Transfer and closure; Definition of Lay-off and Retrenchment and their Compensation with statutes and case laws

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This article is written by Rahul, of 4^th Semester of Teerthankar Mahaveer University Moradabad, an intern under Legal Vidhiya

Introduction

Transfer and closure refer to the process by which an establishment or business entity is moved from one location to another or closed permanently. The process involves a series of legal and practical considerations that need to be addressed to ensure that it is executed within the confines of the law. In India, the process of transfer and closure is governed by various laws, including the Industrial Disputes Act, 1947, the Shops and Establishments Act, 1951, and the Companies Act, 2013, among others. These laws set out the establishment’s obligations, as well as the rights of the employees, in case of transfer or closure of the establishment. The economic world has seen some major developments in recent times. There have been advancements in technology, new methods of production, and an increase in productivity. However, these advancements have not been equally distributed, and some workers have been left behind. In response, governments around the world have begun to implement various policies to ensure that these workers are not left without security.

Lay-off and Retrenchment are terms used to define temporary or permanent termination of the employment of a worker. In India, the provisions regarding lay-off and retrenchment are governed by the Industrial Disputes Act, of 1947[1]. The act protects workers against arbitrary termination of employment by their employers.

One such policy is the provision of compensation for layoffs and retrenchments. These are two different concepts, but they both focus on ensuring that workers are not left without support in case they lose their jobs.

Definition of Lay-off

Section 2k define lay off. Lay-off can be defined as a situation where an employer decides to temporarily stop work or reduce the number of employees due to economic reasons, such as a drop in demand, a shortage of raw materials, or a lack of orders. Layoffs can also occur due to a variety of other reasons such as seasonal or weather-related changes, restructuring, reorganization, or slowdown in business.

According to the Industrial Disputes Act (IDA) of India, a worker is considered to be laid off if, on any day, he/she suspended or permanent terminated by their employer[2].

The Industrial Disputes Act, of 1947, specifies the following provisions regarding lay-off:

The worker shall receive compensation for the period of lay-off, equal to fifty percent of the total wages.[3]
The lay-off period shall not exceed forty-five days in a year.[4]

Lay-off Compensation.

Section 25 (c) of THE INDUSTRIAL DISPUTES ACT, 1947 deal with the layoff compensation. The IDA provides for payment of compensation to workers who have been laid off. This compensation is based on the length of time the employee has been laid off. According to the Act, workers are entitled to receive 50% of their basic wages and dearness allowance (DA) for the layoff period.[5] It is important to note that the payment of compensation is only applicable if there is no provision in the employment contract or collective bargaining agreement that provides for payment of compensation during a layoff. according to Section 25E [6]A worker is not eligible to layoff pay if the worker is fired because their actions are causing other employees to work less efficiently or because of a strike. if the employee misses at least one day each week of the mandatory working hours at the company. if the employee indicates a desire to decline the alternative employment offered to him.

Case Law on Lay-off Compensation

State Bank of India vs. N. Sundaramony and Ors.[7]

The Supreme Court in this case held that employees who have been laid off are entitled to compensation equivalent to 50% of their basic wages and dearness allowance. However, this compensation is only payable for the first 45 days of layoff. After that, the employee may be terminated or retrenched.

Definition of Retrenchment

Section 2(oo) of THE INDUSTRIAL DISPUTES ACT, 1947 define Retrenchment, according to the aforementioned provision, is defined as the dismissal of a worker for any cause other than as punishment for enforcing disciplinary measures[8]. Retrenchment is defined as the termination of the service of an employee due to reasons such as:

Economic difficulties
Failure of machinery If a specific industry’s machinery fails, the law of retrenchment may be used.[9]
The permanent closure of the enterprise
The permanent closure of a department or part of the enterprise
A surplus of workers resulting in the reduction of the workforce
The inability of the employer to continue the business due to financial reasons.

Retrenchment is a commonly used term in industrial relations. It refers to reducing the workforce by dismissing surplus employees due to economic reasons. This may occur due to a slowdown in business, a decrease in orders or sales, or other causes such as technological changes or relocation of the unit. In India, the law provides special provisions relating to layoff, retrenchment, and closure in certain establishments and conditions.

The Industrial Disputes Act, of 1947, provides the following provisions regarding retrenchment:

The employer must provide written notice of one months with reason to the worker before retrenchment.[10]
The worker shall receive compensation equal to fifteen days of wages for each completed year of service.[11]
The compensation shall be paid at the time of retrenchment, along with the other dues of the worker. [12]

Retrenchment Compensation

Under the IDA, if an employer retrenches a worker, they must provide compensation to the worker. The amount of compensation is based on the length of service of the worker and the basic wage and dearness allowance received by the worker. If the worker has worked for one year for the employer, they are entitled to receive 15 days’ wages as compensation.[13]

Precedent for Retrenchment:

Retrenchment is a sensitive issue in industrial relations, and employers must adhere to the law while exercising this right. In a landmark case, Laxmi Devi Sugar Mills Ltd. vs. Ram Sagar Pandey[14], the Supreme Court laid down the condition’s precedent for valid retrenchment. The court held that:

The employer must establish that the retrenchment was due to economic reasons, such as a decline in business or surplus labour, and not for any other reason.
The employer must follow the procedure laid down in Section 25F of the Industrial Disputes Act (1947)[15] which includes giving notice and payment of compensation.
The employer must consider the principle of ‘last come first go’ while selecting the workmen for retrenchment, i.e., the last employee to be hired should be the first to be retrenched.
The employer must prove that there was no alternative to retrenchment, such as redeployment, transfer, or voluntary retirement.

The landmark decision in Workmen of Hindustan Lever Ltd v. Hindustan Lever Ltd [16]clarified the principles and guidelines to be followed while providing compensation to the workmen during Retrenchment. This case dealt with the issue of what constitutes ‘surplus’ employees, and the compensation that they are entitled to receive.

The court held that the employer should consider and apply the ‘last in first out’ principle while identifying employees for retrenchment. The court further held that the compensation should be proportionate to the length of service, and the more senior employees should receive better compensation than the junior employees.

Gujarat Steel Tubes Ltd. vs. Gujarat Steel Tubes Mazdoor Sabha (1979)[17]

The Supreme Court held that retrenchment compensation must be paid to employees who have worked for more than one year in the organization. The amount of compensation should be equivalent to 15 days of average pay for each completed year of service.

Conclusion

Lay-off is a temporary suspension of work or a reduction in the number of working hours due to the lack of work or other reasons beyond the control of the employer. The employer is required to pay compensation to the employees for the period of their lay-off. Retrenchment, on the other hand, is a permanent termination of employment due to the closure of the business or reduction of the workforce for any reasons other than the conduct of the employee. The employer is required to pay compensation to the employees who have been retrenched. Lay-off and Retrenchment compensation are two types of compensation payments that an employer may be required to pay to their employees in cases of termination of employment due to organisational reasons. Retrenchment is an important issue in industrial relations, and it affects the livelihood of employees. The law provides for special provisions relating to layoff, and retrenchment in certain establishments and conditions. Employers must adhere to these provisions while exercising their right to retrenchment. The condition precedent for retrenchment has been laid down by the Supreme Court, and the employer must establish the economic reason, follow the procedures of section 25F[18] and consider the principle of last come first to go while selecting the workmen for retrenchment. It is essential to balance the interests of both the employers and employees to maintain a healthy industrial relation climate in the country.

[1] https://labour.gov.in/sites/default/files/THEINDUSTRIALDISPUTES_ACT1947_0.pdf

[2] https://explore.darwinbox.com/hr-glossary/layoff#:~:text=A%20layoff%20is%20the%20suspension,of%20workers%20by%20their%20employer.

[3] THE INDUSTRIAL DISPUTES ACT, 1947, s 25C

[4] https://www.whatishumanresource.com/layoff–laid-off-and-Retrenchment

[5] https://www.policybazaar.com/corporate-insurance/articles/lay-off-compensation-to-workmen-what-is-it/#:~:text=Lay%2Doff%20Compensation%20(Workmen%20Right,for%20the%20lay%2Doff%20period.

[6] THE INDUSTRIAL DISPUTES ACT, 1947

[7] AIR 1976 SC 1111

[8] https://www.tutorialspoint.com/layoff-and-retrenchment#:~:text=A%20layoff%20essentially%20refers%20to,not%20end%20in%20the%20first.

[9] https://blog.ipleaders.in/detailed-study-laws-retrenchment/

[10] THE INDUSTRIAL DISPUTES ACT, 1947, s 25F (a)

[11] THE INDUSTRIAL DISPUTES ACT, 1947, s 25F (b)

[12] THE INDUSTRIAL DISPUTES ACT, 1947, s 25F (b)