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.
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.
· Kumar H.L. Labour Laws. (Delhi: Universal Law Publishing Co.) 2006.
· Kumar H.L. Dimissal Discharge and Retrenchment. (Delhi: Universal Law Publishing Co.) 2000.
· Available at http://www.citehr.com/16363-legal-provisions-under-industrial-disputes-act.html#axzz1CPDWtKY2, visited on 30th January 2011.
· Available at http://jurisonline.in/2009/05/retrenchment-the-legal-aspect/, visited on 30th January 2011.
# H.L. Kumar,Dismissal, Discharge and Retrenchment (Delhi: Universal Law Publishing Co. Pvt. Ltd.) 2000 p. 221
# AIR 1991 SC 2234
# AIR 1976 SC 1111
# 1991 ( 61 ) FLR 73
# H.L. Kumar,Dismissal, Discharge and Retrenchment (Delhi: Universal Law Publishing Co. Pvt. Ltd.) 2000 p. 223.
# AIR 1957 SC 121
# AIR 1976 SC 1111
# 1976 (1) LLJ 478 (SC)
# H.L. Kumar,labour Law (Delhi: Universal Law Publishing Co.) 2006 p. 120.
# H.L. Kumar,Dismissal, Discharge and Retrenchment (Delhi: Universal Law Publishing Co. Pvt. Ltd.) 2000 p. 257.
# Available at, http://jurisonline.in/2009/05/retrenchment-the-legal-aspect/, visited on 30th January 2011.
# H.L. Kumar,labour Law (Delhi: Universal Law Publishing Co.) 2006 p. 125.
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