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Retrenchment – A Snapshot

Posted by: The ADP Team on 1 July 2019 in Human Capital Management

(Volume – 44 of Coffee Break Compliance Guide from Anandan Subramaniam)

In these days of project based / client based business operations, it is a formidable task for every establishment to “be competitive”. Both the Human Resources and Finance need to be watchful in regulating the right manpower required for establishments in managing the Revenue & Expenses.

Managements need to make-up the revenue loss when there is a project closure / no new client additions.  Many of the establishments use the tool – Retrenchment, which is nothing but a downsizing or right-sizing or reduction in manpower. This is being exercised by the employers, for the following reasons:

  • To reduce expenditure (by reducing expense, an outgoing money, make the company becoming financially solvent)
  • Loss of operating income
  • Re-organizing company structure
  • Due to economic downturns, business losses, closure of projects
  • Pressure from the Investors
  • Pressure from the Shareholders
  • A tactical move before acquisition or merger or de-merger

Managements do (need to) explore few actions before such exercise, viz,

  • Monitory viability to settle retrenchment compensation, where there is a bulk retrenchment
  • Consider alternatives to retrenchment,
    • Postpone investments into
      • innovation, new technology, modernized equipment/ product/ services
    • Concentrating only on profitable – product producing / services
    • Reducing administrative expenses
    • Decreasing benefits of workers
    • Freezing promotions, increments, trainings, replenishment of vacancies, etc.

When decided, the Human Resources shall,

  • Disclose information to all those workers, who will be impacted
  • Proposed timeframe for separation
  • Transparent selection of individual – shall be Fair and opportunity to make an appeal is to considered

Establishments are choosing such manpower based on the

  • Years of Service & Performance
  • Discipline on duty & Commitment to work
  • Knowledge & skills

Nevertheless, while executing so, it shall not be a Discrimination of

  • Gender
  • Union membership
  • Race or Colour or Caste or Nationality or Ethnicity or Religion or Age

Essentially Retrenchment refers to discharge of surplus labour by the employer. This is due to various factors as mentioned above. While exercising Retrenchment, the Principle to be followed by an establishment, is clearly stated under the Industrial Dispute Act, 1947.

The Original Act does not have a definition of word “Retrenchment”, which was subsequently inserted in an amendment in 1953. And in 1984 a further amendment with insertion of section 2(oo) (bb) clearly defines the word “Retrenchment” – where non-renewal of contract of employment between employer and workman, does not mean Retrenchment.

Retrenchment – what the Provisions of ID Acts states:

  1. Section 2(oo) of the Act defines ‘retrenchment’ as meaning the termination by the employer of the service of a workman  for any reasons whatsoever,  otherwise than as a punishment inflicted  by way  of disciplinary action, but does not include (i) voluntary retirement (ii) superannuation (iii) termination due to non-renewal of contract
  2. Section 25 F – The mandatory conditions of Retrenchment – no workman  employed in any industry who has been in continuous service for not less than one year under an employer  shall be  retrenched by  that employer until he has been  paid at the time of the retrenchment, compensation which shall  be equivalent to 15 days’ average pay for every completed years of service or any  part thereof in excess of six months 
  3. Section 25 G – The Procedure of Retrenchment in the absence of any agreement between the employer and the workman in this behalf, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other workman.
  4. Section 25 N – Conditions precedent to retrenchment – Prior permission of the concerned State Government is mandatory for retrenching 100 or more workers, else the termination is termed illegal.
  5. Section 25 Q – Penalty for lay- off and retrenchment without previous permission- Any employer who contravenes the provisions of section 25M (related to layoff) or section 25N shall be punishable with imprisonment for a term which may extend to one month, or with fine which may extend to one thousand rupees, or with both.

Where the Industrial Disputes Act states that, where the Employer has to right to “Consolidate” the state of affairs of his business – through layoff, retrenchment etc., the Worker does have the right to get lawful compensation.

The Hon’ble courts of India, had in many cases had decided the retrenchment on the facts and circumstances of specific cases. More specifically, it has ruled that termination of services due to loss of confidence in an employee, inefficiency or misconduct does not amount to retrenchment. Termination for unauthorized absence from duty, discontinuance of service of casual or daily workers, invalid initial appointment, compulsory retirement and closure or transfer of business have been held to be retrenchment.

Let the handshake be smooth and lawful.

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TAGS: Employment Employment Legislation Labour Management

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