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The Coffee Break Guide to Compliance – Vol. 15

Posted by: on 21 September 2018 in Amendments, HR, Human Capital Management, Talent Management

This post is part of the Coffee Break Guide to Compliance by Anandan Subramaniam. Please subscribe to the blog updates if you’d like to be notified of these posts. Please comment below with your doubts and queries.

The Coffee Break Guide to Compliance – Vol. 15 {Knowing the Variation between Retrenchment & Termination, and Employers’ Obligation}

In recent years, a few establishments are settling/separating employee’s on-roll, stating a common reason, “The project is getting over.”

An establishment cannot ordinarily inform the employee to go (to resign) or separate (issue pink slip). Notwithstanding, the employees are also not accepting an unceremonious separation.

The Industrial Disputes Act, 1947 has clearly defined and categorised various types of separations in a way where the Employer needs to comply as per the Act. It is the most important labour law governing the employer-workmen relationship, thereby laying down the mechanism to be complied by the employer in the process of separating a workman, and the compensation payable, if any.


Retrenchment means termination by the Employer of service of a workman for any reason other than as a punishment inflicted by a disciplinary action. Obviously, it does not include voluntary retirement of the workman or the retirement of a workman on reaching the age of superannuation.

Conditions for Retrenchment and the Compensation Process

  • Workman must have worked for 240 days.
  • Retrenchment compensation @ 15 days’ wages for every completed year to be calculated on the last drawn wages.
  • One month’s notice or wages in lieu thereof. This is in case of retrenchment for such employees where less than 100 workmen are employed in that establishment.
  • Whereas as per Chapter V-B, for such employees engaged in an establishment where more than 100 workmen are employed, the notice or wages in lieu thereof would be 3 months.
  • And prior permission of Government shall be obtained on an application made if the establishment is employing more than 100 workmen; it is only an information in a form of notice be served to Government in case it is less than 100 workmen.
  • Reasons for retrenchment to be informed; and
  • Complying with principle of ‘last come, first go’

As per the interpretation of various Hon’ble courts, Retrenchment must be understood as termination of service of staff on account of their being surplus. Retrenchment compensation has to be paid by the employer when a workman was discharged as surplus and not otherwise.


  • Termination usually refers to a separation after the completion of a fixed period agreed by both the workman and Employer, or at the end of a project for which the particular workman was recruited.
  • It also refers to end of a contract where both workman and employer agree not to renew on the completion of date mentioned in such contract.
  • Otherwise, it refers to separation of workman who is continuously reported ill.

Even during such termination, a formal notice in advance may save the employer from an unpleasant situation later.

Discharge or Dismissal

Where a workman was Discharged or Dismissed for any misconduct, it would neither be considered as Termination nor Retrenchment. Besides, when a workman is Discharged or Dismissed, it happens immediately as a punishment for his/her misconduct.

Recent Amendment by Government

The Government of India has recently amended the Industrial Establishment Standing Order Act to further ease out the industrial relations, by inserting a new provision and introducing the Fixed Term Employment.

Recently, Paragraph 2 of the (MSO) has inserted item 3A and has introduced Fixed Term Employment under the classification of workmen. Further, sub- paragraph (h) has been introduced which defines,

  • Fixed Term Employment: “A fixed term employment workman is a workman who has been engaged on the basis of a written contract of employment for a fixed period”

    Further to Amendment to Model Standing Order (MSO)

  • No Entitlement Notice on Termination
    • In paragraph 13 for sub- paragraph (b) of MSO, the following is introduced
      “No workman employed on fixed term employment basis as a result of non-renewal of contract or employment or on the expiry of such contract period without it being renewed, shall be entitled to any notice or pay in lieu thereof, if his services are terminated.”

Therefore, FTE on expiry of the term of employment is not entitled to any notice, which enables the Employer to make a smooth separation.

To safeguard the reputation and avoid risks, it is time for the establishments to ensure due compliance with applicable employment laws.

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