8–15 pages)

Executed on the first day of employment.

• All offer letter terms, confirmed.
• Detailed roles and responsibilities.
• Confidentiality obligations (surviving termination for 2–5 years).
• IP assignment (present tense, "hereby assigns").
• Non-solicitation covenant (12–24 months post-termination).
• Non-compete during employment (not post-termination — void under Section 27).
• Notice period (typically 30 days at junior levels, 60–90 days at senior levels).
• Termination rights and grounds.
• Leaves and benefits.
• Reference to employee handbook and policies.
• POSH policy reference.
• DPDP data handling obligations.
• Dispute resolution clause.

The two-document approach has two advantages: candidates sign the offer letter before joining (binding commitment), and the employment contract is executed on day one as a complete legal document.

POSH Compliance: The Unforgiving Checklist

When it applies

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 creates obligations for every employer. However, two specific obligations are triggered at specific thresholds:

• Internal Committee (IC) must be constituted at workplaces with 10 or more employees. This is regardless of gender composition — the threshold is total employee count at the specific workplace.
• Local Committee is available for workplaces with fewer than 10 employees, providing a redressal mechanism through the District Officer.

Core obligations for every employer

• Written anti-harassment policy.
• Communication of the policy to all employees (including at orientation).
• POSH training (typically annual) for all employees.
• Internal Committee with specific composition: at least 50% women members, external member from an NGO or someone with expertise, presiding officer who is a senior woman employee.
• Annual report filing to the District Officer.
• Compliance referenced in the employer's annual report (for companies required to file one).

Getting it right as a startup

• Adopt a standard POSH policy (many free templates available from Ministry of Women and Child Development).
• Identify IC members early — even before hitting 10 employees — and build the committee before the trigger.
• Budget for external member compensation (typically ₹5,000–₹20,000 per meeting).
• Run annual training — can be video-based for small teams, in-person or interactive for larger.
• Maintain a confidential incident register.

Review Your Employment Contracts Against the New Codes

The Non-Compete Question: What Actually Works

The statutory position

Section 27 of the Indian Contract Act, 1872 is unambiguous: "every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

The section has been interpreted consistently by Indian courts — including the Supreme Court — to mean that post-termination non-compete restrictions are generally void and unenforceable.

What is enforceable

• Non-compete during employment. An employee cannot work for a competitor while employed. This is routinely upheld.
• Non-solicitation of employees. For 12–24 months post-termination, the former employee cannot solicit or hire employees of the company. Generally enforceable.
• Non-solicitation of customers. For 12–24 months post-termination, the former employee cannot solicit customers with whom they had a business relationship during employment. Generally enforceable.
• Confidentiality. Indefinite or long-term confidentiality obligations covering trade secrets are enforceable.
• Garden leave. The employer keeps the employee on payroll during the notice period without work, effectively preventing competing employment during that window. Enforceable.

What is not enforceable

• Post-termination non-compete for a period.
• Restrictions on working in a specific industry post-termination.
• Territorial restrictions on post-termination employment.

Founders should stop including post-termination non-competes in employment contracts — they signal legal inexperience and create no actual protection. Replace them with well-drafted non-solicitation and confidentiality covenants.

The First 10 Hires: Practical Compensation Design

For a pre-seed to seed-stage startup, compensation structures for the first ten hires typically look like:

Engineering IC

• CTC: ₹15–30 lakh depending on experience.
• Structure: 50% basic, HRA, special allowance, retirals.
• ESOPs: 0.05%–0.25% depending on level and criticality.
• Notice: 30–60 days.

Sales / GTM

• CTC: ₹10–25 lakh base + variable.
• Variable component: 20–40% of total, tied to quota achievement.
• Important: variable component does NOT form part of "wages" under the Code on Wages if tied to specific deliverables and not guaranteed.
• ESOPs: 0.05%–0.30%.

Operations / Early hires

• CTC: ₹8–20 lakh.
• Standard retirals.
• ESOPs: 0.05%–0.15%.

Senior hires (CTO, CRO, Head of Product)

• CTC: ₹35–80 lakh.
• Higher ESOP weightage: 0.5%–2.0%.
• Longer notice period: 90 days typical, 120 days for C-suite.
• Severance provision: 3–6 months' salary for termination without cause is increasingly common.

What Startups Routinely Get Wrong

1. Treating the notice period as unilateral

Both parties must serve notice. An employment contract where "Employee must serve 60 days but Company may terminate immediately" is unconscionable and unenforceable as to the asymmetric portion.

2. No payroll register

Section 122 of the Code on Wages requires maintenance of a register of wages, register of employees, and wage slips. Sloppy payroll record-keeping creates exposure in statutory inspections.

3. Missing Internal Committee

Hiring the 10th employee without an Internal Committee already constituted is a compliance lapse from day one.

4. Over-use of "independent contractor" classification

Structuring a full-time worker as an independent contractor to avoid PF, ESI and gratuity liability is a misclassification that authorities can reverse. Retroactive PF, ESI, gratuity and penalty liability over years of "contractor" engagement can exceed the cost of the salaries themselves.

5. No written employee handbook

Leave policies, working hours, conduct norms, grievance procedures, and policies on specific issues (drug and alcohol, social media, moonlighting) should be consolidated into a written handbook referenced by the employment contract.

6. Interns treated as informal contributors

Interns are entitled to protection under the Sexual Harassment Act, 2013. If performing substantial work for more than a short period, they may be entitled to wage-based protections. Use a written intern agreement with a defined stipend (even if nominal), defined duration, and explicit non-employment status.

The First-Ten-Hires Checklist

Before the tenth hire:

• [ ] Shops and Establishments Act registration in the state of operation.
• [ ] EPF registration (at 20+ employees, but voluntary before).
• [ ] ESI registration (at 10+ employees if any earn below threshold).
• [ ] Professional tax registration (state-dependent).
• [ ] Gratuity liability accrual in the balance sheet.
• [ ] Standard offer letter and employment contract templates.
• [ ] Employee handbook.
• [ ] POSH policy and Internal Committee in place.
• [ ] Payroll system set up (typically outsourced to a payroll partner like RazorpayX, Zoho Payroll, or similar).
• [ ] IP assignment clauses in all employment contracts.
• [ ] Non-solicit covenants replacing any non-compete clauses.
• [ ] Data retention policy for employee data (DPDP compliance).

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Frequently Asked Questions

When does a startup need to register for PF in India?▾

The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 applies when the establishment employs 20 or more persons. Registration must be completed within one month of crossing the threshold. However, voluntary coverage is permitted and common — most white-collar startups offer PF as a default benefit to all employees from the first hire, even before the 20-employee threshold, to compete for talent. Once PF registration is obtained, it cannot be surrendered, and all eligible employees must be covered. Employer contribution is 12% of basic plus dearness allowance, with matching 12% from the employee.

Is the 50% basic rule under the Code on Wages mandatory now?▾

The Code on Wages, 2019 has been notified centrally, but the practical enforcement of the 50% basic rule depends on state-level notifications of related rules. As of April 2026, several states have notified rules under the Code on Wages, and the 50% threshold for allowances is operative. For compliance hygiene, startups should structure all new offer letters with basic salary at least 50% of gross compensation regardless of whether the specific state has notified full rules. Transitioning existing employees should be done at compensation review cycles to avoid disputes.

Can I enforce a non-compete clause against a former employee in India?▾

Post-termination non-compete restrictions are generally void under Section 27 of the Indian Contract Act, 1872. Indian courts, including the Supreme Court, have consistently held that agreements preventing a person from exercising a lawful profession, trade, or business after termination are unenforceable. Non-compete covenants during employment — preventing an employee from simultaneously working for a competitor — are enforceable. Non-solicitation covenants (preventing the former employee from soliciting the company's clients or employees) for 12–24 months post-termination are generally enforceable. Confidentiality obligations are enforceable for the period during which the information remains secret. The practical takeaway is to drop post-termination non-competes and use non-solicit and confidentiality instead.

What is the threshold for constituting an Internal Committee under POSH?▾

Under Section 4 of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, every employer with 10 or more employees at a workplace must constitute an Internal Committee (IC). The threshold is 10 employees total, not 10 women employees. The IC must be constituted before the employer crosses the threshold or immediately on crossing it. Composition requirements: presiding officer (a woman employee at a senior level), at least two employee members (preferably women with experience in social work or legal knowledge), and one external member from an NGO or person familiar with issues of sexual harassment. At least half the total members must be women. Non-constitution of the IC is itself an offence under the Act, independent of any specific harassment incident.

How should I structure ESOPs for the first 10 employees?▾

Structure ESOPs through a board-approved and shareholder-approved ESOP scheme under Section 62(1)(b) of the Companies Act, 2013. For the first 10 hires at a pre-seed/seed startup, typical grant ranges are 0.05% to 0.30% for individual contributors and up to 2% for critical senior hires. Key design elements: four-year vesting with a one-year cliff, exercise price at fair market value determined by a registered valuer, post-termination exercise window of 90 days or more, and an honest conversation with the employee about the Section 17(2)(vi) perquisite tax at exercise. Individual grants should be by board resolution referencing the scheme, with a written grant letter signed by the employee and archived.

Do I need to provide gratuity to employees who have worked less than 5 years?▾

Under the Payment of Gratuity Act, 1972, entitlement to gratuity accrues at five years of continuous service, with exceptions for death and permanent disablement (where the five-year requirement is waived). The quantum is 15 days' wages for each completed year, capped at ₹20 lakh. Employers are encouraged to maintain a gratuity fund (approved under the Income Tax Act) to fund this liability, though the obligation exists regardless of funding. Some states have proposed reducing the five-year threshold to three years under the Code on Social Security, 2020 framework; founders should track state-level notifications. Employees with less than the applicable threshold at departure are not entitled to gratuity, though many startups provide ex-gratia payments for retention or goodwill reasons.

Can I classify my early hires as independent contractors to avoid employment law compliance?▾

Legally possible only if the relationship is genuinely one of contractor engagement, not disguised employment. Indian authorities and courts apply a multi-factor test to determine classification: control over how work is done, fixed working hours, use of company tools and office, exclusivity, integration into core operations, and payment structure. Someone who works full-time from the company's office on a fixed schedule, reports to a manager, uses company email and equipment, and is otherwise indistinguishable from an employee will be classified as an employee regardless of the contract title. Misclassification exposure includes retroactive PF, ESI, gratuity, and penalty liability that can significantly exceed the cost of proper employment. The savings from misclassification are rarely worth the downstream liability.