Retrenchment (Legal or Illegal)

Introduction	jurisprudence
Provisions	section 2(oo) of Industrial Disputes Act
Case laws	Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court (1990) 3 SCC 682 U.P.State Brassware Corpn. Ltd. v. Uday Narain Pandey (2006) 1 SCC 479 Manju Saxena v. Union Of India Management Of The Barara Society Ltd. Cooperative Marketing cum Processing v. Workman Pratap Singh AIR 2019 SC 228
conclusion	present problem

What is Retrenchment?

Retrenchment refers to the process of reducing the workforce in an organisation to cut costs, improve efficiency, or adapt to economic challenges. It typically involves terminating employees’ services due to reasons like financial constraints, restructuring, or reduced demand for products or services.
Retrenchment under labour law, particularly in India, refers to the termination of the service of a workman by an employer for any reason whatsoever, other than as a punishment inflicted by way of disciplinary action. This definition is provided under Section 2(oo) of the Industrial Disputes Act, 1947.

Exceptions to Retrenchment/ There are certain factors that does not fall under the definition of retrenchment:

1. Voluntary retirement of the workman.
2. Retirement of the workman on reaching the age of superannuation if the employment contract contains such a provision.
3. Termination of service due to the non-renewal of the employment agreement.
4. Termination on grounds of continued ill-health.

Essentials for valid retrenchment:

1. Notice: The workman must be given one month’s written notice indicating the reasons for the retrenchment, and the notice period must have expired.
2. Compensation: The workman must be paid retrenchment compensation equivalent to 15 days’ average pay for every completed year of continuous service.
3. Government Notification: Notice in the prescribed manner must be served on the appropriate Government or such authority as may be specified by the government.
4. No requirement of notice if an agreement already specifies the date of termination: if the date already mention in the agreement, then there is no need of notice before retrenchment.

Procedure for Retrenching employees

The procedure of retrenching employees is based on the principle of “first come, last go” and “last come, first go”, meaning the workman who was the last person to be employed in a particular category should be retrenched first, in the absence of any agreement to the contrary between the employer and the workmen and this is defined in section 25G of Industrial Disputes Act.

1. Issue a Written Notice: The employer must give the workman 3 months’ notice in writing indicating the reasons for the intended retrenchment. The notice period must expire before the retrenchment.
2. Alternatively, Pay in Lieu of Notice: The employer can pay the workman wages for the notice period instead of providing the three-month notice.
3. Apply for Prior Permission: The employer must make an application in the prescribed manner to the appropriate Government or the specified authority seeking permission for the retrenchment.
4. State Reasons Clearly: The application must clearly state the reasons for the intended retrenchment.
5. Serve Copy to Workmen: A copy of this application must be served simultaneously on the workmen concerned in the prescribed manner.
6. Government Inquiry: The appropriate Government or the specified authority will conduct an inquiry as deemed fit.
7. Opportunity of Being Heard: The Government will give a reasonable opportunity of being heard to the employer, the workmen concerned, and any other interested parties.
8. Government Decision: After the inquiry, the Government may grant or refuse permission for the retrenchment. The Government is expected to communicate its decision to the employer within 60 days from the date of application. If no communication is received within this period, permission is deemed to have been granted.
9. Pay Retrenchment Compensation: Similar to Section 25F, the workman must be paid compensation equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof exceeding six months, at the time of retrenchment.

Reasons for Retrenchment

1. Economic Difficulties: When a company faces financial challenges or a decline in income, it may resort to retrenchment to reduce its workforce.
2. 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.
3. 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.
4. Failure of Machinery: If a specific industry’s machinery breaks down or fails, retrenchment in Labour Law may be used as a response.

Re-Employment of Workers

Section 25H of ID Act tells about re-employment of workman after retrenchment. It 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. To be eligible for re-employment, workers must meet the following conditions:

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

What is Lay-Off?

Lay-off is a temporary suspension of employment initiated by the employer due to reasons beyond their control, such as economic downturns, shortage of raw materials, breakdown of machinery, or natural calamities. It does not imply termination, as the employer intends to recall the workers once normal conditions resume.
It is defined under section 2(kkk) of Industrial Disputes Act as, “the failure, refusal or inability of an employer on account of shortage of coal, power or raw materials or the accumulation of stocks or the break-down of machinery [or natural calamity or for any other connected reason] to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched”.

Key Elements of Lay-off:

1. Employer’s Inability: The inability to provide work must stem from the employer’s side.
2. Specific Reasons: The reasons for this inability are usually related to:
   – Shortage of coal, power, or raw materials.
   – Accumulation of stocks.
   – Breakdown of machinery.
   – Natural calamity.
   – Any other connected reasons of a similar nature.  
3. Workman on Muster Roll: The workman whose employment is affected must be on the muster roll (official record of employees) of the industrial establishment.
4. No Retrenchment: The situation must not amount to retrenchment, which is a permanent termination of service for economic reasons. Lay-off is temporary.

Difference between LAY-OFF and RETRENCHMENT

LAY – OFF	RETRENCHMENT
It is defined under section 2(kkk) of the Act and it means the termination of workman temporarily for a particular period of time.	It is defined under section 2(oo) of the Act and it means permanent removal of workers/ employees from employment.
It takes place due to lack of work in specific unit of the company or due to downturn in business.	It takes place due to financial constraints or restructuring of the company.
During lay-off period, employees are not terminated from their employment.	During retrenchment, employees are removed from employment.
Employees may be given unemployment benefits.	Employees are given severance pay and other compensation.
Notice period is not essential.	Notice period is essential.

Case Laws

Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court

Facts: Employees of the Punjab Land Development and Reclamation Ltd. (Chandigarh), appointed as Presiding Officers, Land Court, Chandigarh, were dismissed on the grounds that their appointments by the chairperson were unauthorized.
The dismissed employees filed a suit in the Labour Court, which ruled their termination unlawful due to the lack of proper retrenchment procedures. The Labour Court ordered reinstatement with back wages, except for one employee, Yashpal, who was awarded wages up to October 10, 1979, with continuity of service under the Industrial Disputes Act, 1947. The company appealed to the High Court, which overturned the Labour Court’s order regarding reinstatement, back wages, and continuity of service.
Issue: What is the word “retrenchment” under Section 2(oo) of the Industrial Dispute Act, 1947 mean?
Judgement: The bench undertook a detailed examination of the definition of ‘retrenchment’ as enshrined in Section 2(oo) of the Industrial Disputes Act, delineating its essential constituents:
(i) termination of a workman’s service,
(ii) by the employer,
(iii) for any reason whatsoever,
(iv) excluding termination by way of disciplinary action.
The Court underscored the primacy of ascertaining the legislative intent, as opposed to relying on presumed intentions.
Acknowledging a potential disharmony between the definitional provision of Section 2(oo) and the substantive provisions of Sections 25F, 25G, and 25H, the bench advocated for the application of the principle of harmonious construction. They referenced the Supreme Court’s decision in Sundara Money, wherein a broad, liberal interpretation of ‘retrenchment’ was favored over a restrictive construction. The bench further clarified that the doctrine of stare decisis does not necessitate rigid adherence to precedent when such adherence would contravene the legislative purpose.
The Court emphasized the significance of the word ‘means’ in the definition of Section 2(oo), asserting that it signifies an exhaustive definition, thereby precluding the attribution of alternative meanings.
Furthermore, the bench reasoned that a comprehensive interpretation of ‘retrenchment’ would not unduly impinge upon employers’ contractual rights or rights conferred by standing orders. Rather, it imposes an additional statutory obligation to ensure that affected workmen are afforded retrenchment benefits. The Court reiterated its judicial duty to give effect to the legislative intent, even when not explicitly articulated by the legislature, and to apply the statutory provisions in consonance with the factual matrix of each case.
The court dismissed civil appeal no. 3241-48 of 1981, 686(NL) of 1982, 18 17 of 1982,  1898 of 1982, 3261 of 1982, 1866 of 1982, 1868 of 1982, 8456 of 1983, 10828 of 1983 and S.L.P. (C) No. 3149 of 1983 were dismissed with the quantification of the cost at Rs.  3000 in each of the appeals. 
In the civil appeal no. 686 of 1982, the court directed the reinstatement of the respondent  as he was serving since 1983. 
In the civil appeal no. 885 of 1980, the court disposed of the appeal and directed to pay the  workmen the compensation amounting to Rs. 1,25000 with reinstatement. 
Civil appeal no. 4116 of 1984, 512-513 of 1984, 783 of 1984 were wrongly placed  according to the court and the subject matter is not related to all the appeals with a similar  issue involved in this case.

U.P. State Brassware Corpn. Ltd. v. Uday Narain Pandey

Facts: Mr. Udai Narain Pandey (respondent) was engaged by U.P. State Brassware Corporation (appellant) on July 23, 1984, for the Project Peetal Basti, where he performed duties related to building construction and material handling. He served in this capacity until his redeployment to the Non-Ferrous Rolling Mill project, pursuant to an order dated February 12/13, 1987, commencing his new assignment on March 31, 1987.
Upon the cessation of the project, the appellant terminated the respondent’s services. The Labour Court, in its judgment dated October 31, 1991, ruled in favor of the respondent, ordering reinstatement with effect from April 1, 1987, and directing the appellant to pay all arrears within thirty days, along with litigation costs of INR 50.
The appellant subsequently filed a writ petition before the Allahabad High Court in May 1992, contending that the respondent was not a permanent employee and that his services were coterminous with the project, as stipulated in the order dated February 12/13, 1987. The High Court dismissed the writ petition and awarded the respondent additional compensation of INR 10,000. Thereafter, the appellant preferred a special leave petition before the Supreme Court of India.
Issue: Whether the Appellant  had lawfully terminated services of Respondent in this case ?
Is the provision of ‘No Work , No Pay applicable here ?
Whether the Respondent entitled to get paid for the days he did not work ?
Judgement: The Supreme Court clarified that it cannot issue universal rulings for all similar cases, but must tailor its judgments to the specific facts of each situation. It acknowledged the potential injustice of ordering employers to pay wages for unperformed work. However, the Court also recognized that the burden of wrongful termination would disproportionately affect employees if compensation were denied.
The Court examined the applicability of Section 2(oo)(bb) of the Industrial Disputes Act, which excludes the termination of employment as a result of the non-renewal of a contract of employment between the employer and the workman concerned.
The Court considered the circumstances of the respondent’s employment and termination in light of this provision.
The Court addressed the argument of “no work, no pay,” emphasizing that while it is a valid principle, it cannot be applied indiscriminately, especially in cases of wrongful termination.
The Court balanced the potential injustice of requiring employers to pay for unperformed work against the disproportionate burden on employees in cases of wrongful termination. The Supreme Court upheld the High Court’s order, and upheld the compensation for the employee.
The court reviewed the lower courts decisions, and made sure that the correct balance was made between the employer and employee.

Management Of The Barara Society Ltd. Cooperative Marketing cum Processing v. Workman Pratap Singh

Facts: The appellant, a cooperative marketing society, terminated the services of the respondent, Pratap Singh, a peon, on August 1, 1985. The respondent challenged the termination before the Labour Court, which adjudicated it as unjustified and awarded compensation amounting to Rs. 12,500 on February 3, 1988. Both parties filed writ petitions before the High Court, which were dismissed. The respondent accepted the compensation as directed by the Labour Court.
Subsequently, the respondent submitted a representation to the appellant, requesting re-employment, citing the appellant’s regularization of two other peons pursuant to Section 25(H) of the Industrial Disputes Act, 1947. The appellant rejected this request, leading to a renewed referral to the Labour Court. The Labour Court determined that the respondent was not entitled to the benefits of re-employment under Section 25(H) of the Industrial Disputes Act, 1947.
The respondent then filed a writ petition before the High Court, which was allowed by a learned Single Judge, who directed the appellant to re-employ the respondent.
The appellant’s appeal before the Division Bench of the High Court was dismissed, thereby affirming the decision of the learned Single Judge. The appellant thereafter preferred a Special Leave Petition before the Supreme Court.
Issue: Whether the workman is entitled to re-employment or not under Section 25 (H) of the Industrial Dispute Act, 1947?
Judgement: The Court held that the respondent’s claim for re-employment under Section 25(H) of the Industrial Disputes Act, 1947, was untenable, as he had accepted compensation in lieu of reinstatement, thereby extinguishing his right to such relief. The Bench clarified that the legislative intent behind Section 25(H) is to afford retrenched employees preferential consideration for re-employment when vacancies arise within the employer’s establishment.
Compliance with the procedural requisites of Section 25(H) mandates adherence to Rule 78 of the Industrial Disputes (Central) Rules, 1957. To establish a valid claim for re-employment under this provision, the respondent must adduce evidence demonstrating: (i) that he was a retrenched employee, and (ii) that the employer is actively filling vacancies within their organizational structure.
The court determined that the respondent could not successfully invoke Section 25(H) by relying on the regularization of an incumbent employee, as this action does not constitute the filling of a vacancy within the purview of the provision. The court articulated a clear distinction between employment and regularization of services: employment signifies the engagement of new personnel to fill vacant positions, whereas regularization pertains to the conferral of permanent status upon existing employees.
The court further stated that it will not entitle the respondent to re-employment under the petitioner. The Supreme Court allowed the appeal, reversed the High Court’s order, and reinstated the Labour Court’s award.

Manju Saxena v. Union Of India

Facts: The appellant, initially appointed as Lady Confidential Secretary, was promoted to Senior Confidential Secretary at the respondent bank. When the Senior Confidential Secretary position became redundant, the bank offered her four alternative posts with equivalent pay and a severance package, both of which she declined.
Subsequently, the bank terminated her employment on October 1, 2005, providing six months’ compensation in lieu of notice, amounting to Rs. 8,17,071. The appellant then initiated an industrial dispute before the Regional Labour Commissioner, seeking an enhanced severance package but not reinstatement. Conciliation efforts failed. She subsequently filed a claim before the Central Government Industrial Tribunal (CGIT), seeking an enhanced severance package, loan waiver, and full pension. The CGIT ordered her reinstatement with terminal benefits.
The respondent challenged this order in the High Court, which directed the CGIT to determine if the appellant qualified as a ‘workman’ under the Industrial Disputes Act. The CGIT affirmed her status as a ‘workman’ and ordered reinstatement with back wages and benefits. The appellant’s application for interim maintenance was granted by the High Court, awarding Rs. 75,000 under Section 17B of the Industrial Disputes Act. This was reduced by a Division Bench in a Letters Patent Appeal. A single judge of the High Court then allowed the bank’s petition, setting aside the CGIT’s order, ruling that the appellant had abandoned her employment, and ordering her to return the severance compensation. The appellant’s appeal to the High Court’s Division Bench was dismissed, though the order to return the severance compensation was overturned.
The appellant then appealed to the Supreme Court.
Issue: Whether the voluntary abandonment of her services will come under the purview of Section 25F of the Industrial Dispute Act, 1947, or not?
Whether it entitled the petitioner to any other claims or benefits from the respondent or not?
Judgement: The court held that the petitioner’s voluntary abandonment of her services, despite being offered alternative positions and a severance package, precluded her from claiming ‘continuous service’ under Section 25F of the Industrial Disputes Act.
The court referenced Hathisingh Manufacturing Ltd. vs Union of India, outlining the requirements for retrenchment under Section 25F. They emphasized that ‘continuous service’ is a prerequisite for the application of Section 25F.
The court modified the judgement to exempt the appellant from restituting the amount received under section 17B of the Act and litigation expenses. The Court dismissed the civil appeal, holding that the compensation paid to the petitioner constituted a complete and final settlement of all her claims.