Retrenchment is something akin to downsizing. When a company or government goes through retrenchment, it reduces outgoing money or expenditures or redirects focus in an attempt to become more financially solvent. Many companies that are being pressured by stockholders or have had flagging profit reports may resort to retrenchment to shore up their operations and make them more profitable. Although retrenchment is most often used in countries throughout the world to refer to layoffs, it can also label the more general tactic of cutting back and downsizing.
The above is a very informal definition of retrenchment. Retrenchment has more to it than just termination of employment by a employer. There are a host of legal provisions which govern the practice of retrenchment. Section 2 (oo) of the Industrial Disputes Act, 1947 defines Retrenchment as -
” the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include -
(a) voluntary retirement of the workman, or
(b) retirement of the workman on reaching the age of superannuating if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or
(b) termination of the service of the workman as a result of the non-removal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
(c) termination of the service of a workman on the ground of continued ill-health;
The definition of retrenchment was not included in the Industrial Disputes Act, 1947 in its original form. It was inserted by Amendment to the Act in 1953. Thus the Industrial Disputes A ct, 1947 provides for certain conditions in which the termination of employment would not be considered as retrenchment. It is intersting to note here that the provision (bb) to Section 2(oo) was inserted later through the Amendment Act 49 of 1984. Section 2(oo)(bb) provides that termination of employment on non - renewal of employment agreement upon its expiry shalll not be considered as ‘retrenchment’. Before this provision was added to the Act, the Courts were of the opinion that non - renewal of such contracts of employment would constitute retrenchment for the purpose of this Act. This opinion was expressed by the Supreme Court in Hindustan Aluminum Corporation v. State of Orissa. It was later realized that the judgment was a bad judgment and the provision (bb) was subsequently added to the section.
The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and others (AIR 1991 SC 2234) had restricted the defintion of ‘Retrenchment’ under S.2(oo)(bb) to occur only when there is a ‘discharge of excess labor’ by the employer. Later the Supreme Court in State Bank of India v. N. Sundara Money (AIR 1976 SC 1111), Punjab Land Development and Reclamation Corporation Ltd., Chandigarh v. Presiding Officer, Labour Court, Chandigarh (1991 ( 61 ) FLR 73 ) and subsequent decisions rejected the narrow interpretation adopted by the Court in the earlier decision and held that any retrenchment, as defined in Section 2(oo), means termination by the employer of the service of a workman for any reason whatsoever otherwise than as a punishment inflicted by way of disciplinary action and those expressly excluded by Clauses (a), (b) and (c) of the definition. In view of these decisions, it cannot be said that retrenchment means termination by the employer of the service of a workman as surplus labor.
Now that the law is settled on what retrenchment is, let us proceed to the provisions contained in the Industrial Disputes Act, 1947, regarding the procedure to be followed in cases of retrenchment.
Section 25F provides the conditions precedent to retrenchment. According to this section the employer must satisfy the following conditions before retrenching an employee employed for a period of continuous period of not less than one year -
(a) the workman has been given one months notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice:
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days average pay [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 may be specified by the appropriate Government by notification in the Official Gazette].
Calculation of average pay is done by dividing the last drawn monthly salary by 25 and then multiplying the dividend by 15 for every completed year of continuous work.
Section 25N also lays down the conditions precedent to retrenchment -
1) No workman employed in any industrial establishment to which this Chapter applies, who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until,-
(a) the workman has been given three months notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice; and
(b) the prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette (hereafter in this section referred to as the specified authority) has been obtained on an application made in this behalf.
(2) An application for permission under sub-section (1) shall be made by the employer in the prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such application shall also be served simultaneously on the workmen concerned in the prescribed manner.
(3) Where an application for permission under sub-section (1) has been made, the appropriate Government or the specified authority, after making such inquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen concerned and the persons interested in such retrenchment, may, having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the workmen and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen.
(4) Where an application for permission has been made under sub-section (1) and the appropriate Government or the specified authority does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.
Section 25G lays down the procedure of retrenchment. Where any workman in an industrial establishment, who is a citizen of India, is to be retrenched and he belongs to a particular category of workmen in that establishment, in the absence of any agreement between the employer and the workman in this behalf, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other workman. The employer is also required to maintain a seniority list of the workmen. The system of last in first out is to be followed in retrenching workmen.
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