A Guide To Retrenchment In Labour Law

Often, we see organizations dismiss many employees from their company at once for some reason. However, this is not a termination; it is called the retrenchment of employees. Retrenchment mainly means removing or sacking some employees from your organization.

Any organization retrenches when there are some losses in their business or any kind of amendment is made. Due to these unavoidable situations, the organization needs to reduce the number of employees. But keeping in mind both the employee and the employer, some provisions have been made for retrenchment in labour law, only by following which an employer can retrench employees.

So in today's blog, we will learn in detail about the meaning of retrenchment in labour law and its reasons. Along with this, we will also understand the rights of the employees and the legal frameworks of the retrenchment.

What Is Retrenchment?

Retrenchment is terminating an employee’s service with the employer. It usually occurs for economic reasons, structural changes, or other operational requirements in the company.

If we talk about what is retrenchment in labour law, then it simply means that companies dismiss their employees from the organization to save costs or increase productivity.

These are not included in retrenchment because if they are, then the law applies to the employees.

Retrenchment meaning in the labour law: The term “Retrenchment” used in labor law means retrenched by the employer based on the performance or behavior of the employee. Retrenchment may be due to a reduction in the size of the business, mergers, technological advancements, or economic recession. It means that an organization or a factory terminates its surplus employees from the company due to unavoidable reasons.

Retrenchment in India is regulated by the Industrial Disputes Act, 1947 (IDA), Section 2(oo), which sets conditions and provisions for compensation to protect employee rights.

Causes And Circumstances Leading To Retrenchment

After building an understanding of what is retrenchment in labour law, let’s know the reasons behind retrenching the employees.

Here are some common causes of retrenchment including:

• Economic Recession: When the economy slows, companies cut costs, including by cutting jobs.
• Technological Change: Automation and technological upgrades often displace certain roles by reducing the workforce.
• Organizational Restructuring: Some of the reasons include retrenchment due to mergers, acquisitions, or changes in business strategies.
• Cost-Saving Measures: Retrenchment may be implemented by companies to reduce and streamline operational costs.
• Lack of Demand for Products or Services: A decline in product demand can cause companies to scale down production and let go of employees.
• Mergers and Acquisitions: In cases of mergers, companies often consolidate roles, leading to retrenchment.

There are two types of retrenchment:

• Voluntary Retrenchment: Voluntary resignation programs are often provided by the company offering the employees benefits.
• Involuntary Retrenchment: The reason for this retrenchment is that the company has to reduce the number of its employees, and hence they are ordered to leave the premises without any option. The employees are legitimate and entitled to compensation under the law.

Legal Framework Governing Retrenchment In India

In India, retrenchment is primarily governed by the Industrial Disputes Act, of 1947 or applicable labor laws, as the case may be. This law provides the terms of retrenchment so that employees are treated fairly.

The law requires companies to give prior notice to employees and compensation for retrenched employees.

Important Provisions Under The Industrial Disputes Act, 1947

1. Section 25F (Notice and Compensation):

• For a change of job or transfer, the employer has to give notice of a period of one month or pay instead of notice for a period of a few months to enable the employee to sustain himself and his family until they find another job.
• Retrenched employees must receive compensation, which is known as “retrenchment compensation” equal to 15 days of average pay for every completed year of service.
• When it is decided to retrench employees, the employer has to inform the government.

2. Section 25G of Retrenchment Order: The Act follows the principle of “last in, first out” (LIFO), wherever the most recent employees are to be retrenched first, and after that the other employees who had been hired before unless there is a pressing need to do so efficiently.
3. Re-Employment of Retrenched Employees (25H): If the company considers rehiring, priority is given to retrenched employees.
4. Applicability of the Law: Adequate provision has been made for “employees” mainly defined under the Industrial Disputes Act, which includes manual, unskilled, technical, and operational workers. The law cannot apply to managerial or supervisory employees unless in special cases.

Employer Obligations And Procedures For Retrenchment

Step-By-Step Process

To carry out retrenchment legally, employers need to follow these steps:

• Identify the Positions for Retrenchment: Decide which roles are no longer required.
• Notify Employees: Give a one-month notice to affected employees or pay them instead of notice.
• Provide Retrenchment Compensation: Offer retrenchment compensation equivalent to 15 days of average pay for each year of service.
• Check State Laws: Make sure all applicable state laws are followed.
• Maintain Records: Document all steps in the retrenchment process, including compensation and notice given.

Many employees don’t know what is Retrenchment compensation. So let us tell you that the retrenchment compensation is 15 days of wages for every completed year of service, and it is based on the current salary.

You can calculate retrenchment compensation by this method:15 days’ wages = Monthly monthly salary × 15 / 30

Legal Requirements Before Initiating Retrenchment

Section 25F of the Industrial Disputes Act, 1947 mentions the requirements for a legal retrenchment in labor law. These apply only to an employee who has completed one year on the job. The conditions required for a valid retrenchment in labor law are as follows:

1. Notice to the employees: Before employees are retrenched, it is necessary to give a notice in writing at least one month before the retrenchment is to be implemented. The reason for retrenchment is part of the notice of retrenchment. Also, employees can be laid off only after giving notice before that.
2. No requirement for notice if an agreement already specifies the date of termination: If employees originally agreed to retire from the job after a date identified, there is no need to give them notice at the time of retrenchment from their services.
3. Retrenchment compensation: If the employer fails to send notice of retrenchment to employees, compensation will be paid by the employer to the employees. This will not exceed fifteen days' earnings for each completed year of continuous service or any part of a period exceeding six months.
4. Notice must be given to the appropriate authority: You must notify employees before retrenching them from their jobs; it is necessary to notify the appropriate government or regulatory body. This must be given in the prescribed manner as stated in the Official Gazette.
5. Compliance with notice regulations: The notice provided to the employees should be by Rule 76 of the Industrial Disputes (Central) Rules, 1957, which deals with notice of retrenchment in labor law.

While removing employees from their services, the employer must act within the limitations imposed by the law, which are as follows:

• There should be good faith.
• The employees should not be harassed.
• The employer should not violate the applicable law.

Also Read : Difference Between Layoff And Retrenchment

Rights And Benefits Of Retrenched Employees

Retrenchment is a process that grants employees rights to ensure they are not discriminated against. However individuals may enjoy these rights differently according to local labour laws, employment contracts, and the region.

1. Notice Period: The employee must receive advance notice of retrenchment. If they are not given notice, they are entitled to be paid according to their contract and local labour laws.
2. Severance Pay: Under local laws and employment conditions, employees are entitled to a severance package or retrenchment compensation.If you are confused about what is retrenchment compensation, then we explain it in detail with the calculation.
3. Fair Selection: The decision on retrenchment must be made on a fair, impartial basis and free from the effects of discrimination or bias.
4. Reason for Retrenchment: An employee needs to know why the company is firing them, which are called legitimate business reasons.
5. Consultation and Representation: Employees or their representatives have the right to be consulted during the retrenchment process in many regions.
6. Grievance Options: If employees feel that the retrenchment decision was unfair or violated their rights, they can challenge or question such a decision.
7. Re-Employment Options: If possible, employers should offer redeployment or retraining within the company instead of retrenchment.
8. Counseling and Support: For mass retrenchment, employees should receive support services such as counseling or help in finding a new job.

Exceptions To Retrenchment Provisions

The definition of retrenchment does not cover the following situations:

• Voluntary Resignation: Retrenchment according to Labor Law does not refer to a case where an employee voluntarily and willingly resigns from his job.
• Retirement after Reaching Retirement Age: If an employee or the employer retires after reaching retirement age, retrenchment is not considered. But keep in mind that this provision must be mentioned in the employment contract.
• Non-Renewal of the Employment Contract: If the employer does not renew the employment contract and, as a result, the employee cannot work in the industry, the labor law does not consider retrenchment.
• Perpetual Ill-Health: If any employee is fired or terminated because he has regular health issues, then it is not considered retrenchment.

Role Of Labor Courts And Tribunals In Retrenchment Cases

Retrenchment Labour Courts and Tribunals are very helpful in dealing with disputes about retrenchment. They help ensure that companies retrench correctly, including the law, and protect the rights of employees.

Once an employee believes that his retrenchment is unfair, he can take the case to the Labour Court, which can be ordered to either pay the employee or re-employ that employee.

Complaint Procedure in Case of Retrenchment: An employee with a complaint regarding retrenchment may prefer to complain to the Labour Court. The jury has to be satisfied that all legal steps were taken and the rights of the employee were respected first and foremost.

Legal Remedies And Dispute Resolution In Retrenchment

Common Issues And Disputes Arising From Retrenchment

Disputes can arise when:

• Companies failed to provide fair compensation to the employees.
• Retrenchment is done in an unlawful manner and without following basic laws.
• Retrained employees may not be considered for new roles, despite having legal preference.

Legal Remedies Available to Retrenched Employees

If the law isn’t followed during retrenchment, then the government gives punishment to the employers. For this, there is a new rule, which is called Punishment for Infringement.

Under Section 25Q of the Industrial Disputes Act, if an employer doesn’t follow the provision of Section 25N and violates the fundamental provision of retrenchment, then the employer has to pay a penalty.

The employer will be bound to pay 1000 rupees or may be imprisoned for a period of up to 1 month or both.

Landmark Case Laws On Retrenchment In India

Lakshmi Devi Sugar Mills Ltd. v. Ram Sagar Pandey (1957)

In the case of Lakshmi Devi Sugar Mills Ltd. v. Ram Sagar Pandey (1957), the Supreme Court of India laid down important guidelines that an employer has to follow before dismissing (retrenching) an employee. The conditions given in these two paragraphs ensure fair retrenchment and legal validity.

• Financial justification: He therefore said that retrenchment must be proved to be due to financial reasons, such as a decline in business or an exodus of workers.
• Notice and compensation: As per Section 25F of the Industrial Disputes Act, 1947, employers have to give advance notice to affected employees and pay them retrenchment compensation.
• Last in, first out principle: For example, employers should try to hire their experienced senior employees first and in reverse order—that is, the later they join the company, the sooner they are fired.
• No alternative available: Employers must also prove that there is no alternative available other than retrenchment, for example, transferring employees to other jobs.

Meenakshi Mills Ltd. v. Meenakshi Mills Ltd Case

In Meenakshi Mills Ltd. v. Meenakshi Mills Ltd. and Others (1992), the workers filed a petition under Articles 14, 19(1)(g), and 19(6) of the Constitution on the ground that Section 25N of the Industrial Disputes Act is against to Articles 14, 19(1)(g), and 19(6) of the Constitution because it allows employers to terminate the services of workers.

Refusing to call the section unconstitutional, they said it violated their rights. Nevertheless, the Supreme Court declared Section 25N valid—retrenchment would take place but with restrictions to prevent unfair practices. It also emphasized that resolving such retrenchment disputes is open to both employees and employers who can seek court intervention.

Retrenchment in the Global Context

Retrenchment practices are followed around the world, but most countries emphasize employee protection through mandatory severance and equality during retrenchment.

Unemployment benefits and reemployment services are often robust in developed countries but are usually nonexistent or quite limited in developing countries.

Conclusion

In labor law, retrenchment is a process through which companies change their workforce according to business needs while protecting employee rights. Employers follow proper procedures to compensate employees for sudden job losses and treat them fairly. And also employees should know what is retrenchment compensation because it’s important for them and their families.

India has clear laws that govern retrenchment in a fair and just manner. Understanding what is retrenchment in labour law and following these laws is helpful for both employers and employees and makes retrenchment a fair deal for both parties.