What is the Difference between Retrenchment & Layoff?

At times, companies may need to let go of some employees in order to tackle some unforeseen challenges in their business. This move aims to reduce the costs and manage the expenses by reducing the salary you need to pay at the end of every month. When letting go of employees in such instances, companies usually employ one of the two viable ways – retrenchment or layoff.

Retrenchment

When a company, regardless of the industry, starts losing value, retrenchment acts as a permanent solution to resolve the issue by reducing the number of employees working at the company, which, in turn, reduces the cost to the company. The process of retrenchment is initiated because of some economic and commercial issues, and not due to any conflict between an employer and their employee. This process also demands a consultative process and government approvals.

Retrenchment is a fundamental process that must be conducted fairly in accordance with the models of fairness and equality. The process impacts both employers and employees; such instances are referred to as worker’s involuntary unemployment.

The definition of retrenchment, as per laws in India, can be found under Section 2 of the Industrial Disputes Act, 1947. It refers to the termination of a section of the employees or labor force due to surplusage.

While retrenchment can be conducted for any reason, it does not include:

• Voluntary departure from the organization.
• Retirement because of age aspect and provisions of the contract.
• Termination due to the worker being continuously ill.

Some important conditions that must be fulfilled before retrenchment are stated under Section 25F. These are:

• Employees must be given one month’s notice in writing declaring the reasons for the retrenchment and renumeration for this one-month period.
• Employees must be compensated with fifteen days’ salary at the time of retrenchment.
• The same notice should also be served on the apt government.

Potential Reasons for Retrenchment

The employer may conduct retrenchment for any reason they deem fit. However, they must remain just and adhere to relevant legal provisions. When employees are terminated in a running or a continuous business as part of retrenchment, they may have been discharged due to various reasons such as:

• Financial Issues: If a company encounters some financial challenges or faces some loss in its income, they may consider limiting its employees through the method of realization.
• Rationalization in the Industry: An organization may choose to go down the path of retrenchment to reduce the extra workforce and prepare the company to adopt some new methods that would help them unlock more potential for growth.
• Some Technological Changes in the Industry: New technologies are being continuously adopted by companies around the globe. As such, if the technology reduces the number of employees required for certain actions, the company shall be bound to retrench.
• Breakdown of Machinery: Retrenchment may also be conducted if some machinery of the industry fails.

Layoff

The definition of ‘layoff’ can be found under Section 2 of the Industrial Disputes Act, 1947. Some crucial circumstances required for layoffs are mentioned below:

• Employer fails, refuses or is unable to hire the employee.
• The employer’s failure, refusal or inability to employ must be because of a lack of raw materials, accumulation of stocks, breakdown of some machinery, natural disaster, or any other related cause.
• The employee’s name must be mentioned in the establishment’s muster rolls.
• The employee has not been retrenched.

Difference between Layoff & Retrenchment

Layoff	Retrenchment
Layoffs refer to the temporary suspension of an employee by the employer.	Retrenchment is the permanent termination of an employee.
It majorly occurs due to some financial challenges or temporary shutdown of the business.	It is caused by a strategic approach that is necessary to reduce costs, downsize the company or simply restructure the organization.
Employees may be rehired when issues are resolved.	Employees shall not be rehired.
It is temporary in nature.	It is permanent.
You may or may not need to serve a notice period.	You must serve the notice period in this case.
Business may stop during the layoffs.	Business shall continue after declaration.
You may receive severance pay or certain benefits.	You may not get any compensation or benefits.

Suggestions to Help Avoid Ill-Executed Layoffs

• Issue Notices in Advance

Sending out notices to employees in advance helps employees reduce or potentially eliminate the unemployment period after they are relieved from their duties at your organization. This shall also reduce the dissatisfaction of such employees towards the organization, as they shall see you making efforts to help them even when the company is not in a good place itself. In addition, it shall help such employees avoid unnecessary expenses and save money rather than facing a financial disaster post termination of employment.

• Create a Clear Business Policy

It is advised to create a clear and concise set of guidelines that shall help conduct ethical and humane layoffs. The employer is liable to communicate their concerns with employees using clear policies and procedures. Preparing a policy does not hinder the business in any way, but simply clarifies the company’s concerns and position in different situations.

• Help with Outplacement

It is vital to help employees obtain new jobs to ensure they are not worried about their unemployment period. Considering outplacement is provided as compensation, laid off employees are bound to find a job much earlier than if they had conducted the job search themselves. This is usually conducted by big companies that aim to assist the displaced workers find apt roles quickly and without having to deal with unnecessary worries.

Conclusion

Layoff and retrenchment are difficult activities that affect both the employer and employees. While employers may claim that these steps are vital for the company’s survival, employees may argue that it shall result in loss of their livelihood and create insecurity. Although it is understandable that layoff and retrenchment are necessary steps for the business when it is not in a good phase, employers must ensure that they make efforts towards making it as less troublesome for the employee as possible.