'Retrenchment': Conditions Precedent and Procedure

Section 71 then adds fairness in the choice of who goes, and section 72 adds a claim to come back if the work returns.

Some words this chapter uses

Termination means the ending of the employment by the employer's act.

Punishment inflicted by way of disciplinary action is dismissal for misconduct. It is expressly outside the definition, and it is governed instead by the standing orders under Chapter IV and by section 50.

Superannuation is retirement on reaching the age fixed for it.

Average pay is the basis of the compensation in section 70(b). It is defined in section 2(d).

Fixed term employment, section 2(o), is engagement on a written contract for a fixed period, with the three protections that definition attaches.

Last come, first go is the shorthand for the rule in section 71.

Section 2(zh): what retrenchment is

Retrenchment means the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include:

• (i) voluntary retirement of the worker;
• (ii) retirement of the worker on reaching the age of superannuation;
• (iii) termination as a result of the non-renewal of the contract of employment on its expiry, or of such contract being terminated under a stipulation in that behalf contained in it;
• (iv) termination as a result of the completion of tenure of fixed term employment;
• (v) termination on the ground of continued ill-health.

"For any reason whatsoever"

These four words are the most important in the definition and they are wider than students expect.

The natural assumption is that retrenchment means dismissing surplus labour. It does not. The definition catches any termination by the employer, whatever his reason, subject only to the disciplinary carve-out and the five exclusions. Ending a worker's service because the department is being reorganised, because the employer has lost a contract, because he wants to replace the man with a machine, or because he simply no longer wishes to employ him, is all retrenchment, and section 70 applies to all of it.

The consequence is practical and worth stating. An employer who wants to end a worker's service, and who cannot bring the case within the disciplinary carve-out or one of the five exclusions, must comply with section 70. There is no fourth category.

The disciplinary carve-out

Termination as a punishment inflicted by way of disciplinary action is not retrenchment. That is why a dismissal for misconduct does not attract section 70's notice and compensation. But it attracts a great deal else: the misconduct must have been defined in advance under item 9 of the First Schedule, the inquiry must ordinarily be completed within ninety days with subsistence allowance under section 38, and the Tribunal may set the dismissal aside or substitute a lesser punishment under section 50. See [Certifying, Appealing and Modifying Standing Orders].

The five exclusions

(i) and (ii) are straightforward. Voluntary retirement is the worker's own act, and superannuation is the arrival of an age both parties knew about.

(iii) covers the contract that ran out or was ended under its own terms. Two limbs: non-renewal on expiry, and termination under a stipulation contained in the contract.

(iv) is new and it is the one to flag. Termination as a result of the completion of the tenure of fixed term employment is not retrenchment. The repealed Industrial Disputes Act 1947 had no such clause, for the simple reason that it did not have fixed term employment at all; the Code introduced the concept in section 2(o) and had to say what happens when such a contract runs its course.

Read exclusion (iv) with section 2(o) or it looks worse than it is. A fixed term worker's hours, wages, allowances and other benefits may not be less than those of a permanent worker doing the same or similar work; he is eligible for all statutory benefits proportionately; and he is eligible for gratuity after one year rather than five. So the Code gives a fixed term worker parity while the contract runs, and then lets it end without retrenchment compensation. Whether that is a fair bargain is the standing criticism of the provision.

(v) is continued ill-health, which is termination for a reason personal to the worker but not disciplinary.

Section 70: the three conditions precedent

No worker employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until:

• (a) the worker has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice;
• (b) the worker has been paid, at the time of retrenchment, compensation equivalent to fifteen days' average pay, or the average pay of such days as the appropriate Government notifies, 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 the appropriate Government specifies by notification.

The three are cumulative. The section says "until" and joins (b) and (c) with "and". Compliance with two of the three is non-compliance.

Who is protected. Only a worker in continuous service for not less than one year, which is defined by section 66 and its deeming provisions, worked in ['Lay-off' and the Right to Compensation]. A worker who actually worked 240 days in the preceding twelve months, or 190 below ground in a mine, is deemed to have a year.

Condition (a): notice, and the reasons

One month's notice, in writing, indicating the reasons. Three requirements in one clause, and the third is regularly forgotten. A notice that says only "your services are terminated with effect from one month hence" does not comply, because it does not indicate the reasons for retrenchment.

Wages in lieu are an alternative, so the employer may pay a month's wages and end the service at once. But the alternative is only to the period; the writing and the reasons are still required.

Condition (b): the compensation, and how to calculate it

Fifteen days' average pay for:

• every completed year of continuous service; and
• any part thereof in excess of six months.

Work an example, because the arithmetic is exactly what MU asks.

Two traps. The part-year counts only if it is in excess of six months, so exactly six months does not count. And the compensation is payable at the time of retrenchment, not later: an employer who retrenches first and pays afterwards has not complied with condition (b).

And note the flexibility Parliament kept. The clause says fifteen days' average pay "or average pay of such days as may be notified by the appropriate Government", so the figure can be raised by notification without amending the Code.

Condition (c): notice to the Government

Notice, in the prescribed manner, on the appropriate Government or the authority it specifies by notification.

This is notice, not permission, and the distinction is the whole difference between Chapter IX and Chapter X. In an establishment covered by Chapter X the employer needs prior permission to retrench; here he needs only to tell the Government he is doing it. That contrast is the subject of [The Larger Establishments: Chapter X and the Three Hundred Threshold].

Section 71: who goes, and the last-come-first-go rule

Where a worker who is a citizen of India is to be retrenched, and he belongs to a particular category of workers in that establishment, then, in the absence of any agreement between the employer and the worker in this behalf, the employer shall ordinarily retrench the worker who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other worker.

Four elements, and each is a qualification on the rule.

It applies to citizens of India. A non-citizen is outside the section.

It operates within a category, not across the establishment. The last person employed in that category goes, so a fitter is not compared with a clerk.

It yields to agreement. If the employer and the worker have agreed some other basis, the agreement governs.

And it yields to recorded reasons. The employer may retrench somebody else for reasons to be recorded. The word "ordinarily" in the section points the same way.

So the rule is a presumption, not a prohibition, and the protection lies in the requirement to record the reasons. An employer who departs from seniority must commit his justification to writing at the time, and that record is what a Tribunal will examine if the departure is challenged as victimisation or as an unfair labour practice under section 84 and the Second Schedule.

Section 72: the right to be re-employed

Where a worker is retrenched and the employer proposes to take into his employment any person within one year of such retrenchment, he shall, in the prescribed manner, give an opportunity to the retrenched workers who are citizens of India to offer themselves for re-employment, and such retrenched workers who offer themselves shall have preference over other persons.

Three points.

The trigger is any proposal to employ any person, not merely a proposal to fill the same post. If the employer is hiring at all within the year, the obligation arises.

The period is one year from the retrenchment.

The right is a preference, not a guarantee. The retrenched worker must be given the opportunity to offer himself; if he does, he has preference over other persons. He is not automatically reinstated, and the section is again confined to citizens of India.

Read section 72 with the second proviso to section 67. An employer who lays workers off, converts the lay-off into a retrenchment after forty-five days with a set-off, and then hires afresh when trade recovers, meets section 72: the workers he retrenched have preference. The three provisions together are meant to make a genuine downturn survivable and a manufactured one expensive.

Lay-off, retrenchment and dismissal compared

A worked example

The facts. A packaging plant in Wada. Demand has fallen and the employer decides to reduce the packing line from forty workers to thirty.

Is this retrenchment? Yes. It is the termination by the employer of the service of workers for a reason whatsoever and it is not a disciplinary punishment; none of the five exclusions applies.

Who is protected? Every one of the ten who is in continuous service for not less than one year, judged by section 66, including anybody deemed to have a year by having actually worked 240 days in the preceding twelve months.

What must the employer do for each of them? All three of section 70's conditions. One month's notice in writing indicating the reasons, or a month's wages in lieu. Compensation at the time of retrenchment of fifteen days' average pay for every completed year and any part over six months. And notice to the appropriate Government in the prescribed manner.

Meera has served 4 years and 8 months. Four completed years, plus a part in excess of six months, so five units: seventy-five days' average pay.

Rakesh has served 2 years and 5 months. Two completed years; five months is not in excess of six; so two units: thirty days' average pay.

Who should go? Under section 71, absent agreement, the employer must ordinarily retrench the workers last employed in that category, that is the ten most junior packers who are citizens of India. If he wants to keep a junior worker and retrench a senior one, he may, but for reasons to be recorded.

The employer keeps a junior packer because she is the only one trained on the new sealing machine, and records that. That is a permissible departure: section 71 requires only that the reasons be recorded, and this reason is on its face genuine and operational.

The employer keeps a junior packer because the senior one is the union secretary, and records "operational requirements". The record exists but the reason is a pretence. The retrenchment is open to challenge, and it is also capable of being an unfair labour practice under section 84 and the Second Schedule, which is the subject of [Unfair Labour Practices].

Eight months later trade recovers and the employer wants to hire six packers. Section 72 applies: he proposed to take persons into his employment within one year of the retrenchment, so he must, in the prescribed manner, give the retrenched workers who are citizens of India an opportunity to offer themselves, and those who do have preference over other persons.

Now three variations on the definition.

A worker's fixed term contract expires and is not renewed. Not retrenchment: exclusion (iv), completion of the tenure of fixed term employment, and exclusion (iii) if the contract simply expired. But note that while the contract ran, section 2(o) required his hours, wages, allowances and other benefits to be not less than a permanent worker's doing the same or similar work, and made him eligible for gratuity after one year.

A worker is dismissed for theft after an inquiry. Not retrenchment: it is a punishment inflicted by way of disciplinary action. Section 70 does not apply; the standing orders, section 38 and section 50 do.

A worker retires at sixty under the plant's rules. Not retrenchment: exclusion (ii), retirement on reaching the age of superannuation.

What this does NOT mean

It does not mean retrenchment is confined to surplus labour. The words are "for any reason whatsoever".

It does not mean an employer may not retrench. He may, on complying with the three conditions in section 70.

It does not mean seniority is absolute. Section 71 says the employer shall ordinarily retrench the last employed in the category, unless for reasons to be recorded he retrenches another.

It does not mean compensation may be paid later. Section 70(b) requires it at the time of retrenchment.

It does not mean a bare notice will do. Section 70(a) requires the notice to be in writing indicating the reasons.

It does not mean the Government must approve. Section 70(c) requires notice. Prior permission is Chapter X, for larger establishments.

It does not mean a retrenched worker gets his job back automatically. Section 72 gives him an opportunity to offer himself and preference over other persons if the employer hires within a year.

It does not mean a fixed term worker has no rights. Section 2(o) gives him parity of hours, wages, allowances and benefits, proportionate statutory benefits, and gratuity after one year.

Limits, criticism and amendments

Exclusion (iv) is the most criticised provision in this Chapter. By taking the completion of a fixed term contract outside retrenchment altogether, the Code makes it possible to run a workforce on rolling fixed terms and never pay retrenchment compensation to anybody. The answer offered is section 2(o)'s parity requirements and its one-year gratuity, and whether that is enough is exactly the argument.

Fifteen days' average pay per year is a modest figure for a worker losing a livelihood, and it is unchanged in substance from the repealed Act. The power to raise it by notification exists and would have to be used.

Section 71's protection is thinner than it looks. The employer may depart from seniority for reasons to be recorded, and the section does not require the reasons to be good, only recorded. Their adequacy is a question for a Tribunal after the event.

And section 72 depends on the employer telling the retrenched workers he is hiring. The obligation is to give an opportunity "in such manner as may be prescribed", so the practical value of the right turns on the rules rather than on the section.

Against that, the notice with reasons in section 70(a) is a real improvement on a bare notice, and section 76's proviso preserves any more favourable benefit under a standing order, settlement, award or contract, so the Chapter is a floor and not a ceiling.

Quick revision

• Section 2(zh): termination by the employer of a worker's service for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. Five exclusions: voluntary retirement; superannuation; non-renewal on expiry or termination under a stipulation in the contract; completion of tenure of fixed term employment; continued ill-health.
• Section 70, three cumulative conditions for a worker of one year's continuous service: (a) one month's notice in writing indicating the reasons, expired, or wages in lieu; (b) compensation at the time of retrenchment of fifteen days' average pay (or as notified) for every completed year and any part in excess of six months; (c) notice to the appropriate Government in the prescribed manner.
• Section 71: absent agreement, ordinarily retrench the last person employed in that category, for a worker who is a citizen of India, unless for reasons to be recorded another is retrenched.
• Section 72: if the employer proposes to employ any person within one year of the retrenchment, he must give the retrenched workers who are citizens of India an opportunity to offer themselves, and they have preference over other persons.
• Notice, not permission. Prior permission is Chapter X.
• Section 76: the Chapter overrides inconsistent law including standing orders, but a more favourable benefit survives, matter by matter.

Test yourself

1. Define retrenchment and list what it excludes. Section 2(zh) defines retrenchment as the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. It does not include voluntary retirement; retirement on reaching the age of superannuation; termination as a result of the non-renewal of the contract of employment on its expiry or of its being terminated under a stipulation contained in it; termination as a result of the completion of the tenure of fixed term employment; or termination on the ground of continued ill-health.

2. State the conditions precedent to a valid retrenchment. Section 70 provides that no worker in continuous service for not less than one year shall be retrenched until he has been given one month's notice in writing indicating the reasons for retrenchment and the period has expired, or has been paid wages for the notice period in lieu; until he has been paid, at the time of retrenchment, compensation equivalent to fifteen days' average pay, or the average pay of such days as the appropriate Government notifies, for every completed year of continuous service or any part thereof in excess of six months; and until notice in the prescribed manner has been served on the appropriate Government or the authority it specifies. All three are cumulative.

3. A worker with 5 years and 8 months of continuous service is retrenched. Calculate his compensation. Five completed years, plus a part of eight months which is in excess of six months and therefore counts as a further unit, giving six units of fifteen days' average pay, that is ninety days' average pay, payable at the time of retrenchment. Had his service been 5 years and 6 months exactly, the part would not have been in excess of six months and the figure would have been seventy-five days.

4. Must the most junior worker always be the one retrenched? No. Section 71 provides that where a worker who is a citizen of India is to be retrenched and belongs to a particular category, then in the absence of any agreement between the employer and the worker the employer shall ordinarily retrench the worker who was the last person employed in that category, unless for reasons to be recorded he retrenches any other worker. The rule is therefore a presumption operating within a category, displaced by agreement or by recorded reasons, and the protection lies in the requirement that the reasons be recorded at the time so that a Tribunal can examine them.

5. What right does a retrenched worker have if the employer starts hiring again? Under section 72, where a worker is retrenched and the employer proposes to take any person into his employment within one year of the retrenchment, he must, in the prescribed manner, give the retrenched workers who are citizens of India an opportunity to offer themselves for re-employment, and those who do so have preference over other persons. It is a preference, not automatic reinstatement, and the trigger is any proposal to employ any person, not merely to fill the same post.

6. Why is the exclusion of fixed term employment from retrenchment controversial? Because exclusion (iv) of section 2(zh) takes the completion of the tenure of fixed term employment outside retrenchment altogether, so no notice, no compensation and no Government notice is required when such a contract runs its course. The repealed Industrial Disputes Act 1947 contained no such clause, having no concept of fixed term employment. An employer may therefore staff an establishment on rolling fixed terms and never incur retrenchment compensation. The Code's answer is section 2(o), which requires a fixed term worker's hours of work, wages, allowances and other benefits to be not less than those of a permanent worker doing the same or similar work, makes him eligible for all statutory benefits proportionately, and makes him eligible for gratuity after one year rather than the usual five. Whether that parity is an adequate exchange for the loss of retrenchment protection is the substance of the criticism.