Concept of Retrenchment | Labour and Industrial Law - CLAT PG PDF Download

Introduction

Retrenchment refers to the permanent removal of surplus staff due to fundamental changes in the nature of the business. This process leads to a complete severance of the employer-employee relationship and results in involuntary unemployment for the affected workers.

In India, until 1953, there were no statutory provisions to protect workers from the risks of involuntary unemployment. However, the Industrial Disputes Act was amended in 1953 and again in 1976 to include provisions regarding retrenchment.

Definition

According to Section 2(oo) of the Industrial Disputes Act, retrenchment is defined as the termination of a workman's service by the employer for any reason other than disciplinary action. However, it does not include:

• Voluntary retirement of the workman;
• Retirement upon reaching the age of superannuation;
• Termination due to the non-renewal of a fixed-term contract;
• Termination due to continued ill health.

"For any reason whatsoever" In the case of Sundaramany, the Supreme Court interpreted the phrase "for any reason whatsoever" in the context of retrenchment very broadly. The court ruled that any termination, regardless of the reason, constitutes retrenchment. This interpretation emphasizes the comprehensive nature of retrenchment under the law.

• In the Hindustan Steel case, the Supreme Court ruled that the termination of the timekeepers' services was retrenchment, similar to the decision in Sundaramany's case. The court clarified that even in cases of composite orders, the lack of a separate termination order does not negate the applicability of retrenchment.
• The principles established in these cases were reaffirmed in Delhi Cloth & General Mills v. Sambu Nath, where the court held that removing a workman's name from the rolls constituted retrenchment. In Santosh Gupta v. State Bank of India (1980), the Supreme Court ruled that terminating an employee's appointment due to failing a test for confirmation was retrenchment under section 25-F. The court emphasized that section 2(oo) covers termination for any reason except those explicitly excluded by section 25-F or other provisions of the Act.

Termination of Casual Worker’s Service is Not Retrenchment

• Termination of a casual worker's service upon completion of specific urgent work does not constitute retrenchment. If a worker is engaged on a casual basis without a written contract for a particular urgent task, their service automatically ends when the work is finished, and retrenchment procedures do not apply.
• Even if a casual worker is repeatedly needed for urgent tasks and works for an extended period, their termination does not amount to retrenchment. Unlike cases where employment contracts specify a specific duration, the circumstances and facts in this instance are different.

Exclusion from the Definition of Retrenchment

• Voluntary Retirement: When an employee voluntarily chooses to retire or resign from their position, it does not fall under the definition of retrenchment.
• Superannuation:For termination due to superannuation to be valid, the following conditions must be met:
  • There should be a stipulation in the employment contract regarding retrenchment based on the age of superannuation.
  • The stipulation must clearly state the age of superannuation.
• Termination under this clause will not be considered retrenchment if the age of superannuation is not mentioned in the contract or standing orders.
• Termination on Non-Renewal of Service Contract: If employment is based on a fixed-term contract, non-renewal of the contract upon its expiration does not constitute retrenchment.
• Continued Ill Health: Termination due to the continued ill health of a worker is excluded from retrenchment. Continued ill health can refer to physical or mental health issues that incapacitate a worker for future work indefinitely. Determining whether a worker is experiencing continued ill health is a factual matter that can be established by either party.

Conditions for Valid Retrenchment

• One month's notice with reasons or one month's wages in lieu of notice is required. Notice is not necessary if termination date is specified in an agreement.
• Compensation equivalent to 15 days' average pay for each completed year of service or any part exceeding six months is mandatory.
• Notice of retrenchment must be served to the appropriate government or notified authority.

Retrenchment Compensation

• Payment of compensation is a mandatory condition for the validity and effect of retrenchment under Section 25-F(b).
• If compensation under Section 25-F(b) is not offered within the notice period under Section 25-F(a), the notice becomes inoperative and void.
• Notice or wages in lieu of notice under Section 25-F(a) and payment of retrenchment compensation under Section 25-F(b) are prerequisites for retrenchment.
• These clauses prohibit retrenchment until the conditions are fulfilled.

Eligibility for Compensation

• To be eligible for compensation, workmen must have completed a minimum of one year of continuous service within twelve calendar months.
• For underground mine work, 190 days of work is required; for other cases, 240 days of work is necessary.

Rate of Compensation

• Under Section 25-F(b), the workman is entitled to 15 days' average pay for every completed year of continuous service, or any part thereof exceeding six months of continuous service.
• The employer has the right to set off any lay-off compensation paid to the workman in the preceding twelve months against the retrenchment compensation.
• In case of the workman's death, his legal heirs are entitled to the retrenchment compensation.

Notice to the Appropriate Government

• Section 25-F(c) requires giving notice of retrenchment to the government, but this notice is only directory and not mandatory.
• In Bombay Union of Journalists v. State of Bombay, the Supreme Court ruled that sections 25-F(a) and (b) are mandatory, while previous notice to the government under section 25-F(c) does not invalidate retrenchment.
• Notice under section 25-F(c) is meant to inform the government about employment conditions in various industries in its region.

Remedy against Violation of Section 25-F: As the dispute regarding rights or obligations under Section 25-F cannot be directly raised in writ proceedings, the Supreme Court has established that the exclusive remedy is through a reference under Section 10 of the Industrial Disputes Act. This remedy should be utilized for issues that arise from the Industrial Disputes Act itself.

The Impact of 1976 and 1984 Amendments on Retrenchment

Under Section 25-N, introduced by the 1976 amendment, specific conditions are outlined for valid retrenchment in establishments with 100 or more workers averaging per working day over the past 12 months.

Conditions for Valid Retrenchment

• Continuous Service Requirement: No workman with less than one year of continuous service can be retrenched until:
• Notice Requirement: A three-month written notice stating reasons for retrenchment is given, or wages for the notice period are paid.
• Agreement Exception: No notice is needed if retrenchment is under an agreement specifying the termination date.
• Compensation: The workman is paid compensation equivalent to 15 days' average pay for each completed year of service or any part thereof exceeding six months.
• Government Notice: Notice in the prescribed manner is served on the appropriate Government.

Upon receiving notice, the appropriate Government must conduct an inquiry and may grant or refuse permission for retrenchment in writing. If the Government does not respond within three months from the notice date, the retrenchment is deemed valid after three months.

Withdrawal of Dispute

• Section 25-N(7) empowers the appropriate Government to withdraw disputes involving retrenchment questions in establishments covered by Chapter VB, pending before a Conciliation officer or the Central or State Government. This is applicable if the Government believes the retrenchment is not in the interest of industrial peace or is retaliatory. Such disputes are transferred to a specified authority by the Government's notification in the official Gazette. The authority's order is final and binding on both the employer and the workman.
• Section 25-N(b) is mandatory; if compensation is deemed insufficient, the retrenchment is void ab initio unless there is a bona fide action by the employer or a waiver by the workman.

Penalty for Violations

• Section 25-Q prescribes penalties of imprisonment for up to one month, fines up to Rs. 1,000, or both for violating notice and permission requirements under Section 25-N(1)(c) or Section 25-N(4).

Retrenchment Procedure

Last Come First Go Principle
Section 25-G incorporates the principle of "last come first go" in retrenchment, applicable only if all specified conditions are met:

• The claimant must be a workman as per section 2(s).
• The claimant should be an Indian citizen.
• The industrial establishment must qualify as an "industry" under section 2(j).
• The claimant should belong to a specific category of workmen within the establishment.
• There should be no agreement contradicting the "last come first go" procedure between the employer and the workman.

If these conditions are satisfied, the employer is expected to retrench the last worker in that category. Deviation from this procedure is allowed for justifiable reasons, which must be documented.

Last Come First Go Explained

• The principle of "last come first go," as stated in Section 25-G, allows employers to decide which employees to retrench in cases where retrenchment is justified. However, this rule is not absolute, and employers can depart from it for valid reasons. 
• The purpose of this rule is to protect against discrimination in retrenchment decisions. Failing to adhere to the "last come first go" principle without justification may suggest that the retrenchment is based on improper motives, making it invalid and potentially an unfair labor practice or victimization.

Departure from the 'Last Come First Go' Rule

• The 'last come first go' rule mandates that employers retrench the most recently hired worker first. However, this rule is flexible, allowing for exceptions in extraordinary situations. 
• For example, if a junior employee possesses a unique qualification essential to the employer, they may be retained while a more senior employee is laid off. Justifiable reasons must support any deviation from this rule. Section 25-G requires the application of the "last come first go" principle within specific categories. 
• Employees falling within the same category should be retrenched based on this principle. If seniority among workers in a category is identical, evidence must demonstrate their inclusion in the same category. Creating separate categories based on criteria like pay scales or length of service is not permitted. Such differentiation leads to the establishment of distinct categories.

Effect of Departure from 'Last Come First Go' Rule

• If a retrenchment violates the 'last come first go' rule, it will be considered invalid unless supported by valid and justifiable reasons. 
• Typically, the worker who was improperly and illegally retained is entitled to reinstatement and remuneration for the period of unemployment.

Re-employment of Retrenched Workman - Section 25-H

• Section 25-H mandates that after retrenchment, if an employer intends to hire any person, they must give preference to retrenched workmen who offer themselves for re-employment. 
• These retrenched workmen have priority over new applicants. Thus, Section 25-H imposes a statutory obligation on the employer to prioritize retrenched workmen when considering subsequent employment.

Conditions for Applying Section 25-H

• The retrenched workman must have been 'retrenched' before the re-employment in question. If the workman's termination was due to reasons other than retrenchment, such as dismissal, discharge, or superannuation, they cannot claim preferential re-employment under this section.
• The workman must be a citizen of India.
• The workman must offer themselves for re-employment; failing to do so will forfeit their right. The offer should be made in response to the notice given by the employer under Rule 76 of the Industrial Disputes (Central) Rules, 1957, or corresponding State Rules.
• The retrenched workman should have been in the same category of service as the position for re-employment in the industrial establishment.

It is the nature of the work, not the designation, that determines the category of the post. For instance, if a workman was titled assistant storekeeper but primarily performed clerical tasks and was retrenched, and later the management hired three clerks, Section 25-H would be violated as the retrenched workman was not given preferential re-employment.