Law and You > Labour Laws > The Industrial Relations Code, 2020 > Retrenchment Under the Industrial Relations Code, 2020

When a business, company or organisation faces a decline in its operations due to factors like reduced demand for labour, retrenchment becomes a necessary way to reduce the number of employees.  Retrenchment is one of the manners in which companies use to terminate employment.  Thus retrenchment is a kind of downsizing of the workforce. During the process of retrenchment, the establishment reduces outgoing money or expenditures or redirects focus in an attempt to become more financially solvent.

It is to be noted that retrenchment involves letting go of employees and workers because of economic and business reasons, rather than due to a dispute between the company and the employee. It is essential to carry out this process fairly and equally, ensuring principles of fairness and equality are upheld. The focus should be on achieving economic, social and industrial justice. It is important to note that retrenchment affects both the employer and the employee, leading to involuntary unemployment for the worker. This process requires consultation and government approval.

Retrenchment:

According to Section 2(zh) of the Industrial Relations Code, 2020, “retrenchment” means the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include—

• voluntary retirement of the worker; or
• retirement of the worker on reaching the age of superannuation; or
• termination of the service of the worker as a result of the non-renewal of the contract of employment between the employer and the worker concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
• termination of service of the worker as a result of completion of tenure of fixed term employment; or
• termination of the service of a worker on the ground of continued ill-health;

Exceptions to the Definition of Retrenchment:

It is better to understand first, what is not retrenchment?

• Retrenchment is not a punishment inflicted by way of disciplinary action.
• Voluntary retirement scheme is a method used by employers to reduce surplus staff. This mode has come about in India as labour laws do not permit direct retrenchment of unionized employees. Voluntary retirement is not retrenchment.
• The retirement of the workman on reaching the age of superannuation is a contract between the employee and employer. Hence it is not retrenchment.
• If the workmen are employed under a contract for a stipulated period, then terminating services of such employees at the end of the period of contract is not retrenchment.
• If workman is employed for fixed term employment then the termination of service of the workman as a result of completion of tenure of fixed term employment is not a retrenchment.
• The termination of employment of workman due to his/her ill health (medical grounds) is not a retrenchment.

Now, the termination by the employer of the service of a worker for any reason whatsoever not covered above is a retrenchment.

Essential Ingredients of Retrenchment:

1. There must be a termination of the service of a workman;
2. The termination must be by the employer;
3. For any reason whatsoever, and Otherwise than as by way of punishment inflicted by way of disciplinary action; and
4. Not in the list of exceptions.

In State Bank of India v. N. Sundaramony, AIR 1976 SC 1111 case, the Bank’s contention was that the termination of service is not retrenchment but the Supreme Court held that the termination of service is a retrenchment. The Court held that the definition of the term “retrenchment” includes the termination of services.

In Robert D’souza, v. Executive Engineer, Southern Railway, 1982 I LLJ 330 SC case, the Supreme Court held that any reason for whatsoever, it would be retrenchment, except if the case does not fall in any of the excepted categories.

Reasons for Retrenchment:

Retrenchment by an employer can be carried out for various reasons, as long as those reasons are just and legal. While it is generally a difficult decision for both employers and employees, certain circumstances may lead to the necessity of retrenchment. Here are some common reasons:

• Financial Challenges: Companies facing financial difficulties may resort to retrenchment as a cost-cutting measure. Economic downturns, declining revenues, or unexpected financial losses can force organizations to revaluate their staffing levels to stay afloat.
• Restructuring and Reorganization: Companies often undergo structural changes to adapt to evolving market conditions, technological advancements, or shifts in business strategies. This can involve streamlining operations, merging departments, or eliminating redundant positions, leading to retrenchment.
• Technological Advances: Automation and technological advancements may reduce the need for certain job roles. Companies that adopt new technologies to improve efficiency may find themselves with excess manpower, leading to workforce reductions.
• Mergers and Acquisitions: When two companies merge or one acquires another, there may be redundancies in job functions and positions. Retrenchment may be necessary to eliminate overlapping roles and create a more streamlined and efficient organization.
• Outsourcing: Some companies choose to outsource certain functions to external service providers to reduce costs. This can result in the retrenchment of in-house employees who were previously responsible for those outsourced tasks.
• Market Changes: Rapid changes in market demand, consumer preferences, or industry regulations can impact a company’s ability to sustain its current workforce. Adjustments may be necessary to align the workforce with the changing needs of the business.
• Cost-Cutting Initiatives: In an effort to improve profitability or navigate challenging economic conditions, companies may implement cost-cutting measures, and retrenchment is often one of the options considered to reduce labour costs.
• Natural Disasters or External Shocks: Unforeseen events such as natural disasters, global pandemics, or other external shocks can significantly impact businesses. These events may lead to decreased revenues or disruptions in operations, necessitating retrenchment as a survival strategy.
• Decline in Demand: A decrease in demand for a company’s products or services can result in excess capacity and, consequently, the need for a smaller workforce. This is particularly common in industries with cyclical demand patterns.

It’s important to note that retrenchment decisions should ideally be made with careful consideration, taking into account the well-being of the affected employees and the long-term sustainability of the organization. Companies often explore alternatives, such as retraining, redeployment, or offering voluntary retirement, before resorting to retrenchment.

In Haji Ismail Said & Sons Pvt. Ltd. V. First Industrial Tribunal, 1966 II LLJ 59 Cal. Case, the Court held that all retrenchments are termination of services but all termination of services are not retrenchments. Termination without reason cannot be called retrenchment. There must be valid and proper reason behind the retrenchment of a workman.

In Managing Director of Karnataka Handloom Development Corporation Limited v. Sri Mahadeva Laxman Raval, 16 November, 2006 case, the respondent was hired for specific hours and intervals as an expert weaver to train other weavers. His services were terminated when the contract period ended. The respondent raised an industrial dispute, but the Supreme Court ruled that this termination was not retrenchment as defined in the Act because the respondent was employed on a contract basis with a predetermined time frame and not as a regular worker.

In Delhi Cloth and General Mills Co. Ltd. v. Sambu Nath Mukerji, 1978 SCR (1) 591 case, the Supreme Court followed this interpretation of the definition and held that even “striking off the name of the workman from the rolls” for being absent without leave is “retrenchment”. Hence, the reasons of termination are not limited to any particular class of reasons, and need not be only on economic grounds such as redundancy, etc.

In Anand Bihari v. Rajasthan State Road Transport Corporation, Jaipur, AIR 1991 ASCIR 1003 case, the Supreme Court clarified that termination due to eyesight issues is considered a termination due to ill health and falls within the definition of retrenchment.

In Workmen of Subong Tea Estate v. Subong Tea Estate, 1964 I LLJ 333 SC case, the Supreme Court held that it is the sole discretion of management to decide the strength of the workforce but the retrenchment should be with proper and valid reasons. Thus the retrenchment of workmen can only be used to reduce uneconomical strength of workmen with proper and valid reason otherwise it may be considered as victimization of the workmen.

In Modern Stores v. Krishandas, AIR 1970 M.P. 16 case, the court held that the act of retrenchment is not malafide if it is done to reduce the uneconomical strength of workmen and it is a right of the employer to restructure the business.

Condition Precedent to Retrenchment:

According to S. 70 of the Industrial Relations, Code, 2020 no worker 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—

(a) the worker has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice;

(b) the worker has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days’ average pay, or average pay of such days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months; and

(c) notice in such manner as may be prescribed is served on the appropriate Government or such authority as may be specified by the appropriate Government by notification.

For a retrenchment in Labour Law to be considered valid, certain conditions outlined in Section 25F must be met. These conditions apply when an employee has been continuously employed for at least one year. Thus, the employee is entitled to the protection of S. 70 of the Code, if he is employed in an industry and has been in continuous service for not less than one year under the employer.

The prerequisites for a valid retrenchment are as follows:

• Notice to Employees: According to Section 70(a) of the Industrial Relations Code, 2020, the employer must issue a written notice to the workman at least one month before the retrenchment takes effect. This notice should specify the grounds for retrenchment and the retrenchment should only occur after providing this notice to the employees and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice. Such notice is not necessary if the retrenchment is under the agreement which specifies a date of termination of services.

• Compensation: According to Section 70(b) of the Industrial Relations Code, 2020, the employer is required to pay compensation which shall be equivalent to fifteen days’ average pay, or average pay of such days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months.
• Notice to Appropriate Authority: The appropriate government or authority must be notified in the prescribed manner, as specified in the official gazette.
• Adherence to Notice Regulations: According to Section 70(c) of the Industrial Relations Code, 2020, the employer must give notice to appropriate government in addition to the other two conditions. What is important to note is that the notice must state the reason for retrenchment of the employee and the notice must be issued as is prescribed in the rules framed under the Act.

Further, in the case of the employers of industrial units, who have employed three hundred workmen or more on an average per working day for the preceding twelve months (S. 77(1)) are required to comply with certain different conditions. What is critical to note is that unlike notice requirements of S. 70, the employer is required under S. 79 to make application along with the reasons of intended retrenchment to the State Government for seeking its prior permission to retrench the employee. The State Government has the discretion to grant or withhold such permission after making enquiries. Hence, a simple termination as per the contract of employment can prove disastrous in the event the termination is challenged. In this case the employer must issue a written notice to the workman at least three months before the retrenchment takes effect. This notice should specify the grounds for retrenchment and the retrenchment should only occur after providing this notice to the employees and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice. Such notice is not necessary if the retrenchment is under the agreement which specifies a date of termination of services

Failure to comply with these prerequisites renders a retrenchment invalid. If a retrenchment is found to be unlawful or is not approved by government authorities, the affected employee has the right to reinstatement with continuity of service and the right to wages for the period in question. It is to be noted that the procedure under S.70 or S. 79 of the Code itself does not, by itself, confer any right on the employer to retrench a workman.

In Bansi Light Railway Company Ltd. V. Joglekar, 1957 I LLJ 243 SC case, the Supreme Court held that the retrenchment is legal if other requirements of the definition of retrenchment are fulfilled. The employer has a right to discharge the uneconomic surplus and his act is bona fide and not for the purpose of victimization of his employees.

In Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., (1992) II Lab. LJ 294 (SC) case, the Supreme Court has held section 25 N of IDA, 1947 (S. 79 of the Industrial Relations Code, 2020) as constitutionally valid on the ground that the restrictions imposed on the right of employer to retrench workmen is in the interest of general public. It does not inferring Article 19 (1) (g) or the Constitution and duty to pass a speaking order and affording opportunity to the parties concerned is sufficient safeguard against arbitrary action. Authority is not invested with judicial power while functioning under subsection (2) of section 25-N and hence no appeal lies to the Supreme Court against an order passed under subsection (2) of section 25-N.

In Rajinder Singh Chauhan and others v. State of Haryana, 21 November, 2005 case, the employees who worked for the Haryana Store Federation of Consumers Co-operative Wholesale Stores Limited were retrenched in accordance with Section 25F of the Industrial Disputes Act of 1947. Dissatisfied with the retrenchment process, they initially challenged it in the Punjab and Haryana High Court through writ petitions under Article 226 of the Constitution of India but did not obtain a favourable remedy. Subsequently, the employees filed writ petitions in the Supreme Court, contesting the decision of the High Court. The Supreme Court ruled that the respondents, who were the employers, did not fall within the scope of Section 2(g) of the Industrial Disputes Act of 1947. Therefore, the High Court’s determination that Section 25N did not apply to the appellants’ retrenchment was correct. The matter was referred to the Supreme Court for a final decision. The Supreme Court upheld the constitutionality of Section 25N of the Industrial Disputes Act of 1947. The court reasoned that the restrictions placed on employers’ rights to retrench workers were in the interest of the general public and did not violate constitutional rights. Additionally, it was determined that if employers failed to comply with the provisions of Section 25N, it could lead to industrial disputes.

In Baldev Singh v. Labour Court, Chandigarh and another, (1991) II Lab. LJ 534 (P & H) case, the Court held that the contravention of section 25-F of the Industrial Disputes Act, 1947 (S. 70 of the Industrial Relations Code) renders the order of termination void and inoperative and entitle the workman to the relief or reinstatement with full back wages. If no reasons are given to depart from the normal rule of awarding full back wages, the workman is entitled for the same.

In National Masih v. U.P. Scheduled Caste Finance and Development Corporation Ltd. and others (1991) II Lab LJ 347 (All.) case, the services of a Director of the Corporation where terminated without paying any compensation under section 25-F of the Industrial Disputes Act, 1947 (S. 70 of the Industrial Relations Code). The function of Corporation is to organise and work is various ways for upliftment of down trodden, help them financially for various purpose, including starting industries and helping them in getting technical training. It was held that is view of the various activities being carried on by the corporation it is an industry within the meaning of the industrial Disputes Act and termination of their services amount to retrenchment which being in violation of section 25-F of IDA is illegal.

In Yashwant Singh Yadav v State of Rajasthan, (1991) 1 Lab LJ 501 (Raj.) case, the Court held that the definition of workman in section 2 (s) in IDA, 1947 does not make a distinction between a full time employee and a part time employee. The termination of even a part time employee amounts to retrenchment and if revisions of Section 25-F IDA are not followed the retrenchment will not be valid.

In Govind Singh v. Presiding Officer, Labour Court, 1993 (66) F.L.R. 560 (All.) case, the Court held that a daily wage employee could not be thrown out, without following procedure under section 25-F of IDA.

In Dattatraya Sahankarrao Karde v Executive engineer (1994) I LLN 297 (Bom.) case, the Court held that the condition for retrenchment or workman under clauses (a) and (b) of Section 25-F IDA are condition, precedent.

Procedure of Retrenchment (The Principle “Last come, first go”):

According to S. 71 of the Industrial Relations Code, 2020 where any worker in an industrial establishment who is a citizen of India, is to be retrenched and he belongs to a particular category of workers in that establishment, then, in the absence of any agreement between the employer and the worker in this behalf, the employer shall ordinarily retrench the worker who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other worker.

• For this purpose, the employer is also required to maintain a seniority list of the workmen. The system of last in first out is to be followed in retrenching workmen.

• If a case for retrenchment is made out, it would normally be for the employer to decide which of the employees should be retrenched. However, this rule is not intended to deny the freedom of the employer to depart from it for sufficient and valid reasons.
• The rule “last come first go” is intended to afford very healthy safeguard discrimination of workmen in regard to retrenchment. The departure from the ordinary industrial rule of retrenchment without any justification, may itself, in a proper case, lead to the inference that the impugned retrenchment is the result of ulterior consideration and hence it is mala fide and may amount to unfair labour practice and victimization. The rule of ‘last come first go’ has to be complied with for the validity of the retrenchment.
• The rule “last come first go” is not an inflexible rule and extraordinary situations may justify variations. For instance, a junior recruit who has a special qualification needed by the employer may be retained even though another who is one up is retrenched. But there must be a valid reason for this deviation. The burden is on the management to substantiate the special ground for departure from the rule. Section 71 of the Code insists on the rule “last come first go” being applied category wise and limits of the category to which he belongs.

In Swadesamitran Ltd. V. Their Workmen, AIR 1960 SC 762 case, the Supreme Court held that reasons such as inefficiency, habitual irregularity in the discharge of duties, and untrustworthiness are sufficient and valid reasons to deviate from the rule of “last come, first go”.

Retrenchment Compensation Calculation:

• It is obligatory on the part of the employer to pay retrenchment compensation at the rate of 15 days wages (for every completed year) to be calculated at the last drawn salary of an employee.
• Calculation of average pay is done by dividing the last drawn monthly salary by 25 and then multiplying the dividend by 15 for every completed year of continuous work.
• The calculation of compensation is to be based from the date of appointment and in case an employee has completed 240 days, he will be entitled to 15 days retrenchment compensation besides one month’s notice or salary in lieu thereof as if he has worked for one year. 240 days include Sundays or off days as well as a festival or national holidays.
• In case an employee has worked for more than one year, the procedure is that in case the subsequent period of one year is less than six months then it will be counted as one year for calculation of the compensation. While making calculations the period of notice is also to be taken into consideration.

In Management of Willox Buckwell (India) Ltd. V. Jagannath, AIR 1974 SC 1166 case, the Supreme Court held that even temporary worker can also claim retrenchment compensation.

In J. Reddy v. Railways, Guntkal Divn., 1975 I LLJ 351 A.P. case, the Court held that even casual workers can also claim retrenchment compensation if they are in continuous service for 1 year.

Re-Employment of the Retrenched Workman:

According to S. 71 of the Industrial Relations Code, 2020 where any worker is retrenched and the employer proposes to take into his employment any person within one year of such retrenchment, he shall, in such manner as may be prescribed, give an opportunity to the retrenched workers who are citizens of India to offer themselves for re-employment and such retrenched workers who offer themselves for re-employment shall have preference over other persons.

Thus, S. 71 of the Code, imposes a statutory obligation on the employer to give preference to retrenched workmen when he subsequently employs any person. To apply Section S.71 of the Code following conditions should satisfied:-

• The workman should have been ‘retrenched’ prior to the re-employment in question. In other words, if that workman’s termination of employment was not due to retrenchment, but due to some other eventualities like dismissal, discharge or superannuation, etc., he cannot claim the preferential right of re-employment under this section.
• He should be a citizen of India.
• He should offer himself for re-employment failing which he will forfeit the right.

In Delta Wire Pvt. Ltd. v. General Labour Union, (1995) IILLJ 287 Bom case, the Court held that the only right available to a worker who has been retrenched and compensated under the law is the preference for re-employment provided by Section 25H IDA (S. 71 the Industrial Relations Code, 2020). However, it does not guarantee the same level of service or position as before retrenchment.

Distinguish Between Lay-Off and Retrenchment

Lay-Off	Retrenchment
Lay-off is defined in Section 2 (t) of the Industrial Relations Code, 2020	Retrenchment is defined in Section 2 (zh) of the Industrial Relations Code, 2020
It is temporary	Retrenchment is permanent. They may again be appointed in appropriate cases.
In lay-off, the employer is compelled to refuse employment under certain circumstances, viz. shortage of raw materials, power, finance, etc., which arise temporarily in the industry.	In retrenchment, the employer lessens over-burdened employees under circumstances, viz. Government policies, loss in some departments, etc.
When the employer declares lay-off, the industry stops its function.	While the process of retrenchment is going on, the industry does not stop its function. It continues to function.
In lay-off, all the employees or a group of employees are refused to employment.	In retrenchment, the last come first goes. i.e. last employed person is retrenched first.
The Conditions Precedent is not necessary in case of lay-off.	The Conditions Precedent are to be followed in case of retrenchment, viz. notice to the concerned employee, notice to Government in the prescribed manner, etc. (S. 70).
The laid-off employees are paid laid-off compensation. The payment of gratuity does not arise in a lay-off.	The retrenched employees are paid retrenchment compensation + payment of gratuity
All of the laid-off employees should be taken back in their usual posts, as soon as the lay-off lifted out.	Re-employment of retrenched workmen also takes place in certain circumstances. But it is, not mandatory that all the retrenched workers should be re-employed. (Sec. 71)

Conclusion:

As per Section 2(zh) of the Industrial Relations Code, 2020, retrenchment is the termination of service of a worker “in any capacity whatsoever”, yet rejects termination by strategy for punishment demanded according to disciplinary activity, intentional retirement, retirement on achieving the period of superannuation if the agreement of employment contained such stipulation, non-rebuilding of the agreement of employment, and continued with ill health. Retrenchment might be because of inescapable reasons including justification or establishment of new work sparing apparatus. Retrenchment refers to the legal process of reducing surplus employees within a business, company or organisation due to various reasons like economic difficulties, restructuring or technological changes. To execute a valid retrenchment, specific conditions given in the Code must be met, including providing notice to affected employees, offering compensation and obtaining government approval.