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What is Retrenchment?

Terminating employees is common in the private sector where corporates relieve employees who fail to fulfill the performance standards of the company, do not follow the company’s moral and ethical code of conduct or fail to work with their team. Terminations are often carried out hastily by the HR department of a company attributing to pressure from stockholders, or as a tactic to cut down expenses.

Retrenchment is one of the ways companies use to terminate employment 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 means 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 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

The Industrial Disputes Act states that an employer can retrench an employee for any reason. The Supreme Court has held that the mere act of striking off an employee’s name from the employee roll for being absent from office without leave is also retrenchment. As per the apex court’s decision, there are no economic or other requirements to be there for retrenching an employee. A labour lawyer in Delhi can give you the most accurate advice about retrenchment in India.

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 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 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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