A detailed Analysis of Lay–off and Retrenchment

Detailed Analysis of Lay–off and Retrenchment

The dismissal of employees by the company for reasons other than the employee’s fault is referred to as layoff. A layoff is a temporary situation in which an employer is unable to continue employing workers for a short period of time. Retrenchment is a circumstance in which an employer reduces his staff in order to boost revenues and reduce losses. Even in retrenchment, the loss of employment isn’t due to the employee’s fault. The Act that addresses layoffs and retrenchments is The Industrial Disputes Act of 1947.

Understanding the concept of lay-off under the Industrial Disputes Act, 1947

Section 2 (kkk) of the Industrial Disputes Act, 1947 defines the term ‘Layoff’’ as the inability, failure, or refusal of the employer to provide employment to a workman whose name is mentioned in the muster roll of his industrial establishment and who is not retrenched due to the lack of power, coal, raw materials, accumulation of stocks, breakdown of machinery or natural calamity for any other relevant reasons.

Conditions essential for a lay-off

• There must exist an inability, failure or refusal from the employer’s side to provide employment to the workmen.
• Such inability, failure or refusal must be due to lack of power, coal, raw materials, accumulation of stocks, breakdown of machinery or natural calamity for any other relevant reasons.
• The name of the workman must be mentioned in the muster roll of the employer’s industrial establishment.
• The workman must not have been subjected to retrenchment.

A layoff is a measure that is only used in existing businesses. The concept doesn’t apply if the employer decides to permanently close his manufacturing establishment. Layoffs must correspond to the conditions outlined in Section 2 (kkk) of the Industrial Disputes Act of 1947, or they will not be considered legal. In the condition of layoffs, employees will be removed immediately; nevertheless, such unemployment is temporary in nature, thus it does not result in the termination of the already existing employer-employee relationship and does not result in any changes to the terms of such employment.

Section 25A of the Industrial Disputes Act, 1947: Non-Applicability of Compensation on Industries

As per Section 25A, the compensation accrued from the layoff provisions mentioned in the said Act shall not apply to the following kinds of industrial establishments:

• Such industrial establishments where less than 50 workmen worked on an average during each working day in the preceding calendar month.
• An industrial establishment where work is done seasonally or occasionally.
• An industrial establishment that comes under the aegis of chapter V-B as included by the Industrial Disputes Amendment Act of 1976

Section 25B of the Industrial Disputes Act, 1947: Continuous Service

As per Section 25B, a workman is said to render continuous service if he has worked for at least one year without any interruption. He shall be eligible for compensation if he has rendered a minimum of one year of continuous service. The interruption of such continuous service is not affected by reasons such as an accident, authorized leave, sickness, legal strikes, lockouts and the termination of work that is not due to the fault of the workmen.

There are two exceptions where even if a workman is not in continuous service shall be deemed to be in continuous service they are:

1. If the workman was employed for the preceding 12 calendar months from the date on which such calculation is being made.
2. If the workman during such 12 months had rendered his services for 190 days or more in the case of being employed in a mine and 240 days in any other employment.

Conditions precedent for providing compensation to a laid-off workman

Compensation Rights

Whenever a workman whose name is borne on the muster rolls of an industrial establishment and who has completed not less than one year of continuous service under an employer is laid-off, whether continuously or intermittently, he shall be paid by the employer for all days during which he is laid-off, except for such weekly holidays as may intervene, compensation which shall be equal to fifty percent of the total of the basic wages and dearness allowance that would have been payable to him had he not been laid-off.

Provided that if during any period of twelve months, a workman is laid off for more than forty-five days, no such compensation shall be payable in respect of any period of the lay-off after the expiry of the first forty-five days, if there is an agreement to that effect between the workman and the employer: Provided further that it shall be lawful for the employer in any case falling within the foregoing provision to retrench the workman in accordance with the provisions contained in section 25F at any time after the expiry of the first forty-five days of the lay-off and when he does so, any compensation paid to the workman for having been laid- off during the preceding twelve months may be set off against the compensation payable for retrenchment.

However such compensation is subject to the following conditions –

1. The workman is not a badli or a casual worker.
2. The workman’s name must be mentioned in the muster roll of the industrial establishment.
3. The workman must have rendered at least one year of continuous service under such an employer.

Conditions for non-applicability of compensation on Workmen Section 25E

States when a workman shall not be entitled to layoff compensation –

1. If the workman is absent from the establishment during the required working hours at least once a day.
2. If the workman is laid off for slowing down the efficiency of workmen in another part of the establishment or due to the reason for a strike.
3. If the workman expresses his refusal towards the alternative employment being given to him, provided that:
   1. Such employment is given in the same establishment he has been laid off from.
   2. Such employment is given in any other establishment under the same employer within 5 miles radius from the establishment to which he belonged.
   3. Such employment as per the employer does not require any previous experience or special skills as compared to the work that the workman can do.
   4. Such employment provides the same wages to the workman as his previous employment did.

Prohibition of lay-off under Industrial Disputes Act, 1947

Section 25M imposes various constraints on employers when laying off employees (Chapter VB added to the Industrial Disputes Act of 1947 by the Industrial Disputes Amendment Act of 1976). These limits apply to industrial establishments that are not seasonal and employ more than 100 people. An employer may not lay off a worker whose name appears on the muster roll of his industrial facility unless the reason is a lack of electricity or a natural calamity. If the labour is for a mine, the reasons could be a fire, explosion, an excess of combustible gas, or a flood.

After obtaining the consent of the concerned authorities indicated by the government or the government itself, an employer may lay off workers. To that end, the employer must file an application outlining the reasons for the lay-off, and a copy of that application must be sent to the workers affected by the lay-off. Following receipt of an application, the relevant authorities or government can enquire into such layoff. Following such an investigation, the order of the relevant body or the government must be communicated to the business and the employees who are being laid off. The order of the relevant authority or government shall be deemed final and binding for a period of one year from the date of issue of such order.

If the responsible authority or government does not convey its order granting or refusing authorization for such layoff within 60 days of the date of application, the application will be regarded as granted. The order of the relevant authority or the government can be referred to a tribunal for adjudication or reviewed, either on its own initiative or in response to an application made by an employer or a worker.

If a layoff occurs even after permission to do so is denied, it will be regarded as illegal, and the workers laid off will be entitled to the benefits of the law. However, if an employer provides alternative employment to a worker, he is not considered to have laid him off.

Understanding the concept of retrenchment under the Industrial Disputes Act, 1947

Section 2(oo) of the Industrial Disputes Act, 1947 talks about retrenchment.  As per the said section, retrenchment refers to the termination of a workman for any reason except for a form of punishment in furtherance of imposing disciplinary action. However, retrenchment does not include voluntary retirement of a workman, workman retiring upon reaching the age of superannuation as mentioned in the employment contract, removal of a workman on basis of continued ill-health, and removal of the workman because the employment contract is terminated or is non-renewed after its expiry.

Section 25N: Conditions precedent to retrenchment of workmen

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,
   1. 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;
   2. 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 on 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.

Herein cited the list of few States threshold to seek authority approval to Lay-off & Retrenchment

Lay-off & Retrenchment: Juxtaposition

A layoff is the temporary termination of a worker at the disposal of an employer, whereas retrenchment is the removal of excess workers to increase the efficiency of an industrial establishment, provided that such removal is done for any reason other than punishment in furtherance of imposing disciplinary action.

A layoff is a temporary termination, but a retrenchment is a permanent termination. The employer-employee relationship does not end in the former but it does end in the latter.

In a layoff, the industrial establishment ceases to function or operate following the declaration. In retrenchment, however, the industrial establishment maintains its functions or operations.

A laid-off employee is rehired as soon as the layoff term is over. In the event of retrenchment, the worker’s employment is immediately terminated, and there is no longer a relationship between the employer and the worker.

What’s Next:

Every state in India enforces a set of rules on various businesses operating under its jurisdiction. Many of these statutory laws are a part of the Shops and Commercial Establishment Act. If you are conducting business In Karnataka, then this overview of the Karnataka Shops and Commercial Establishments Act would be a useful resource for you.