What is Retrenchment?

Retrenchment is one of the ways companies use to terminate employees when the company is forced to downsize its number of employees. Subsidiary companies of Multinational Corporations often resort to retrenchment to deal with their expenditure on human resources. However, companies often fail to consider the legal requirements to be carried out before retrenching their employees.

Retrenchment meaning is terminating an employee due to the surplus of labor or incapacity of employees to match the performance standards of the company. The Industrial Dispute Act, 1947 deals with employment-related disputes in India and Section 2(oo) of the Act states that ‘retrenchment means termination of service of a workman by an employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. However, the following are not covered within the meaning of employee retrenchment:

  • Voluntary retirement of a workman
  • Retirement of workmen on reaching the age of superannuation if the employment agreement contains a provision regarding superannuation
  • Termination of service of a workman due to the nonrenewal of employment agreement
  • Termination on grounds of continued ill-health


What is considered to be a fair procedure for retrenchment?

- The employer must consult with the employees who are likely to be affected by the employee retrenchment, or their workplace forum, registered trade union or elected representatives, or any person elected in terms of a collective agreement (“consulting employees”).

- The employer must issue a written notice inviting the consulting employees to consult and disclosing all the necessary information for such consultation.

- The employer and consulting employees must engage in a consensus-seeking process on certain matters contained in the notice

- The employer must allow the consulting employees to make representations about the matters contained in the notice and other matters relating to the proposed retrenchment.

- The employer must respond to the consulting employees’ representations. If the employer disagrees with the consulting employees, it must state the reasons for disagreeing with them.

- The employer must select the employees to be dismissed based on a selection criteria agreed with the consulting employees or a selection criteria that is fair and objective.

- After the consultation process has been exhausted, the employer may make its decision to retrench, and then issue a notice of employee retrenchment to the affected employees.

- The law provides for additional procedures that the employer, employing more than 50 employees, must follow when making a decision to retrench.

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