Retrenchment in Labour Law

When a business, company or organisation faces a decline in its operations due to factors like reduced demand for labour, retrenchment becomes a necessary way to reduce the number of employees. Retrenchment in Labour Law involves letting go of employees and workers because of economic and business reasons, rather than due to a dispute between the company and the employee. This process requires consultation and government approval.

It’s essential to carry out this process fairly and equally, ensuring principles of fairness and equality are upheld. The focus should be on achieving economic, social and industrial justice. However, it’s important to note that retrenchment affects both the employer and the employee, leading to involuntary unemployment for the worker.

Meaning of Retrenchment in Labour Law

The term “retrenchment” is defined in Section 2(oo) of the Industrial Dispute Act, 1947 (“Act”) as the termination of an employee’s service. However, it’s important to note that retrenchment in Labour Law is distinct from disciplinary action and it does not include the following situations:

• When a worker voluntarily retires.
• When a worker retires upon reaching the age of superannuation, provided that the employment contract includes such a provision.
• When a worker’s service is terminated because the employment contract expires and is not renewed or if the contract contains a provision for termination in such cases.
• When a worker’s service is terminated due to ongoing health issues.

In essence, retrenchment in Labour Law refers to the termination of an employee’s service for reasons such as company restructuring, downsising, economic challenges, technological advancements or discontinuation of a specific department or unit, among others. It’s important to emphasise that retrenchment is not the same as termination for disciplinary reasons. The Supreme Court, in the case of Anand Bihari v. Rajasthan State Road Transport Corporation, Jaipur, clarified that termination due to eyesight issues is considered a termination due to ill health and falls within the definition of retrenchment as per Section 2(oo) of the Act.

Exceptions to Retrenchment in Labour Law

The definition of retrenchment does not cover the following situations:

• Voluntary Resignation: If an employee voluntarily and willfully resigns from their job, it is not considered retrenchment in Labour Law.
• Retirement After Superannuation: If an employee or employer retires after reaching the age of superannuation, this is not considered retrenchment. However, this provision must be specified in the employment contract.
• Non-Renewal of Employment Contract: If the employer does not renew the employment contract and as a result, the employee cannot work in the industry, it is not considered retrenchment in Labour Law.
• Termination Due to Employee’s Ill Health: If an employee’s service is terminated because of ongoing health issues, both physical and mental, it is not classified as retrenchment. Whether the employee is indeed suffering from a continuous illness is determined based on the specific circumstances of the case and can be argued by either party.

Reasons for Retrenchment in Labour Law

Retrenchment by an employer can be carried out for various reasons, as long as those reasons are just and legal. Some common reasons for retrenchment in Labour Law include:

• Economic Difficulties: When a company faces financial challenges or a decline in income, it may resort to retrenchment to reduce its workforce.
• Rationalisation in the Industry: Companies often need to make their operations more efficient as they evolve. This can involve structural or operational changes and if a department or unit becomes redundant, retrenchment may be used after careful evaluation.
• Technological Changes: Industries frequently adopt new technologies to improve efficiency. While this can reduce the need for employees, it may also require retraining. If the new technology makes certain jobs obsolete, retrenchment may be necessary.
• Failure of Machinery: If a specific industry’s machinery breaks down or fails, retrenchment in Labour Law may be used as a response.

In a case example, the Managing Director of Karnataka Handloom Development Corporation Limited v. Sri Mahadeva Laxman Raval (2006), the respondent was hired for specific hours and intervals as an expert weaver to train other weavers. His services were terminated when the contract period ended. The respondent raised an industrial dispute, but the Supreme Court ruled that this termination was not retrenchment as defined in Section 2(oo) of the Industrial Disputes Act of 1947 because the respondent was employed on a contract basis with a predetermined time frame and not as a regular worker.

Requirements for a Valid Retrenchment in Labour Law

For a retrenchment in Labour Law to be considered valid, certain conditions outlined in Section 25F must be met. These conditions apply when an employee has been continuously employed for at least one year. The prerequisites for a valid retrenchment are as follows:

• Notice to Employees: The employer must issue a written notice to the workforce at least one month before the retrenchment takes effect. This notice should specify the grounds for retrenchment and the retrenchment should only occur after providing this notice to the employees.
• Compensation: If the employer fails to provide the required notice to the employees, they are liable to pay compensation for this failure. The compensation should be an amount equal to 15 days’ wages for each completed year of continuous employment or any part thereof exceeding six months.
• Notice to Appropriate Authority: The appropriate government or authority must be notified in the prescribed manner, as specified in the official gazette.
• Adherence to Notice Regulations: The notice regulations must comply with the provisions of Rule 76 of the Industrial Disputes (Central) Rules, 1957, which govern the notice of retrenchment.

Failure to comply with these prerequisites renders a retrenchment invalid. If a retrenchment in Labour Law is found to be unlawful or is not approved by government authorities, the affected employee has the right to reinstatement with continuity of service and the right to wages for the period in question.

Procedure of Retrenchment in Labour Law

The principle of ‘first come, last go’ and ‘last come, first go’ is a well-known concept in industrial law, codified in Section 25G. A worker can seek procedural protections under this provision, but certain conditions must be met:

• Qualification as a Worker: The person seeking protection must meet the definition of a worker as defined in Section 2(s) of the Act.
• Citizenship: The worker should be a citizen of India.
• Employment in an Industry: The employee must have been employed in an establishment classified as an industry under Section 2(j) of the Act.
• Specific Workforce Category: The employee must belong to a specific category of the workforce in the industry.
• No Agreement on Retrenchment Order: There should not be any prior agreement between the employer and the employee regarding the order of retrenchment in Labour Law.

The procedural protections of Section 25G are applicable only when all these five conditions are simultaneously met.

Re-Employment of Retrenched Workers

Section 25H of the Act is based on the idea that when an employer lays off a worker due to a shortage of labour, that worker should be given the first opportunity to return to work when the need for additional employees arises. This section places a legal obligation on the employer to offer retrenched employees the chance to apply for re-employment. To be eligible for re-employment, workers must meet the following conditions:

• Offer of Re-Employment: When the company retrenches workers, they should be given the opportunity to return to work if needed.
• Citizenship: The worker must be a citizen of India.
• Notice: The employer should provide notice to the retrenched workers regarding any potential re-employment opportunities.
• Same Industry: Re-employment should be in the same industry where the worker was previously employed before being retrenched.
• Preference for Retrenched Workers: The employer must give preference to retrenched workers over other individuals when filling new positions.

It’s important to note that only a worker who has been formally retrenched has the right to claim the benefits under Section 25H. Dismissed, discharged or superannuated workers do not have a claim for preferential re-employment. If an employer offers re-employment to a retrenched worker and the worker declines without a valid reason, they may lose the benefits provided under Section 25H.

When an employer needs to hire more workers, the retrenched worker should be given the opportunity to rejoin the workforce. The principle of equality is not only embedded in Section 25H but is a fundamental principle in industrial adjudication. It emphasises equal treatment and compliance with principles of natural justice, fairness, justice and equity.

In the case of Delta Wire Pvt. Ltd. v. General Labour Union and Another (1995), it was established that the only right available to a worker who has been retrenched and compensated under the law is the preference for re-employment provided by Section 25H. However, it does not guarantee the same level of service or position as before retrenchment in Labour Law.

Criteria for Retrenchment of Workmen under Section 25N

Section 25N of the Act outlines the conditions that must be followed before an employer can retrench a worker. These conditions are as follows:

• Notice to Worker: An employer can only retrench a worker who has been continuously employed for at least one year in the industry. The employer must provide the worker with a notice stating the reasons for retrenchment at least three months before the intended date of retrenchment. Additionally, the worker must be paid their annual wages before the notice period.
• Government Approval: Permission for retrenchment in Labour Law and the issuance of the notice must be approved by the government or an appropriate authority.
• Application for Approval: The employer is required to submit an application for retrenchment approval to the government and the appropriate authorities in the prescribed manner. A copy of the approval or refusal must be provided to the workers as specified in the official gazette.
• Investigation and Decision: Upon receiving the application for retrenchment approval, the government will investigate the matter. The employer is given a fair opportunity to present their case. Subsequently, the government will either grant or refuse authorisation, based on what it deems appropriate. The decision will be communicated to both the employer and the worker. The government must conduct the investigation following the principles of natural justice, ensuring transparency and impartiality.
• Timeframe for Decision: The government must issue the order within sixty days after receiving the employer’s application for authorisation. If the government does not issue the order within this timeframe, it is presumed that authorisation has been granted.
• Finality of Order: The order issued by the government or the specified authority, whether it approves or refuses retrenchment, is considered final and binding on all parties. It remains in effect for one year from the date it was communicated to the parties.
• Tribunal Adjudication: If the employer challenges the government’s order, it will be referred to the tribunal for adjudication. The tribunal must pass judgment on the matter within thirty days.
• Refusal by Government: If the government refuses the application for retrenchment permission, it is considered illegal.

In the case of Rajinder Singh Chauhan and others v. State of Haryana and others (2006), the employees who worked for the Haryana Store Federation of Consumers Co-operative Wholesale Stores Limited were retrenched in accordance with Section 25F of the Industrial Disputes Act of 1947. Dissatisfied with the retrenchment process, they initially challenged it in the Punjab and Haryana High Court through writ petitions under Article 226 of the Constitution of India but did not obtain a favourable remedy.

Subsequently, the employees filed writ petitions in the Supreme Court, contesting the decision of the High Court. The Supreme Court ruled that the respondents, who were the employers, did not fall within the scope of Section 2(g) of the Industrial Disputes Act of 1947. Therefore, the High Court’s determination that Section 25N did not apply to the appellants’ retrenchment was correct.

In the case of Workmen of Meenakshi Mills Limited etc v. Meenakshi Mills Ltd and another (1992), the constitutional validity of Section 25N was questioned, with the argument that this provision violated Article 14, Article 19(1)(g) and Article 19(6) of the Constitution of India. It was claimed that employers had no constitutional rights to retrench workers.

The matter was referred to the Supreme Court for a final decision. The Supreme Court upheld the constitutionality of Section 25N of the Industrial Disputes Act of 1947. The court reasoned that the restrictions placed on employers’ rights to retrench workers were in the interest of the general public and did not violate constitutional rights. Additionally, it was determined that if employers failed to comply with the provisions of Section 25N, it could lead to industrial disputes.

Therefore, the power to raise industrial disputes and seek permission for retrenchment was vested in both the workers and management, allowing them to approach the appropriate government for approval or refusal of retrenchment in Labour Law.

Punishment for Infringement

Section 25Q of the Industrial Disputes Act states that if any employer infringes the fundamental provisions related to retrenchment and violates the provisions of Section 25N, they can be subject to punishment. The punishment may include imprisonment for a period of up to one month or a fine that can go up to one thousand rupees or both.

Conclusion

Retrenchment in labour law refers to the legal process of reducing surplus employees within a business, company or organisation due to various reasons like economic difficulties, restructuring or technological changes. To execute a valid retrenchment in Labour Law, specific conditions must be met, including providing notice to affected employees, offering compensation and obtaining government approval.

The aim is to balance the interests of both employers and employees while ensuring fairness and adherence to industrial justice principles. Retrenched workers may have the right to preferential re-employment when opportunities arise. Failure to comply with legal requirements can lead to penalties, including fines and imprisonment, as outlined in Section 25Q of the Industrial Disputes Act. Retrenchment plays a crucial role in managing workforce dynamics and ensuring the sustainability of businesses.