Retrenchment Rules in India

In today’s extremely competitive market, businesses must take tough decisions to ensure they keep up with the market and are not left behind due to their unwillingness to retrench employees. Retrenchment may need to be conducted due to a number of reasons.
However, employers must make genuine efforts to help such employees avoid complications after the retrenchment process is complete.
Certain requirements must be fulfilled before the retrenchment process can be initiated in India.

Definition

Retrenchment refers to the permanent termination of the employment of an individual due to surplus labor, incapacity of the employee or some other financial reasons. This is basically a method adopted by organizations to reduce their workforce due to certain unavoidable reasons.

However, retrenchment has been given a much broader meaning under the Industrial Disputes (ID) Act, 1947.

Under Section 2(oo) of the Industrial Disputes Act, 1947, retrenchment refers to the termination of an employee’s services for any reason. However, termination of employment will not be considered as retrenchment if:

• The employment is terminated as a disciplinary action against the employee.
• The employee voluntarily retires.
• The employee retires on superannuation.
• The employee is relieved due to non-renewal of their contract.
• Employment has been terminated due to the employee being continuously ill.

As per the definition mentioned above, it can be said that termination of employment for any reason may be termed as retrenchment. However, there are certain requirements that must be fulfilled before an individual’s employment is terminated. These requirements basically safeguard the rights of the employees and promote welfare of labor.

Mandatory Requirements for Retrenchment

Section 25F

Section 25F of the ID Act states the requirements for retrenchment and is applicable on an employee who has been continuously employed for not less than a one-year period. The requirements for a valid retrenchment in this case are:

• One month’s written notice stating the reasons behind retrenchment was sent and the same period has expired, or the employee has been paid compensation for a one-month period instead of the notice period.
• The employee is compensated with an amount equal to 15-days average pay for every year that they have completed in the organization or any part thereof more than 6 months.
• The apt government or authority has been served a notice as per the predefined method.

Section 25G

As per Section 25G of the ID Act, in case of absence of an agreement between the employer and employee, considering the retrenched employee is an Indian citizen and falls under a specific category of employees in that specific industrial establishment, the employer shall first retrench the employee who was the last one to join the organization. This basically means that the employee who has served the least amount of time in the organization shall be the first one to be retrenched.

Note: There are certain special guidelines for organizations that employ 100 or more workers on an average for the preceding 12 months.

Section 25N

The mandatory requirements for retrenchment of employees who have served continuously for not less than a one-year period in the above-mentioned establishment is:

• Three months’ written notice stating the reasons for retrenchment was given and this period has expired or, alternatively, the employee has received compensation instead of notice period.
• Permission to do so has been obtained in advance from the apt government or designation authority. The employer must submit an apt application noting the reasons for the planned retrenchment. Thereafter, an inquiry shall be made by the authority after hearing all parties relevant to the case.

The Supreme Court upheld the constitutional validity of Section 25N of the ID Act in the case of Workmen of Meenakshi Mills Ltd. & Ors vs. Meenakshi Mills Ltd. & Ors.

It must be noted that employers that break the conditions mentioned under Section 25N shall be punishable with imprisonment of up to one month, fine that may extend up to INR 1,000 or both.

Employers must comply with the above-mentioned statements and ensure a legal and valid retrenchment process is conducted.

When it comes to the employees, different states in India have different regulations and requirements related to the employee’s notice, who are terminated through the simple removal process, the method of dismissal in case of misconduct, etc.

Besides, the terms of workers, who do not fall under the ID Act, are usually defined under their contracts. The contract shall list down the details of the conditions that may lead to termination of employment along with the method used for termination of employment as well.

When it comes to termination, generally, there is a notice period clause in employment contracts. Though, the clauses may even state that the employer can bypass fulfilling the requirements and simply pay the salary and other benefits to the employee as advance notice instead of asking them to serve a notice period.

The Delhi Shops & Establishments Act, 1954

The Delhi Shops & Establishments Act, 1954 applies to the entire National Capital Territory of Delhi. Along with other provisions, it also defines the conditions of work that are employed in shops, commercial establishment and other similar premises. Provisions for an employee’s dismissal are provided under Section 30 of the Act. These requirements are:

• The employee must be continuously employed for a period of not less than three months.
• One month’s written notice or compensation in lieu of notice must be given to the employee.
• If the employee is being terminated on grounds of misconduct, you don’t need to serve a notice provided that they have been given an opportunity to provide an explanation for the allegations against them.

Conclusion

It is imperative to duly comply with the mandatory requirements of the retrenchment process to avoid any potential disputes in the future. Besides, you must also be familiar with the instances in which termination shall not be deemed as retrenchment, like the employee taking voluntary retirement, termination due to non-renewal of contract, etc.