Retrenchment: Meaning and Legal Provisions


July 29, 2018

Under the Indian Labour Law, the law relating to Retrenchment constitutes an essential aspect of Labour Law. The provisions relating to Retrenchment are discussed below:

  1. Industrial Dispute Act, 1947 (ID Act) – This is a Central Act and governs any establishment falling under the definition of “Industry” under Section 2(j) of the Act.

Under this “industry” means any systematic activity carried on by co-operation between and employer and his workmen for production, supply or distribution of goods or services.

  1. Shops and Establishments Act of States

What is Retrenchment?

The term “Retrenchment” has been given a very wide meaning under Section 2(oo) of the ID Act to include termination by the employer for any reason whatsoever, other than a punishment given in disciplinary proceeding.

The provision further states that Retrenchment does not include:

  1. Voluntary retirement;
  2. Retirement on reaching age of superannuation;
  3. Termination of service of workman as a result of non-renewal of contract of employment;
  4. Termination of workman due to continuous ill-health

A mere perusal of the aforesaid provision shows that the employer has been given wide discretion for terminating an employee as it states that employer can terminate for any reason whatsoever…

What Conditions have to be fulfilled for retrenchment?

Section 25F of the ID Act is a very essential provision for law relating to retrenchment.

If the conditions or requirements given in this provision are not followed by the employer, then the retrenchment of employee will be illegal and invalid.

According to this provision, a workman employed in any industry who has been in continuous service for not less than one year under an employer cannot be retrenched unless-

  • The workman has been given one month’s 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;
  • The workman has been paid compensation at the time of retrenchment;
  • Notice in the prescribed manner is served on the appropriate Government

Hence, if aforesaid conditions have not fulfilled by the employee before retrenching employee, then the employee can challenge the same.

Section 25FF of the ID Act provides for Compensation to workmen in case of transfer of undertakings.

According to this provision where the ownership of management of an undertaking is transferred from the old employer to a new employer, a workman is entitled to notice and compensation.

However, the workman shall have been in continuous service for minimum one year in that undertaking immediately before such transfer.

In the case of Ambala Cantt. Electric Supply vs Commissioner of Income-Tax, the High Court of Punjab & Haryana had explained the object of Sections 25F and 25FF of the ID Act. The Court in the case observed that Section 25FF was introduced to safeguard the rights of workmen, who because of the transfer of an undertaking could not be employed by the transferee.   The Court in the case further observed that the language of Section 25FF of ID Act makes it clear that if the right of the retrenchment compensation accrues to the workman, then it must be a right to receive compensation from the employer, who was its” (undertaking’s) owner uptil the date and time of transfer. The only thing to be guarded against is that the retrenchment should not be by way of punishment, but in anticipation of a transfer.

The issue of Retrenchment compensation was also dealt with by the Supreme Court in the case of Commissioner of Income-Tax vs Gemini Cashew Sales Corporation.

In this case, the Supreme Court held that the Liability to pay retrenchment compensation arises under Section 25FF when there is a transfer of the ownership or management of an undertaking: it arises on the transfer of the undertaking and not before. The right, therefore, arises from determination of employment, or from transfer of the undertaking: it has no existence before these events take place.

Consent of Workmen for Transferring an Undertaking– In the case of Sunil Kumar Ghosh v. K. Ram Chandran, the Supreme Court held that without consent, workmen cannot be forced to work under different management and in that event, those workmen are entitled to retirement/retrenchment.

Retrenchment of White Collar Employees

The term white collar employees has nowhere been expressly defined under the Indian Law. However, white collar employees are those who work in the managerial capacity.

Thus, the employees who don’t fall under the definition of “workman” under Section 2(s) of ID Act are white collar employees. The definition of workman any person (including an apprentice employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute.

The definition of “workman” specifically excludes those persons who are employed in managerial or administrative capacity.

Hence, white collar employees are not governed by the ID Act and retrenchment or termination on account of redundancy is also not governed by the provisions of the ID Act.

In private sector organizations, the employment and termination of white collar employees or employees who do not fall under the definition of “workman” under Section 2(s) of the Industrial Dispute act, 1947, will majorly be governed by the terms of the employment or the employment contract.

If there is any breach of the terms of employment contract, then the employee can claim damages from the employer.

Expert advice indicates that in big organizations, the employer in general does not terminate an employee on the grounds of redundancy. Rather, the employer through negotiation arrives to a settlement for voluntary resignation in lieu of compensation. In such cases, the employee becomes bound by voluntary resignation and there is hardly any scope for him to challenge the termination.

Hence, if the employee does not fall within the definition of “workman” under the Industrial Dispute Act, 1947 then in private sector his/ her employment, termination and other aspects will be governed by the contract of employment.

Severance pay would again be governed by the terms of employment contract and if the employee (including employee in managerial or administrative capacity) has been in continuous services of the employer for not less than 5 years then he/she is entitled to payment of gratuity under Section 4 of the Payment of Gratuity Act, 1972.