6/10/22, 4:47 PM A detailed study on the laws of retrenchment - iPleaders

A detailed study on the laws of retrenchment

By Rachit Garg - July 14, 2021

Image source - https://bit.ly/35XYdUo

The article is written by Harmanpreet Kaur from Amity University, Kolkata. The article
will give comprehensive information on the laws of retrenchment.

Table of Contents 
1. Introduction
2. Conceptual meaning of retrenchment 
3. Retrenchment under the Industrial Disputes Act, 1947
3.1. Interpreting the definition of the term retrenchment
3.1.1. Exceptions to the definition of retrenchment 
3.1.2. The reasons for retrenchment
3.2. Prerequisites of a valid retrenchment
3.3. Procedure of retrenchment 
3.3.1. Principle of ‘first come, last go’ and ‘last come, first go’
3.4. Re-employment of retrenched workmen
3.5. Conditions precedent to retrenchment of workmen
3.6. Punishment for infringement 
4. Conclusion 
5. References

Introduction
In contrast to the majority of the East Asian countries, India has enacted and
implemented a range of regulations and laws aimed at protecting the worker’s well-being
over time. Thus, there exist laws safeguarding the trade union rights, rules and
regulations forbidding bonded labour and child labour in hazardous industries, laws
ensuring minimum wages, and laws preventing retrenchment, layoffs, and dismissal of
workers.

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In India, as per Section 3(1) of the Industrial Disputes Act of 1947,  industries with more
than a hundred employees, these industries must obtain government approval before
making any redundancies or retrenchments, and employees are entitled to three months’
notice of any such action. The method serves as a safeguard for employees who may be
fired without any specific reason or justification by industry authorities or as a cost-
cutting strategy for employers. The perspective of introducing such legislation is to
provide protection to the rights of the workers and promote the welfare of the labour, but
the perspective has an unintended consequence of making the Indian economy less
flexible. As a result, when industries and corporations confront adversity, retrenchment
rules compel them to maintain bloated workforces and personnel, thereby affecting the
industries as they are then left with fewer resources for making investments in the new
production processes.

The legislation of retrenchment is ironic because when looked upon from an overall
aspect, the laws may be harming the labourers rather than aiding them, by reducing
employment and lowering their wages.

Conceptual meaning of retrenchment 

When the business of industry, firm or any organization falls low owing to a change like
labourers the business, retrenchment becomes a permanent means of decreasing
surplus employees. It is the process of retrenchment of employees and workers as a
result of economic and commercial conditions, rather than a disagreement between the
company and the employee. The method entails a consultative process as well as
government approval.

It is a fundamental activity to ensure that the process is done fairly and equally,
following the ideals of fairness and equality. Economic, social, and industrial justice
should be the emphasis of such an activity. The procedure, on the other hand, has an
impact on both the employer and the employee. The situation is referred to as the
worker’s involuntary unemployment.

Retrenchment under the Industrial Disputes Act,

1947

Interpreting the definition of the term retrenchment

The modification to the Industrial Disputes Act of 1947 included Section 2(oo). The
provision was added to the Industrial Disputes Act, 1976 by the way of an amendment.
The Act was amended because the 1947 Act lacked measures that would give employees
protection and immunity if they were faced with any type of involuntary unemployment.
Therefore, Section 2(oo) was introduced as a statutory provision to promote the welfare
of the laborers and provide them with adequate financial realities in the Industrial
Disputes Act,1976.

Section 2(oo) of the Act defines the term ‘retrenchment’. The term retrenchment can be
referred to as the permanent termination of the employment of the employee or a

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worker by his or her employer for any reason or circumstance, but other than
disciplinary action.

Exceptions to the definition of retrenchment 

The conditions mentioned underneath are not covered by the definition of retrenchment.
They are:

If the worker intentionally or willfully resigns from the service of the employer, then
such voluntary retirement will not be covered by the definition.

If the employer or employee retires after attaining the age of superannuation but such
a provision must be mentioned in the employment contract between the employer and
the employee.

If the employee is restricted to work in the industry as a result of the employer’s

failure to renew the contract of employment.

Termination due to the employee’s continuing bad health is not covered under the
concept of retrenchment. The ill-health of the employee would include his physical
and mental health. The question of whether the employee is suffering from a
continuous illness is based on the facts and circumstances of the case and can be
shown or refuted on either side.

The reasons for retrenchment

The action for retrenchment taken by the employer may be for any reason as he thinks
fit but should be just and legal. When a portion of the staff or labor force is discharged
as a surplusage in a running or a continuing business, termination of which may be due
to  various possible reasons such as:

Economical difficulties – If the company faces financial hardships or experiences any

kind of loss in its income, the industry then considers limiting its respective
employees by way of retrenchment.

Rationalization in the industry – Sometimes, companies and industries require more

realistic ways in their operations as they progress. It is possible that applying such
techniques will result in structural or operational modifications. If the industry
becomes redundant as a result of such developments, the method of retrenchment
can be used after such recognition and evaluation of all relevant factors

Technological changes in the industry – Technological developments are progressively

being implemented by industries in their enterprises. As a result, while adopting such
technological developments may reduce the need for employees, it may also be
necessary for workers to be able to properly comply with the new technology. As a
result, if the deployed technologies render the usage of employees obsolete, the firm
or industry may be obliged to retrench.

Failure of machinery – If a specific industry’s machinery fails, the law of retrenchment

may be used.

In the case of Managing Director, Karnataka Handloom Development Corporation Limited

v. Sri Mahadeva Laxman Raval (2006), the respondent was appointed for fixed working
hours and intervals as an expert weaver in the company to train other fellow weavers.

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His services were discontinued after the expiry of the contract period. The respondent
raised an industrial dispute with the company in the labour court. The court directed his
reinstatement, and the award was approved by the High Court. Hence the corporation
filed an appeal in the Supreme Court. The Supreme Court held that the terms of
appointment show that the respondent was not a worker but employed on contract
based on a time-barred action. The court further held that Section 2(oo) of the Industrial
Disputes Act of 1947 was not attracted and discontinuance of the service of the
respondent was not retrenchment as defined in Section 2(oo) of the Act.  

Prerequisites of a valid retrenchment

The conditions for a valid retrenchment are outlined in Section 25F. These requirements,
however, apply if an employee has been in continuous service for at least one year in the
case of retrenchment. The  conditions mandated to comply with a valid retrenchment
are:

1. Before one month, the employer shall issue a written notice outlining the grounds for
the retrenchment to the workforce. The retrenchment should only be effective when
the employees have been given notice for retrenchment.

2. If the employer fails to provide a notice to the employees, then they shall be liable to
pay a compensatory amount for such conduct.

3. The employee must be compensated with an amount equal to 15 days annual wage
for the completed year of continuous employment in the industry or any portion of it
exceeding six months.

4. The appropriate government or authority is served notice in a prescribed way, as

specified in the official gazette.

5. The notice regulations must adhere to the provisions of Rule 76 of the Industrial
Disputes (Central) Rules, 1957, which govern the notice of retrenchment.

The requirement of paying compensation is a mandatory pre-condition for retrenchment

of a workman, therefore its non-compliance will render a retrenchment invalid. If the
retrenchment is proved unlawful or is not approved by the government authorities then
such a workman has a right to reinstatement with continuity of service and right to
wages for such period.

Termination of service of a workman for any reason other than those except in Section
2(oo) amounts to retrenchment. If the prerequisites for a valid retrenchment have not
been complied with, the termination would be void. 

Procedure of retrenchment 
The retrenchment principle of ‘first come, last go’ and ‘last come, first go’ are well-
known in industrial law. The concept has been codified in Section 25G. A worker can
seek the procedural protections afforded by this provision. The protection can only be
availed if the following requirements are fulfilled:

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1. The person seeking protection must qualify the definition of a worker as defined in
Section 2(s) of the Act.

2. The workman should be a citizen of India

3. The employee should have been employed in the establishment, which, according to
Section 2(j) of the Act, is classified as an industry.

4. The employee must belong to a specific category of a workforce in the industry

5. There should not be any kind of agreement between the employer and the employee
regarding the principle of ‘last come first go’.

The procedure of retrenchment can only be valid under Section 25G if all the five
conditions have been simultaneously complied with.

Principle of ‘first come, last go’ and ‘last come, first go’
The principle of ‘first come, last go’ and ‘last come, first go’ can only be applied if the
worker has been classified under different categories of the workmen employed in any
industry or establishment. The principle of ‘last come, first go’ states that in the case of
retrenchment, the employer has the power to decide which of the employees are to be
retrenched. The rule acts as a healthy safeguard if there is any kind of discrimination
against the worker in case of retrenchment. The principle will not be applicable if:

If there is any type of agreement between the employer and the employee.

For any other reason, the employer considers necessary.

The principle of retrenchment is that management should start with the latest recruit
and progressively retrench employees higher up in the list of seniority. The management
in matters of retrenchment should act fairly and must comply with the principles of
equality, equity, justice, and fairness. 

In the case of Brohan Kumar v. Barauni Oil Refineries (1971), it was decided that in the
absence of any agreement between the employer and the workers, the employer must
use the “last come, first served” principle in the case of an employee’s retrenchment.
The retrenchment would be carried out based on the seniority of workers working
categorically, not on their seniority.

Re-employment of retrenched workmen

The Act’s Section 25H is based on the well-known concept that when an employer
retrenches a worker due to labour allow shortage, the worker should be given the first
chance to return to work whenever the need for another hand arises. Section 25H
imposes a statutory obligation on the employer to give an opportunity to the retrenched
employees to apply for re-employment. The workmen must satisfy the following
conditions:

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1. When the company retrenches, the workers should be allowed to re-enter

employment.

2. The worker must be a citizen of India.

3. The notice should be given to the workmen for any kind of re-employment.

4. The workers should be granted reemployment in the same industry where he was
employed before being laid off.

5. The retrenched workers shall be preferred by the employer for re-employment over
other persons.

Only a ‘retrenched’ workman has been given the right to claim benefit under Section
25H. A dismissed, discharged or superannuated worker has no claim for preferential re-
employment. If the worker is given a notice by the employer for re-employment and he
consequently fails to offer himself for re-employment, then he will be disentitled from
claiming the benefit under Section 25H. When an employer has to employ more workers,
the retrenched worker must be allowed to re-enter the workforce. The principle of
equality is not only incorporated in this specific Section 25H, but it is the general
application in industrial adjudication that everybody must be equally treated and must
comply with the provisions of natural justice, equality, fairness, justice, and equity. 

It was cited in the case of Delta Wire Pvt. Ltd. v. General Labor Union and Another
(1995), that after having been retrenched and been paid the statutory compensation the
only right that is available to a worker because of having been previously employed is
the one conferred by Section 25H of the Act. The worker has a preference for re-
employment, but he cannot claim the same level of service after re-employment as he
had before retrenchment.

Conditions precedent to retrenchment of workmen

The criteria to be followed before retrenchment of workmen have been stated under
Section 25N. The conditions are:

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1. Section 25N states that the worker who has been in continuous service for at least
one year in the industry shall be retrenched by the employer only if he has been given
the notice by the employer before three months stating the reasons for retrenchment
and the worker has been paid with the annual wages before the notice.

2. The permission for the retrenchment and the issuance of the notice should be
approved by the government or any other appropriate authority.

3. The employer must make an application for retrenchment approval to the government
and the appropriate authorities in the prescribed manner and the copy of such
approval must be submitted to the workers as specified in the official gazette.

4. When the employer requests approval for a retrenchment procedure, the government
will undertake an investigation into the procedure and, after providing the employer
with a reasonable opportunity to be heard, will grant or refuse authorization to the
method as he considers fit. The order of the same shall be provided to the employer
and the worker. The government must follow the principles of natural justice and be
transparent and impartial when conducting an investigation.

5. The government must notify the order of the employer within sixty days after the
employer has applied for authorization to the government or the appropriate
authorities. If the order is not made within sixty days of the expiration date, it is
presumed granted.

6. The order issued by the government or the specified authority, whether approved or
refused, becomes final and binding on all parties, and it will be in effect for one year
from the day it was conveyed to the parties.

7. If the order by the government is challenged by the employer then it will be referred
to the tribunal for adjudication and the tribunal should within thirty days pass the
judgment on the matter.

8. The application for permission for retrenchment if refused by the government, shall be
considered illegal.

Thus, it is mandatory that the application for permission is necessary to be made to the
government and the decision of the government lays final on the parties. 

In the case of Rajinder Singh Chauhan and other v. State of Haryana and others (2006),
the appellants were the employees of the Haryana Store Federation of consumers co-
operative wholesale stores limited. Hence, they were retrenched by the employers in
compliance with Section 25F of the Industrial Disputes Act of 1947. They were aggrieved
by the process of retrenchment and challenged the labour action of the employers i.e,
retrenchment through the writ petitions under Article 226 of the Constitution of India,
but failed to get any remedy.

The employees then filed writ petitions in the Supreme Court challenging the decision of
the Punjab and Haryana High Court. The Supreme Court held that the employer i.e, the
respondents were not included under the definition of Section 2(g) of the Industrial
Disputes Act of 1947. Hence, the High Court was appropriate in determining that Section
25N did not adhere to the appellants’ retrenchment.

In the case of Workmen of Meenakshi Mills Limited etc v. Meenakshi Mills Ltd and
another (1992), the constitutional validity of Section 25N was challenged because the

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provision violated Article 14, Article 19(1)(g) and Article 19(6) of the Constitution of
India, stating that the employer had no constitutional rights to retrench the workmen.

The case was referred to the Supreme Court for its final decision. The Supreme Court
held that Section 25N of the Industrial Disputes Act of 1947 was constitutionally valid on
the ground that the restrictions imposed on the rights of employers to retrench workmen
are in the interest of the general public. Hence, it does not infringe the rights of the
Constitution. It was further held that an industrial dispute may arise on account of the
failure on the part of the employer if he does not comply with the provisions of Section
25N. Hence, the power has been conferred to the workmen and the management to
raise industrial disputes and move the appropriate government granting or refusing the
permission for retrenchment. 

Punishment for infringement 

Section 25Q states that if any employee infringes the basic provisions of retrenchment
and violates the provisions of Section 25N, he shall be punishable with imprisonment for
a term extending to one month or a fine extending to one thousand rupees and both.

Conclusion 
The provisions of retrenchment have been made in compliance with the basic
constitutional rights of the citizens. The labor laws when challenged have been justified
by the Supreme Court that they are constitutionally valid and the Parliament has made
laws keeping in mind the principles of social welfare and economic justice for all. The
industry has been given a due emphasis and that the development of the industry is
correlated to labor contentment. So in order to make the country a welfare state, a
socialist pattern of society must be maintained. Employers use the retrenchment method
to reduce the number of employees in their respective sectors if they are experiencing
problems. The other major techniques that can be adopted for downsizing lay-off,
closure, and voluntary retirement.

References
Labour and Industrial Laws by S.N.Mishra, 29th edition.

https://indiankanoon.org/

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https://www.manupatrafast.in/NewsletterArchives/listing/ILU%20RSP/2015/Nov/MANDAT

https://www.ebrd.com/downloads/about/sustainability/retrenchment.pdf

https://www.researchgate.net/publication/335060965_SEMINAR_ON_LABOUR_LAW_RET

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+690 - TK (Tokelau)
+670 - TL (Timor-leste)
+993 - TM (Turkmenistan)
+216 - TN (Tunisia)
+676 - TO (Tonga)
+90 - TR (Turkey)
+1868 - TT (Trinidad And Tobago)
+688 - TV (Tuvalu)
+886 - TW (Taiwan, Province Of China)
+255 - TZ (Tanzania, United Republic Of)
+380 - UA (Ukraine)
+256 - UG (Uganda)
+1 - US (United States)
+598 - UY (Uruguay)
+998 - UZ (Uzbekistan)

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6/10/22, 4:47 PM A detailed study on the laws of retrenchment - iPleaders

+39 - VA (Holy See (vatican City State))

+1784 - VC (Saint Vincent And The Grenadines)
+58 - VE (Venezuela)
+1284 - VG (Virgin Islands, British)
+1340 - VI (Virgin Islands, U.s.)
+84 - VN (Viet Nam)
+678 - VU (Vanuatu)
+681 - WF (Wallis And Futuna)
+685 - WS (Samoa)
+381 - XK (Kosovo)
+967 - YE (Yemen)
+262 - YT (Mayotte)
+27 - ZA (South Africa)
+260 - ZM (Zambia)
+263 - ZW (Zimbabwe)
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