Under the Industrial Disputes Act, 1947, the right of the employer to retrench “surplus labour” is inherent in its right to manage its business, subject to the terms and conditions of the contract of employment and the provisions of the Act. In the absence of any special conditions of service in the contract of employment, the rights of workers are governed by the Industrial Disputes Act, under which the employer may discharge surplus labour, either temporarily by way of layoff, or permanently, by way of retrenchment (downsizing) or closure of an undertaking.
The Industrial Disputes Act is the major law dealing with the effect of redundancy in India. Before its enactment, there was no law regulating industrial redundancy, and employers had a relatively unfettered prerogative of hiring and firing. The Act initiated restrictions and regulations concerning the industrial redundancy of excess employees and now contains provisions regarding retrenchments and layoffs and related payment of compensation to workers under certain contingencies.
Currently, provisions relating to the effect of redundancy appear in Chapters V-A and V-B of the Act. These chapters deal with layoffs, retrenchment, closure, and transfer of an undertaking. Industrial establishments that are of a seasonal character or in which work is performed only intermittently are not included in the protections of either chapter.
Chapter V-A of the Act, which was added in 1953, covers industrial establishments that have employed 50–99 workers per work day for the preceding 12 months; for the purpose of layoffs, Chapter V-A does not apply to industrial establishments in which fewer than 50 workers were employed on an average work day in the preceding calendar month.
Chapter V-B of the Act, which was added in 1976, covers industrial establishments in which at least 100 workers were employed per work day for the preceding 12 months. Prior to this amendment, employers had an unfettered right to close down establishments, and to retrench and lay off workers, after 60 days’ notice. The 1976 amendment was made after large-scale layoffs, retrenchments, and plant closures, particularly by large companies and undertakings. In order to prevent hardship to employees, while still maintaining a higher tempo of production and productivity, the law put some restrictions on the employer’s right to retrench and lay off workers. It also restricted the right of the employer to resort to closing its undertaking.
- Layoff/Retrenchment/Closure of an Undertaking under Chapter V-A
Workers whose names are on the muster-rolls (employment list) of an industrial establishment, and who have completed at least one year of continuous service under an employer, and who are laid off, whether continuously or intermittently, must be paid by the employer for all days during which they are laid off, except for any weekly holidays that may intervene, subject to the 45-days limitation and the exceptions noted below. Payment must be 50 percent of the total of the basic wages and “dearness allowance” (regional wage adjustment) that would have been payable had the worker not been laid off.
If, during any period of 12 months, a worker is laid off for more than 45 days, no compensation is payable after the first 45 days if there is an agreement to that effect between the worker and the employer, and after 45 days, the employer is permitted to retrench the worker at any time in accordance with the provisions of the Act.
No compensation is payable to a worker who has been laid off under the following circumstances:
- the worker refuses to accept any alternative employment in the same establishment or in any other establishment belonging to the same employer and situated in the same town or village;
- before the layoff, the worker was not present for work at the appointed time during normal working hours at least once a day; or
- the layoff is due to a strike or slowing down of production on the part of workers in another part of the establishment.
The payment of compensation is not a condition precedent to the layoff of a worker. The Standing Orders (regulations issued under the Industrial Disputes Act), read together with Chapter V-A, create a right in favor of the laid-off worker to claim compensation, but they do not create a right of being paid compensation before a layoff. Workers may claim compensation only after they have been laid off, and the employer may then pay either the actual wages or compensation for the layoff as provided under Chapter V-A.
The Industrial Disputes Act does not prescribe any notice period for laid-off employees or any payment in lieu of notice. If there are any standing orders or service rules in a particular company with regard to giving notice, then those orders or rules must be observed. The normal practice under such standing orders or service rules is that the effective date of the layoff and the names of the affected employees are placed on the notice board of the company.
Retrenchment is the termination by the employer of the services of an individual worker or groups of workers (excluding mass terminations due to closure), for any reason whatsoever except for the following:
- as a punishment inflicted by way of disciplinary action;
- voluntary retirement of the worker;
- involuntary retirement of the worker on reaching the age of superannuation (mandatory retirement), if the contract of employment between the employer and the worker contains a stipulation specifying a mandatory retirement age;
- termination of a worker as a result of the non-renewal of the contract of employment between the employer and the worker upon its expiration or as a result of the contract of employment automatically terminating under a contractual stipulation to that effect;
- termination of the service of a worker on the ground of continued ill health; or
- closure of a part or the whole of an undertaking.
There are no restrictions on retrenchment of workers whose continuous service with the current employer is of less than one year’s duration.
Workers employed in any industry who have been in continuous service with their current employer for one year or more may be retrenched under the following conditions:
- the worker
- has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or
- has been paid, in lieu of such notice, wages for the period of the notice;
- the worker has been paid, at the time of retrenchment, compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months; and
- 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.
As discussed immediately above, after a layoff of more than 45 days, the employer is permitted to retrench the worker at any time in accordance with the provisions of the Act. If the employer does retrench workers after 45 days, the employer may offset any compensation paid to the workers for having being laid off for the period of 45 days during the preceding 12 months against the compensation payable for retrenchment.
c. Closure of an Undertaking or Place of Employment
Redundancy may also result in termination of services of employees not on an individual basis but on a mass scale. This form of collective termination takes place in case of permanent closure of an undertaking or place of employment by an employer. Closure can refer to the permanent closing of either the entire place of employment or a part thereof. In view of the fact that the repercussions of termination of employees’ services on a large scale are much more severe than terminations of an individual employee, the Industrial Disputes Act provides a detailed procedure to be followed by an employer for closing an undertaking or place of business. The Industrial Disputes Act provides that every employer who intends to close down his undertaking has to serve 60 days’ notice to the appropriate Government, stating the reasons for the intended closure.
The Act also contains provisions for compensation to the employees whose services have been terminated as a result of a closure. Specifically, where an undertaking is closed down for any reason whatsoever, every worker who has been in continuous service in that undertaking for one year or more immediately before the closure is entitled to notice and compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof over six months.
- Layoffs/Retrenchment/Closure of Undertaking under Chapter V-B
As stated above, the provisions of Chapter V-B are applicable to industrial establishments (not being an establishment of a seasonal character or in which work is performed only intermittently) in which not less than 100 workers were employed on an average per working day for the preceding 12 months. No worker whose name is on the muster-roll of an industrial establishment (as defined in Section 25L) to which Chapter V-B applies may be laid off by the employer, except with the permission of the appropriate government, following a request by the establishment to government authority, unless the layoff is due to a shortage of electric power, a natural calamity, or other events that disrupt work and are outside the employer’s control. When the employer secures permission and lay off employees, the individuals are entitled to layoff compensation as provided in Chapter V-A of the Industrial Disputes Act. In case of retrenchment, the employer is required to provide a notice of three months or pay wages in lieu of the notice period and with the permission of the appropriate government. In case of closure, an employer is bound to apply for prior permission at least 90 days to the date of the intended closure to the appropriate Government, stating clearly the reasons for intended closure.
All the provisions of the Industrial Disputes Act relating to retrenchment under Chapter V-A also apply to cases of layoff under Chapter V-B, except the offset for retrenchment following expiration of the first 45 days of layoff. For employees covered under Chapter V-B, the employer may retrench laid-off employees after the period of 45 days, but it may not offset the compensation paid for the period of layoff against the compensation payable for retrenchment.
B. Transfers of Undertakings
Transfer of ownership and control of a business may, in certain cases, be prejudicial to the interests of employees, either on an individual or a collective basis due to two possibilities. Either the new employer is unwilling to employ them and consequently, the transfer results in termination of their employment, or the terms and conditions of services offered by the new employer are less favorable than those offered by the previous employer. Employee protections in this regard are discussed below.
- Effect of Transfer of Undertaking on Individual Contracts
The Industrial Disputes Act, 1947, provides that, where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from one employer to another, every worker who has been in continuous service for at least one year in that undertaking immediately before the transfer is entitled to notice and compensation as if the worker had been retrenched.
Under the Industrial Disputes Act, the obligation to pay compensation in case of a transfer of undertaking is imposed on the old employer. However, this obligation may be transferred to the new employer if the terms of the transfer so provide and if the affected employees consent.
- Effect of Transfer of Undertaking on Collective Bargaining Contracts
Under the Trade Unions Act, 1926, in the event of a transfer of an undertaking from one employer to another, the trade union(s) concerned may enter into a tripartite agreement with both the old and the new employers, stating that the terms of employment and other service conditions will not be altered in a manner prejudicial to the interests of the employees. Alternatively, the trade union(s) may enter into an agreement with the employer transferring the undertaking to the effect that the new employer will not take any actions adversely affecting the interests of the employees; in this type of arrangement, the old employer transfers the undertaking to the new employer subject to the agreement the old employer has made with the union(s).