A notice period is the time an employer or employee must give before employment ends. Pay in lieu of notice (often called PILON or notice pay) is the salary paid for that period instead of asking the person to work it. In India, the rules come from three places: the employment contract, the state Shops and Establishments Act or standing orders, and, for retrenchment, the Industrial Relations Code, 2020.
There is no single legal notice period for every employee in India. Most notice periods are set by the appointment letter, standing orders or the state Shops and Establishments Act. The Industrial Relations Code sets a floor for retrenchment: a worker with at least one year of continuous service must get one month’s written notice or wages for that month instead, plus retrenchment compensation of 15 days’ average pay for every completed year of service. In an industrial establishment with 300 or more workers, the notice is three months, or wages in lieu, and the employer also needs prior government permission. These rules cover “workers”, which excludes managerial and administrative staff and supervisors earning more than ₹18,000 a month. Whatever the reason for exit, the Code on Wages requires final wages to be paid within two working days.
What is pay in lieu of notice?
Pay in lieu of notice means the employer ends employment straight away and pays the salary the employee would have earned during the notice period. It lets a company close an exit quickly, for example in a restructuring or when a role needs to end before the notice runs out. It works in reverse too: an employee who leaves without serving notice may have to pay the employer for the shortfall, if the contract says so. This is usually called notice period buyout or notice pay recovery.
Is there a legal minimum notice period in India?
For most exits, no. The law sets minimums only for certain situations and certain staff:
| Situation | Minimum notice | Source |
|---|---|---|
| Retrenchment of a worker with 1+ year of continuous service | 1 month’s written notice, or wages for that month instead | IR Code, section 70 |
| Retrenchment in an industrial establishment with 300+ workers | 3 months’ written notice, or wages instead, plus prior government permission | IR Code, section 79 |
| Resignation by an employee | As per the appointment letter, standing orders or state Act | Contract and state law |
| Exit of managers and administrative staff | As per the contract and the state Shops and Establishments Act | Contract and state law |
The IR Code defines a worker as anyone employed for manual, unskilled, skilled, technical, operational, clerical or supervisory work, but not people employed mainly in a managerial or administrative capacity, or supervisors drawing more than ₹18,000 a month.
What does the IR Code require when you retrench a worker?
Section 70 sets three conditions before a worker with at least one year of continuous service can be retrenched:
- Notice: one month’s notice in writing with the reasons, or wages for the notice period instead.
- Compensation: 15 days’ average pay for every completed year of continuous service, or any part of a year above six months.
- Government notice: a notice to the appropriate government in the prescribed manner.
Section 83 also asks the employer to contribute 15 days’ last drawn wages for each retrenched worker to the worker re-skilling fund. For industrial establishments with 300 or more workers, section 79 raises the notice to three months and requires prior permission from the government. For the wider changes, see our Industrial Relations Code guide for employers.
How is notice pay calculated?
Notice pay is the pay for the days of notice not served. The appointment letter should say whether it is based on gross monthly salary or on basic pay, and most employers use gross salary. For a retrenched worker, the legal minimum is the wages for the notice period.
Example: an employee on a gross salary of ₹60,000 a month has a 60-day notice period. The employer asks them to leave after 20 days. If the contract uses gross salary, notice pay for the remaining 40 days is ₹60,000 × 40 ÷ 30 = ₹80,000.
Can you recover notice pay when an employee leaves early?
Yes, if the appointment letter says so. Employers usually adjust the shortfall in the full and final settlement. Deductions from wages are restricted under the Code on Wages, so put the recovery terms in writing, show the calculation on the settlement statement, and take advice before recovering anything that is in dispute. Many employers also allow early release by mutual agreement, which is often the simpler route.
Can you waive or shorten the notice period?
Yes. Either side can agree in writing to shorten or waive the notice. If the employer shortens it, the employee is normally paid for the remaining period unless they agree otherwise. Some employers instead keep the employee on payroll but away from work for the notice period, often called garden leave, which should also be allowed by the contract.
What are the payment deadlines at exit?
Under section 17(2) of the Code on Wages, wages due to an employee who resigns, is removed, dismissed or retrenched must be paid within two working days. Build notice pay, leave encashment and other dues into the same settlement. See our full and final settlement guide and the full and final settlement calculator.
Notice periods for employees hired through an EOR
For a foreign company hiring through an Employer of Record, the EOR is the legal employer, so the notice period, notice pay and settlement follow the EOR employment contract and Indian law, not the law of the client’s country. Agree the notice terms and who pays notice pay at the start. Read more on ending an EOR employee’s contract in India.
Employer checklist
- State the notice period for each side in every appointment letter.
- Say whether notice pay is based on gross or basic salary.
- Write down when notice pay can be recovered and how.
- For retrenchment of workers, follow sections 70, 79 and 83 of the IR Code.
- Check your state’s Shops and Establishments Act and any standing orders.
- Pay final dues within two working days of the exit.
Frequently asked questions
Is a notice period mandatory in India?
Not for every exit. It is set by the contract, standing orders or state law, with legal minimums for retrenchment of workers under the IR Code.
What is the notice period for retrenchment under the new Labour Codes?
One month’s notice or wages in lieu for a worker with one year of continuous service, and three months plus prior permission in industrial establishments with 300 or more workers.
Is pay in lieu of notice allowed in India?
Yes. The IR Code allows wages for the notice period instead of notice for retrenchment, and contracts commonly allow it for other exits.
Can an employer refuse to relieve an employee before the notice period ends?
The employer can ask the employee to serve the notice agreed in the contract, or accept a buyout if the contract allows one. Early release is usually agreed by both sides in writing.
How quickly must final dues be paid?
Within two working days of resignation, removal, dismissal or retrenchment, under section 17(2) of the Code on Wages.
TMS has managed payroll and compliance for companies in India since 2006. We draft notice and exit terms, calculate notice pay and settlements, and close full and final settlement on time, including for EOR employees. Talk to our team.
Sources: Industrial Relations Code, 2020: section 2 (definition of worker), sections 70, 79 and 83; Code on Wages, 2019: section 17. Labour Codes in force from 21 November 2025. General information, not legal advice. Last reviewed 15 October 2026.