Large corporations around the globe such as Twitter, Meta, Amazon etc., are reported to have laid off employees for various reasons and workforce everywhere is going through a phase of uncertainty, and India is no different. In common parlance, ‘lay-off’ is generally referred to reduction in workforce or downsizing.

The Indian laws regulate the reduction in workforce to an extent as discussed below:

The Industrial Disputes Act, 1947 (“IDA”):

The IDA regulates the retrenchment of “workmen”. “Workmen” refers to the non-managerial and non-supervisory employees; and the term “retrenchment” refers to termination of employment of a workman for whatever reason, except as a consequence of proved acts of misconduct, expiry of the employment contract, continued ill-health, voluntary retirement and superannuation of a workman. Hence, termination of surplus workmen or what is commonly referred to as layoff in an existing or a continuing business will amount to retrenchment.

Under the IDA, a workman who has been in continuous service for not less than one year under an employer shall not be retrenched by the employer until the workman has been given one month’s notice in writing indicating the reasons for retrenchment or paid wages in lieu of such notice, and he has been paid 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. The IDA also requires the employer to serve a notice of retrenchment in the prescribed manner on the appropriate Government or such authority as may be specified in this regard.

In some cases, permission from the appropriate Government is required for retrenching the workmen where workforce ranges between 100 to 300 workmen. In a case, the Supreme Court [1] held that the notice and payment of retrenchment compensation are “condition precedent” to retrenchment, and the non-compliance with the same will vitiate the retrenchment. The employer should also follow the ‘last in first out’ rule for retrenching the workmen. Hence, it is incumbent to the employer to comply with these requirements for retrenching the services of the workmen.

State-specific Shops and Establishments Acts:

Companies and establishments falling within the purview of IT services, retail establishments, restaurants etc., are generally covered under the State specific Shops and Establishments Acts. These State-specific acts require the employer to do the following before termination:

  • Provide at least one month’s written notice or payment in lieu of notice to the employees prior to terminating their employment with the company, and
  • Such termination shall be for a reasonable cause.

Other terminal benefits:

Indian laws also prescribe certain other terminal benefits to the employees such as gratuity and leave encashment.

The payment of gratuity is regulated under the Payment of Gratuity Act, 1972 and the employees who have rendered continuous service of five years with the employer will be eligible for the payment of gratuity. The leave encashment is the payment of wages to an employee in respect of earned leaves un-availed by them, and the same is typically regulated under the State-specific Shops and Establishments Act and Factories Act, 1948, as applicable.

Contractual commitment by the employer:

The above laws prescribe the minimum requirements to be complied by the companies prior to reducing the workforce. However, if an employer has committed by way of a contract with the employee to pay higher severance compensation or extend benefits much favourable to the employees, then they should adhere to the same. It is to be noted that the contractual agreement shall be consistent with the state or the central labour laws to avoid any legal complications.

Alternative arrangements:

In practice the retrenchment of workmen is often challenged in the court of law. It may also get complicated in establishments wherein the workmen are unionised. In addition, the requirement to get the government approval for retrenchment in certain cases, further prolongs the process. The alternative arrangements recognised in India are the voluntary retirement schemes, and employers have offered the employees ‘golden handshake’ payment in lieu of their separation from the employer. The  Supreme Court [2] has observed that ‘golden handshake’ is paid not for doing any work or rendering any service, but paid in lieu of an employee himself leaving the services of the company and forgoing all his claims or rights in the same. Such arrangements settle the claims of concerned employees in full and final, sans prescribed rules [3].

It is to be noted that the contractual commitment or a ‘golden handshake’ should be in addition to the statutory dues payable to the employee. Industrial Disputes Act and Shops & Establishment Act provide remedies to employees in case of illegal or unlawful termination; and an employee may also approach civil courts in certain cases.

Conclusion:

The above being the legal position on reduction in workforce, the companies shall ensure that due process laid down under applicable laws is followed in all cases of termination of employment. Further the termination of employment should be in good faith and not in the colourable exercise of the employer’s rights so that the same is upheld in the court of law, if challenged.


[1] Bombay Union of Journalists and Ors. Vs. The State of Bombay and Ors. (19.12.1963 – SC)

[2] A.K. Bindal and Ors. vs. Union of India (UOI) and Ors. (25.04.2003 – SC): MANU/SC/0349/2003

[3] Union of India (UOI) and Ors. vs. Manpreet Singh Poonam and Ors. (08.03.2022 – SC): MANU/SC/0280/2022

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