Retrenchment Under the Industrial Disputes Act, 1947

Introduction

‘Retrenchment’, in common parlance, refers to the discharge of surplus labour from an industrial establishment, signifying an ending, conclusion, or cessation of employment. Unlike a temporary lay-off, retrenchment results in the termination of the employer-workman relationship. This action is typically motivated by economic considerations, such as the need for economy or rationalization. The Industrial Disputes Act, 1947 (hereinafter, ‘the Act’), provides a comprehensive definition of ‘retrenchment’ and lays down stringent conditions and procedures for its lawful implementation.

Definition of ‘Retrenchment’ Under Industrial Disputes Act, 1947

Section 2(oo) of the Industrial Disputes Act, 1947 defines the term ‘retrenchment’ exhaustively and comprehensively. According to this definition, ‘retrenchment’ means:

The termination by the employer of the services of a workman for any reason whatsoever, otherwise than as punishment inflicted by way of disciplinary action, but does not include:

• Voluntary retirement of the workman, or
• Retirement of the workman on reaching the age of superannuation if the contract of employment contains a stipulation in that behalf, or
• Termination of the service of the workman as a result of the non-renewal of contract of employment between the employer and the workman on its expiry or of such contract being terminated under a stipulation in that behalf contained therein, or
• Termination of the service of a workman on the ground of continued ill-health.

It may be noted that clause (bb) was inserted by the 1982 amendment and brought into effect in 1984. The clause is not retrospective in effect.

A. Scope and Interpretation of ‘Any Reason Whatsoever’

The phrase “termination by the employer of the services of a workman for any reason whatsoever” in the main part of Section 2(oo) is broad, encompassing all types of termination of service unless they fall within the specifically excepted categories. The exclusionary clauses must be construed strictly, given the benefits conferred by Section 25F of the Act to those being retrenched.

For instance, sub-clause (bb) must be interpreted narrowly. It is not intended to allow unscrupulous employers to terminate services on the ground of non-renewal of contracts if the work for which the employees were engaged substantially continues. Clause (bb) should apply only where the work or the post itself ceases to exist with the employment, as held in the case of K. Rajendra v. The Director, Project & Eqpt. Corpn. of India Ltd., 1992.

B. Retrenchment vs. Other Forms of Termination

While termination of service for ‘any reason whatsoever’ generally implies the discharge of surplus staff, it excludes termination as a punishment inflicted by disciplinary action and the reasons enumerated in the exclusionary clauses. Termination of service for reasons over which the employer has no control would not be categorised as retrenchment, as the definition implies that termination should be done for a reason. Subsequently, all retrenchment is termination of service, but all termination of service is not retrenchment.

Retrenchment may be due to a variety of reasons, such as economy, rationalisation, installation of new labour-saving machinery, etc. Retrenchment of surplus labour in such cases is inevitable, as the employer has a right to organise and arrange his business in the manner he considers best. So long as this is done bona fide, the authorities cannot question its propriety.

The consensus of judicial opinion is that to determine whether the termination of the service of a particular workman or workmen amounts to retrenchment must be determined in each case on the facts and circumstances of that case; every termination, except those excluded by Sec. 2(oo), amounts to retrenchment.

C. Leading Cases

(a) Uptron India Ltd. v. Shammi Bhan (AIR 1998 SC 1681)

In this case, the respondent, a permanent employee of Uptron India Ltd., was on maternity leave with effect from 7th Nov., 1984, to 29th Jan., 1985, and had thereafter allegedly overstayed. The Standing Orders provided that if an employee overstays leave without permission for more than seven days, the services would be liable to automatic termination. Her services were terminated by merely issuing a letter as per above certified standing orders.

The Supreme Court held that in view of non-compliance with other legal requirements (viz. opportunity of hearing before termination), the termination of her services amounts to retrenchment. The services of a ‘permanent’ employee cannot be terminated abruptly and arbitrarily, notwithstanding that there may be a stipulation to that effect either in the contract of service or in the certified standing orders.

The court observed that while industrial employment has contractual elements, it is also partly non-contractual, as legislation (like the Industrial Employment (Standing Orders) Act, 1946) imposes positive obligations on employers. The purpose of Standing Orders is to introduce uniformity and transparency in employment conditions, which become binding upon certification.

(b) S.M. Nilajkar V Telecom Distt. Manager, Karnataka (2003) 4 SCC 27

In this case, the termination of services of casual workers employed in Government project/scheme on the expiry of the project/scheme was in question. The Supreme Court held that, to avail the benefit of Section 2(oo)(bb), the employer bears the burden of proving that the employment was under a contract explicitly stipulating termination upon project expiry, and that the workers were made aware of this at the commencement of their employment. Merely proving employment of casual workers/daily-wagers in a project and their termination upon its end is insufficient to attract the exception under sub-clause (bb). Thus, such terminations were deemed retrenchment.

The Court acknowledged that sub-clause (bb) was introduced to address situations where welfare schemes or projects, intended to create temporary employment, might otherwise impose onerous permanent obligations on the State. However, labour laws, being beneficial legislation, must be interpreted in favour of beneficiaries in cases of doubt. The Court reiterated that “retrenchment” in its ordinary connotation is the discharge of labour while the business continues. The broad phrase “termination… for any reason whatsoever” in Section 2(oo) indicates a legislative intent to give “retrenchment” a wider meaning. To be excepted from this wide meaning, the termination must strictly fall within one of the four excluded categories.

The termination of service of a workman engaged in a temporary scheme or project may not amount to retrenchment under sub-clause (bb) if:

• The workman was employed in a project or scheme of temporary duration.
• The employment was on a contract (not merely as a daily-wager) that stipulated termination upon the expiry of the scheme or project.
• The employment ended simultaneously with the termination of the scheme or project and consistently with the contract terms.

Conditions Precedent to Retrenchment

Sec. 25F lays down the conditions precedent to retrenchment of workmen. Provisions contained in Sec. 25F is a mandatory pre-condition and must be strictly complied with, it being a beneficial legislation.

According to Sec. 25F, “No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until—

• The workman has been given one month’s notice in writing, indicating the reasons for retrenchment, and the period of notice has expired, or the workman has been paid instead of such notice, wages for the period of the notice.
• The workman has been paid, at the time of retrenchment, compensation which shall be equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof over six months; and
• notice in the prescribed manner is served on the appropriate Government.”

To claim protection under Sec. 25-F, the facts to be proved by a workman are:

• There exists a relationship of employer and employee.
• He is a workman under the definition of employee and employer, employed in an “industry” under Sec. 2(j);
• establishment in which he is employed is not less than one year under the Act; and
• he has completed one year of continuous service as defined in Sec. 25-B under the Act.

These conditions are not cumulative. If one is missing, then Sec. 25-F will not be attracted. To get relief from the retrenchment, the workman has to establish that he has the right to continue in service and that his service has been terminated without complying with the provisions of Sec. 25-F [Surendranagar District Panchayat v Dohyabhai Amarsingh (2005) 8 SCC 750].

In Surendra Kumar Verma v Central Government Industrial Tribunal (AIR 1981 SC 422), Chinnappa Reddy J. has observed that it is not necessary that he should have been in the service of the employer for one whole year. 240 days’ work in 12 months is enough to satisfy the requirement of Sec. 25-F [G.M. Haryana Roadways v Rudhan Singh (2005) 5 SCC 591].

In ShankarPrasad Tiwari v State of U.P. 1992 LIC 324, the services of the workman, a driver in the U.P. Roadways Corporation who had completed more than 1 year of service, was terminated without giving, without paying, the prescribed manner to the State Government and without paying the retrenchment compensation, it was held that the order of dismissal was retrenchment and hence not in compliance of Sec. 25F, the retrenchment would be void ab initio and the employee would be entitled to reinstatement with full back wages.

The nature of activities of ISRO has also been considered to have a bearing on the issue of retrenchment. Since ISRO was considered to be ‘sovereign functions of State’ and therefore it cannot be held to be the ‘industry’ within the meaning of Sec. 2(j), and therefore the protection of Sec. 25F of the Act would not be available to employees of ISRO [Harjosh Thukral v UOI, 1990 LIC 154 (CAT)].

Consequences of Invalid Retrenchment

The definition of ‘retrenchment’ in Sec. 2(oo) is unambiguous. Termination of service not covered within the exceptions or excluded categories mentioned in Sec. 2(oo) amounts to retrenchment. Therefore, non-compliance with Sec. 25-F would vitiate such termination. Retrenchment without complying with Sec. 25-F would be void. Such an action would entitle the workman to a declaration for continuation in service with full back wages (Mohan Lal v Bharat Electronics Ltd. (1981) 3 SCC 225).

In cases where there is a need for retrenchment and the employers have acted bona fide, non-compliance with Sec. 25(F) will give the Labour Court discretion either to order reinstatement or to award compensation instead of reinstatement depending upon the facts and circumstances of each case.

In those cases when the retrenchment is proved unlawful, the workman has a right to reinstatement with continuity of service and right to wages for such period. A workman who is improperly retrenched has a right to reinstatement even if someone has been engaged in his place. In the cases where the retrenchment is bona fide, though invalid due to non-compliance with the requirements of Sec. 25F, the Tribunal may perhaps direct payment of compensation. But that rule applies only to a very few and exceptional cases as held in Management of Oasis School, Hydbd. v Labour Court, 1991 LIC 428.

Sec. 25-F applies to ad hoc temporary employees also, if they have worked for more than 240 days in a year continuously immediately preceding the order of termination (Umesh Saxena v Labour Court (1993) 1 LLN 809 (All)). Sec. 25-F is applicable also to badli workmen continuing in service for one year (Sarabhai Chemicals v Subhash N. Pandya (1984) 1 LLN 601 (Guj) (D.B.)). Sec. 25-F applies even to a daily rated workman (Workmen v Municipal Corpn., Delhi (1987) 2 LLJ 55 (Del)).

Illegality of, or irregularity in, the making of appointment cannot be a ground to refuse to follow the provisions of Sec. 25-F (Punjab Land Dev. & Reclamation Corpn. Ltd. v Presiding Officer, Labour Court (1990) 3 SCC 682).

Compensation in Case of Transfer or Closure of Undertakings

Sections 25FF and 25FFF, introduced by the 1957 Amendment, deal with compensation for workmen in cases of transfer or closure of undertakings.

A. Transfer of Undertakings (Section 25FF)

Where ownership or management of an undertaking is transferred, every workman with at least one year of continuous service immediately before the transfer is entitled to notice and compensation as if they had been retrenched under Section 25F. The liability to pay arises after the transfer, unless the case falls under the proviso.

The proviso to Section 25FF exempts the application of this section if:

• The workman’s service has not been interrupted by the transfer.
• The terms and conditions of service after transfer are not less favourable.
• The new employer is legally liable to pay retrenchment compensation based on continuous service uninterrupted by the transfer.

B. Closure of Undertakings (Section 25FFF)

Even if termination of services due to the closure of business may not strictly be ‘retrenchment’ as per Section 2(oo), Section 25FFF provides that concerned workmen are entitled to compensation as if the said termination were retrenchment, and the compensation payable is as per Section 25F.

Procedure for Retrenchment

Section 25G lays down the procedure for retrenchment, specifically recognizing the principle of “first come, last go” or “last come, first go.” Where a workman in a particular category is to be retrenched, the employer shall ordinarily retrench the last person employed in that category, unless reasons are recorded for departing from this rule.

This principle is required to be adhered to by every employer in an industrial undertaking. However, where the exigencies of the employer depart from this rule, the procedure can be departed from. If an employer departs from this rule, the burden is on him to satisfy the court as to the justifiability of his action, as held in the case of Workman, Jorehaut Tea Co. Ltd. v The Management of Jorehaut Tea Co. AIR 1980 SC 1454.

Thus, any departure from the above principle is possible in two cases, namely –

1. by an agreement to the contrary between the workman and employer, and
2. for any other reasons to be recorded by the employer. The provisions of Sec. 25G is are directory.

It is noteworthy that the above principle has to be applied concerning different categories of workmen employed in an industrial establishment and not to the whole of the establishment. Grade-wise classification of workmen will not create different categories to exclude the operation of Section. 25-G in case of retrenchment of some of the workers falling under a different grade [Workman v Jorehaut Tea Co (1980) 3 SCC 406]. The principle of ‘last come, first go’ does not apply to termination of the services of a temporary employee on the assessment of his work and suitability by terms and conditions of his service [State of U.P. v Kaushal Kishore (1991) SCC (L&S) 587].

The well-recognised principle of retrenchment is that management should start with the latest recruit and progressively retrench employees higher up in the seniority list. However, the management can bona fide retain the employees possessing special qualifications whose services are necessary in the interests of business, irrespective of their seniority [Om Oil & Oilseeds Exchanges Ltd. v Their Workmen AIR 1966 SC 1657].

The failure to comply with the principle of ‘last come, first go’ or, in case of departure, the reasons for such departure not being recorded, would render the retrenchment invalid.

Re-employment of Retrenched Workman

Retrenchment of surplus staff causes undue sufferings not only to the retrenched workman but to all his dependents. Therefore, in order to avoid hardship to the worker and his family, the provisions have been made in Sec. 25H that such workman should be allowed to join service whenever an occasion arises to employ another hand. This section casts an obligation on the employer to give opportunity to retrench workmen in such a case and prescribes certain conditions which should be fulfilled by him to claim preference in employment over other workman seeking employment under the employer.

Special Provisions Relating to Retrenchment in Certain Establishments

Chapter V-B of the Act (Sections 25K to 25S) contains “Special Provisions Relating to Lay-off, Retrenchment and Closure in Certain Establishments”. These provisions apply to industrial establishments (excluding seasonal or intermittent ones) that employed not less than one hundred workmen on average per working day for the preceding twelve months. For such establishments, prior government permission is required for firm closure or workers’ retrenchment, and workers are entitled to three months’ notice.

Conditions Precedent for Retrenchment (Section 25N):

Section 25N lays down specific conditions for retrenchment in these larger establishments:

1. Three Months’ Notice/Wages in Lieu: The workman must be given three months’ written notice indicating reasons for retrenchment, or wages in lieu thereof.
2. Prior Government Permission: The prior permission of the appropriate government or a specified authority must be obtained.
3. Application Process: An application for permission must be made by the employer in the prescribed manner, stating reasons, with a copy served on the workmen.
4. Government Inquiry and Order: The appropriate government/authority conducts an inquiry, provides a hearing opportunity, and then grants or refuses permission based on genuineness of reasons, interests of workmen, and other factors. The order is communicated to both parties.
5. Deemed Permission: If the government/authority does not communicate its order within 60 days, permission is deemed granted.
6. Finality and Review: The order is final and binding for one year, subject to review by the government/authority or reference to a Tribunal for adjudication within 30 days.
7. Consequences of Non-Compliance: If no application for permission is made, or if permission is refused, the retrenchment is deemed illegal from the date of notice, entitling the workman to all benefits as if no notice had been given.
8. Exceptional Circumstances: The appropriate government may exempt establishments from Section 25N(1) in exceptional circumstances (e.g., accident, death of employer)

Conclusion

Retrenchment under the Industrial Disputes Act, 1947, is a meticulously defined and regulated process, designed to balance the employer’s right to manage their business efficiently with the imperative to protect workers’ livelihoods. The broad definition in Section 2(oo) encompasses most forms of involuntary termination, with specific exclusions for voluntary retirement, superannuation, non-renewal of fixed-term contracts, and continued ill-health, subject to strict interpretation.

The Act imposes mandatory conditions precedent for retrenchment under Section 25F, ensuring notice, compensation, and government intimation. Non-compliance with these provisions renders retrenchment void. For larger establishments, Chapter VB introduces more stringent requirements, including prior government permission, reflecting a heightened regulatory concern for significant workforce reductions. The adherence to the “last come, first go” principle under Section 25G and the provision for re-employment under Section 25H further underscore the Act’s protective intent.

Ultimately, the legal framework governing retrenchment aims to ensure that while employers can adjust their workforce to economic realities, such adjustments are carried out transparently, equitably, and with due regard for the welfare and rights of the affected workmen.

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