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 or have had flagging profit reports may resort to retrenchment to share 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 of cutting back and downsizing.
Retrenchment: The Legal Aspect
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 whatever, 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;
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 year) to be calculated at the last drawn salary of an employee. 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 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 compensation. While making calculations the period of notice is also to be taken into consideration.
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 workmen has been given one months notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workmen has been paid in lieu of such notice, wages for the period of the notice:
(b) the workmen has been paid, at the time of retrenchment, compensation which shall be equivalent to 15 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).
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 workmen 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 of such authority as may be specified by that Government by notification in the official Gazette 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 the 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 workmen 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 workmen. 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.
Management of M.C.D. v Prem Chand Gupta (AIR 2000 SC 454)
Earlier appointment of worker was for one year and he was not confirmed after one year. But, after short break, workmen was reappointed against vacant post created by termination of services of another employee. Retrenchment was not for fixed period but the workmen continued to work on vacant permanent post for further 18 months. He completed not less than 240 days of continuous service for one calendar year immediately preceding impugned termination order. This termination amounts to retrenchment. Thus, he was entitled to be reinstated.
C.P.W.D v Madhukar Purshottam Kolharkar (2002) 9 SC 622
In this case respondent workmen was temporarily appointed on daily wages. The appointment order of respondent mentioned his termination at any time without notice. In the absence of fixed term in the order of appointment, it was held that provisions under Sec. 2(oo) (bb) would not be attracted. Thus, the respondent’s termination would amount to retrenchment.
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. 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 retrenchment.
Law Center-II, Faculty of Law, Delhi University, Second Year, Student