Retrenchment would mean downsizing. This term suggests to reduce the income outflow and to curtail the expenditure to make the organization financially sound. It is a technique, which is used for cutting back and downsizing (letting go of an employee).
Retrenchment as in the Industrial Dispute Act, 1947
This term is more than just letting go of an employee or terminating the employee by the employer. This term has been defined in Section 2(00) of the Industrial Dispute Act, 1947 which is defined as the termination by the employer of the service of an employee for any reason whatsoever, Other than as a punishment imposed by the way of disciplinary action, but this section does not include-
- Voluntary retirement of the employee, or
- Retirement of the employee on reaching the age of retirement if the contract of employment between the employer and the employee that contains a stipulation on that behalf; or
- Termination of the service of the employee as a result of the non-removal of the contract of employment between the employer and the employee concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
- Termination of the service of an employee on the ground of continued ill-health.
The definition of retrenchment was not added until an amendment in 1953. Thus, the Industrial Disputes Act, 1947 provides for certain predetermined conditions in which the termination of employment would not be considered as retrenchment. It is to be duly noted here that the provision (bb) to Section 2(00) was further added through an Amendment Act 49 of 1984. Section 2 (00) (bb) provides a way that the termination of employment on non – renewal of employment agreement upon its expiry shall not be considered as ‘retrenchment’.
Various Case Laws regarding Retrenchment
The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and others restricted the definition of ‘Retrenchment’ under Section 2 (00) (bb) to occur only when there is a ‘discharge of excess labor’ by the employer.
Later, in State Bank of India v. N. Sundara Money, a decree by the apex court of the country refused the tapered interpretation adopted by the Court in the earlier decision and stated that any retrenchment, as defined in Section 2(00), means termination by the employer of the service of an employee for any reason whatsoever otherwise than as a punishment imposed by the way of disciplinary action and those expressly excluded by Clauses in the definition. In view of these decisions, it cannot be said that retrenchment means termination by the employer of the service of an employee as extra labor.
This interpretation is exhaustive and comprehensive and states that the expression “for any reason whatsoever” has a very wide interpretation and had no exceptions. Therefore, retrenchment means termination of an employee’s services for any reason whatsoever, other than those specified in Section 2(00).
Conditions patterned to retrenchment
Section 25F of the Industrial Dispute Act, 1947 provides the conditions for retrenchment. According to this section, the employer must fulfill certain conditions before retrenching an employee who has been working for not less than a year-
- The employee has to be given one months’ notice in advance and writing indicating the reasons for retrenchment or the employee has been paid instead of such notice, wages for the period of the notice.
- it has to be checked that whether the employee 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 over six months; and
- Notice in the prescribed manner is served in the appropriate Government Gazette, which may be suggested by the government.
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 of the Industrial Dispute Act, 1947 also lays down the conditions precedent to retrenchment –
No employee working in any industrial establishment who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until-
- The employee has been given three months’ notice in writing indicating the reasons for retrenchment, or the workman has been paid instead of such notice, wages for the period of the notice; and
- The prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette.
Difference between Section 25F and Section 25N of the Industrial Dispute Act, 1947
Sec 25F applies to industrial places where less than 50 employees have been employed on an average per working day in the preceding calendar months and applicable for industries, which are also seasonal.
Sec 25N applies to industrial places where the number of employees employed is more than 100 on an average per working day in the preceding calendar months.
The process through which an organization has to go through for retrenchment is inevitable, the employer has all the say in this matter, on how he thinks that doing what would positively affect his business, and the courts cannot question the same. If re-organization results in letting off surplus employees go, no employer is expected to carry the burden, provided that the retrenchment is done on a fair basis and it goes hand in hand with provisions laid down in the Industrial Dispute Act, 1947.