As international companies grow their footprint and tap into new markets, understanding local hiring laws and employment structures becomes vital to building sustainable operations. In this 17-part series, we guide foreign businesses through the legal and strategic aspects of employment in key global jurisdictions.
This installment brings us to India—a dynamic and fast-growing economy with a deep talent pool, evolving regulatory landscape, and diverse business opportunities. Choosing the right hiring model in India is essential, as companies must navigate a wide range of legal, operational, and tax considerations. From direct employment through various legal entities to alternatives like independent contractors, consultants, or PEOs, foreign businesses have multiple pathways to entering the Indian market—each with its own implications for compliance, cost, and control.
Authored by Manan Agarwal
Aliant+ Accounting Firm in India
1. Are there alternatives to direct employment?
Yes, there are. They are:
(a) Independent Contractors / Freelancers – These are Individuals who work on a contract basis, offering specialized services without being employed full-time. They are usually responsible for their own taxes and benefits.
(b) Professional Employer Organisation (PEO) / Employer on Record (EOR) – These are employees provided by staffing agencies, usually for a fixed term or project. The staffing agency manages the hiring process and the payroll. For all legal purposes, the PEO or EOR is the employer and hence the foreign company is spared the legal obligations which an employer has to comply in India.
(c) Consultants – Often specialists in a particular area, consultants are hired for their expertise on a specific project. They cannot however be considered as employees.
(d) Outsourcing or Offshoring – Instead of hiring employee(s) locally, businesses can outsource work to a third-party provider.
The right choice would depend on factors such as headcount (number of employees) that the foreign company seeks to engage in India along with their skill-sets / specialization, objective of setting up business presence in India, etc.
One of the important aspects to be considered is the tax implications under the various options. Doing business through direct employees who are stationed in India for more than six months in a year could lead to creation of ‘Permanent Establishment’ (‘PE’) in India within the meaning of India’s Double Taxation Avoidance Agreement with most countries. If a PE is constituted in India, Indian tax authorities may try to tax the overseas parent company by allocating part of their business profits to activities undertaken in India.
2. Is it necessary to set up a local entity to hire an employee?
Yes, it is. An employer is fastened with various legal obligations in India such as taxes, social security, safe working conditions, etc, which are possible to discharge only if a legal entity is set up to hire the employees. The following options exist in respect of form of legal entity that can be set up in India to hire employees:
(a) Liaison Office (‘LO’) – Often referred to as ‘Representative Office’, an LO is considered as extension of overseas parent company in India. An LO is not allowed to undertake any commercial activities in India; it is allowed to act only as a channel of communication between the overseas parent company and customers in India. The permission to set up LO in India is granted by the Reserve Bank of India (‘RBI’), Ministry of Finance, which is the nodal body for regulating cross border investments / transactions in India. LO can hire employees directly in India.
(b) Branch Office (‘BO’) – BO can be understood as an upgraded version of LO, the main difference being that BO is entitled to undertake commercial activities and earn revenue in India. BO is also considered as extension of overseas parent company in India and is allowed to hire employees directly.
(c) Wholly owned subsidiary (WOS) – A WOS can be a private limited company or limited liability partnership in India. It is the most traditional and popular form of legal entity in India. Setting up a WOS allows the overseas parent company to manage better the risks in India by having a separate board of directors for the Indian entity which will be responsible for day to day activities of the Indian entity.
An important update – India has a plethora of labour laws. As part of labour law reforms, the Government of India has undertaken the exercise of rationalization of various labour acts by framing 4 labour codes, subsuming 29 labour regulations. The new labour codes are:
(a) Code on Wages, 2019
(b) Code on Social Security, 2020
(c) The Industrial Relations Code, 2020, and
(d) The Occupational Safety, Health and Working Conditions Code, 2020
The objective of this change is to amalgamate, simplify, rationalize and consolidate the provisions of the existing legislations. All the above 4 Codes are approved by the Parliament of India and are now statutes. However, the implementation of these Codes have been stalled due to delays by the various states of India in finalizing the rules.
3. Direct employment vs. independent contractor: what about costs?
(a) Direct employment costs – Hiring an employee usually involves higher ongoing costs in India compared to hiring an independent contractor. These costs include salaries, social security contributions, gratuity, health benefits, leave encashment and compliance with labour laws which involves additional reporting and obligations.
(b) Independent Contractor Costs: Hiring independent contractors / freelancers can be comparatively less expensive as the client / overseas parent company is not responsible for employment-related taxes or benefits. The contractors / freelancers can be hired on a project basis or for a fixed term, which provides flexibility. However, contractors may charge a higher hourly rate than a full-time employee to factor in these costs themselves.
In a nutshell, hiring employees directly often involves higher upfront and ongoing costs but gives the employer more control. Independent contractors / freelancers can be cost effective but come with their own risks regarding control and monitoring.
Conclusion
Hiring is not a one-time activity, rather it is the start of a work relationship with an individual which needs to be constantly monitored. Fulfilment of expectations of both sides, i.e, employer as well as employee is important for smooth progress of business operations. This has an abstract element which is beyond law and touches the human aspect of individuals. Choosing the right hiring option not only helps the foreign company to address the legal or operational bottlenecks, but also has the impact of setting the expectations right for the employees from start.
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