Laws relating to Retrenchment under Industrial Dispute Act, 1947

Retrenchment is something akin to downsizing. When a company or government goes through

retrenchment, it reduces outgoing money or expenditures or redirects focus in an attempt to
become more financially solvent. Many companies that are being pressured by stockholders or
have had flagging profit reports may resort to retrenchment to shore up their operations and make
them more profitable. Although retrenchment is most often used in countries throughout the
world to refer to layoffs, it can also label the more general tactic of cutting back and downsizing.

Retrenchment: The Legal Aspect

The above is a very informal definition of retrenchment. Retrenchment has more to it than just
termination of employment by a employer. There are a host of legal provisions which govern the
practice of retrenchment. Section 2 (oo) of the Industrial Disputes Act, 1947 defines
Retrenchment as -

” the termination by the employer of the service of a workman for any reason whatsoever,
otherwise than as a punishment inflicted by way of disciplinary action, but does not include -

(a) voluntary retirement of the workman, or

(b) retirement of the workman on reaching the age of superannuating if the contract of
employment between the employer and the workman concerned contains a stipulation in that
behalf; or

(b) termination of the service of the workman as a result of the non-removal of the contract of
employment between the employer and the workman concerned on its expiry or of such contract
being terminated under a stipulation in that behalf contained therein; or

(c) termination of the service of a workman on the ground of continued ill-health;

The definition of retrenchment was not included in the Industrial Disputes Act, 1947 in its
original form. It was inserted by Amendment to the Act in 1953. Thus the Industrial Disputes A
ct, 1947 provides for certain conditions in which the termination of employment would not be
considered as retrenchment. It is intersting to note here that the provision (bb) to Section 2(oo)
was inserted later through the Amendment Act 49 of 1984. Section 2(oo)(bb) provides that
termination of employment on non - renewal of employment agreement upon its expiry shalll not
be considered as ‘retrenchment’. Before this provision was added to the Act, the Courts were of
the opinion that non - renewal of such contracts of employment would constitute retrenchment for
the purpose of this Act. This opinion was expressed by the Supreme Court in Hindustan
Aluminum Corporation v. State of Orissa. It was later realized that the judgment was a bad
judgment and the provision (bb) was subsequently added to the section.

Some landmark case laws

The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and othershad restricted
the defintion of ‘Retrenchment’ under S.2(oo)(bb) to occur only when there is a ‘discharge of
excess labor’ by the employer. Later the Supreme Court in State Bank of India v. N. Sundara
Money, Punjab Land Development and Reclamation Corporation Ltd., Chandigarh v. Presiding
Officer, Labour Court, Chandigarh and subsequent decisions rejected the narrow interpretation
adopted by the Court in the earlier decision and held that any retrenchment, as defined in Section
2(oo), means termination by the employer of the service of a workman for any reason whatsoever
otherwise than as a punishment inflicted by way of disciplinary action and those expressly
excluded by Clauses (a), (b) and (c) of the definition. In view of these decisions, it cannot be said
that retrenchment means termination by the employer of the service of a workman as surplus
labor.

The Supreme Court excluded closure from the scope of retrenchment in Hariprasad Shivshankar
Shukla vs. A.D. Divelkar. Further, in the State Bank of India vs. Sundara Money, the Supreme
Court adopted the literal meaning of retrenchment, which is exhaustive and comprehensive and
held that the expression "for any reason whatsoever" was very wide and admitted almost no
exceptions. So, retrenchment means termination of a worker's services for any reason whatsoever,
other than those specified in Section 2(oo).

The Bombay High Court, in State Bank of India v. Sundaramony held that wherein the court held
that an analysis of the definition reveals four essential ingredients, namely

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
4) Otherwise than as by way of punishment inflicted by way of disciplinary action.

Procedure for calculation of retrenchment compensation

While effecting retrenchment of the workmen, it is obligatory on the part of the employer to pay
retrenchment compensation at the rate of 15 days wages (for every completed yaer) to be
calculated at the last drawn salary of an employee. The calculation of compenstation 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 noice or salary in lieu thereof
as if he has worked for one year. 240 days includes Sundays or off days as well as 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 compenstation. While making calculations the period of notice is also to be taken
into consideration.

Provisions related to retrenchment

Now that the law is settled on what retrenchment is, let us proceed to the provisions contained in
the Industrial Disputes Act, 1947, regarding the procedure to be followed in cases of
retrenchment.

Condition precedent to retrenchment

Section 25F provides the conditions precedent to retrenchment. According to this section the
employer must satisfy the following conditions before retrenching an employee employed for a
period of continuous period of not less than one year -

(a) the workman has been given one months notice in writing indicating the reasons for
retrenchment and the period of notice has expired, or the workman has been paid in lieu of such
notice, wages for the period of the notice:

(b) the workman has been paid, at the time of retrenchment, compensation which shall be
equivalent to fifteen days average pay [for every completed year of continuous service] or any
part thereof in excess of six months;and

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

Section 25N also lays down the conditions precedent to retrenchment -

1) No workman employed in any industrial establishment to which this Chapter applies, who has
been in continuous service for not less than one year under an employer shall be retrenched by
that employer until,-

(a) the workman has been given three months notice in writing indicating the reasons for
retrenchment and the period of notice has expired, or the workman has been paid in lieu of such
notice, wages for the period of the notice; and

(b) the prior permission of the appropriate Government or such authority as may be specified by
that Government by notification in the Official Gazette (hereafter in this section referred to as the
specified authority) has been obtained on an application made in this behalf.

(2) An application for permission under sub-section (1) shall be made by the employer in the
prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such
application shall also be served simultaneously on the workmen concerned in the prescribed
manner.

(3) Where an application for permission under sub-section (1) has been made, the appropriate
Government or the specified authority, after making such inquiry as it thinks fit and after giving a
reasonable opportunity of being heard to the employer, the workmen concerned and the persons
interested in such retrenchment, may, having regard to the genuineness and adequacy of the
reasons stated by the employer, the interests of the workmen and all other relevant factors, by
order and for reasons to be recorded in writing, grant or refuse to grant such permission and a
copy of such order shall be communicated to the employer and the workmen.

(4) Where an application for permission has been made under sub-section (1) and the appropriate
Government or the specified authority does not communicate the order granting or refusing to
grant permission to the employer within a period of sixty days from the date on which such
application is made, the permission applied for shall be deemed to have been granted on the
expiration of the said period of sixty days.

Procedure of retrenchment
Section 25G lays down the procedure of retrenchment. Where any workman in an industrial
establishment, who is a citizen of India, is to be retrenched and he belongs to a particular category
of workmen in that establishment, 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. 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.

Conclusion
Globalization induces labour market flexibility which India is yet to attain due to its unyielding
labour law system. It has started making attempts to achieve full employment of all resources and
optimal social welfare but several issues are left unanswered, including retrenchment.

Ordinarily, retrenchment is discharge of surplus labour by the employer. According to Section

2(oo) of the Industrial Disputes Act, 1947 (IDA), retrenchment is the termination of service of a
worker "for any reason whatsoever", but excludes termination by way of punishment inflicted
pursuant to disciplinary action, voluntary retirement, retirement on reaching the age of
superannuation if the contract of employment contained such stipulation, non-renewal of the
contract of employment, and continued ill health.

Retrenchment may be due to inevitable reasons including rationalization or installation of new

labour-saving machinery. An employer has a right to organize his business in any lawful manner
he considers best and courts cannot question its propriety. If re-organization results in surplus
employees, no employer is expected to carry their burden. There is consensus of judicial opinion
in deciding retrenchment on the facts and circumstances of each case.

Courts have decided 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, daily employees, invalid initial
appointment, compulsory retirement, and closure or transfer of business have been held to be
retrenchment.

Indian employers have responded to the restrictive retrenchment laws in several ways including
the greater use of contract, temporary and/or casual labour, the use of golden handshakes, and
setting up production in states where labour is not organized. The government is pursuing
privatization and disinvestment. Any anomaly in retrenchment laws, which address the basic
functioning of companies, needs the immediate attention of lawmakers.