Employee vs. contractor: how to classify workers in India (quiz included)


Apr 20, 2023

When hiring workers in India, it's crucial to classify them correctly—otherwise, you risk significant penalties.

Indian authorities can crack down on the misclassification of workers, and order companies to pay millions of INR in back taxes and fines.

Misclassification is also damaging for workers: it cheats employees out of social security benefits and protections they're entitled to under Indian law, such as minimum wage, overtime pay, vacation pay, and employment insurance benefits. This has a negative impact on the company’s reputation, too.

Learn about how to classify your workers correctly—and stay compliant with Indian labor and employment laws—in this guide.

  • Classifying workers in India
    • What is an employee in India?
    • What is a contractor in India?
    • Worker classification overview: Employees vs contractors in India
    • How to classify your global workers in 90 seconds
  • Tests to classify workers in India
  • Penalties for misclassifying workers in India
  • Hire, manage, and pay employees and contractors in India with Rippling—without worrying about classification

Classifying workers in India

As in many countries, India categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
What is an employee in India?

In India, an employee is defined as an individual who works for an employer in return for wages or other remuneration. Employees are defined by various federal and provincial laws, but the most important distinction is that India's robust worker protection laws always apply to employees—meaning they're always entitled to statutory benefits, including:

  • Employees’ Provident Fund contributions
  • Vacation pay
  • Holiday pay
  • Sick leave
  • Maternity leave

What is a contractor in India?

In India, an independent contractor is defined as an individual who provides services to a business or organization, but who is not an employee of that business or organization. Independent contractors are also known as self-employed individuals, consultants, or freelancers. India also has “contract workers,” who are either subcontracted by independent contractors or work indirectly for a company on a short-term basis.

Independent contractors in India include:

  • Gig workers. People who work jobs that are hourly, part-time, or temporary (e.g. a freelance writer or adjunct professor).
  • Platform workers. People who work for companies that provide services to consumers from an online platform (e.g. Uber drivers).

Worker classification overview: Employees vs contractors in India

The Indian government uses certain criteria to define the employment relationship—and whether it's an employer-employee relationship or an employer-independent contractor relationship.

Below are the main factors.



High level of worker control. Contractors are generally given more autonomy to determine how to complete the work and when to do it.

More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.

Equipment and tools are owned by the worker.

Equipment and tools are typically provided by the company.

Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment.

Highly integrated. Employees are typically more integrated into the employer's organization, for example, they may work at the employer's premises.

No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own income taxes.

Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like health insurance, retirement plans, and paid sick leave.

Time-bound engagement. Contractors are typically engaged for a specific project or period of time.

Indefinite engagement. Employees are generally hired for an indefinite period of time.

Limited disciplinary action. Apart from terminating the contract, companies can’t take action against contractors for misconduct.

Disciplinary action. With just cause, companies can take action against employees for misconduct.

Non-exclusive services. Contractors cannot be contractually bound to a single company; they can provide their services to more than one organization.

Exclusive services. Employees can be contractually bound to provide services to just one company.

How to classify your global workers in 90 seconds

Are you classifying your workers correctly? Find out now.

Accurately classifying your employees and contractors is crucial for complying with employment regulations in India and around the world. With our free classification quiz, you can mitigate the potential business risks and ensure you’re correctly classifying employees and contractors—in just 90 seconds.

Tests to classify workers in India

If you want to classify workers yourself, Indian courts have used a series of "tests," to gauge the type of work that distinguishes hiring employees from hiring independent contractors.

Keep in mind that in a dispute, authorities look at all aspects of the working relationship, and no single test should be considered conclusive for classifying a worker.

  • Control test. Evaluates the amount of control the employer has over the worker.
  • Integration test. Determines whether a worker is involved in day-to-day business operations or independent of it. Employees are generally more integral to a company.
  • Dismissal. Employees are entitled to termination proceedings, whereas contractors can be dismissed for violating the terms of their agreement.

Indian labor law also places certain limitations on companies that hire contractors. The Contract Labor (Regulation and Abolition) Act, for instance, doesn’t allow for contractors to be hired for jobs that are “perennial in nature,” meaning contractors can only work jobs that are set to expire within a fixed time period.

Manage contractors effortlessly under a single system with Rippling

Penalties for misclassifying workers in India

Businesses found to have misclassified employees as contractors in India face serious financial risk. Potential penalties include:

  • Back pay
  • Back taxes on entitlements
  • Government fines
  • Loss of intellectual property rights
  • Loss of business license
  • Jail time

There's more than just the financial risk. Companies found misclassifying workers can suffer other consequences, such as legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies.

Indian authorities are motivated to audit and investigate businesses they suspect are misclassifying workers so they can increase their tax revenue. Employee misclassification, whether accidental or intentional, is risky and potentially very costly.

Classifying workers in India is complex. Check if you're classifying them correctly with our free quiz.

Hire and pay contractors and employees in India with Rippling—quickly and compliantly

Running a global workforce is hard work—especially when it comes to understanding and complying with local labor laws.

  • With Rippling, you can onboard and pay contractors in India in a single system with localized onboarding, flexible payments in local currency or USD, and country-specific consulting agreement templates.
  • You can also hire full-time employees in India through a Rippling entity. Rippling provides benefits, ensures compliance, and handles employee events like leave, performance management, and terminations.

See Rippling in action today.

Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.

last edited: July 13, 2023

The Author

Jackson Knapp

Jackson is a writer from DC, based in Los Angeles. For Rippling, he writes about the global workforce and specializes in hiring trends in Australia, India, the Philippines, and Japan.