Retrenchment is defined under Section 2(oo) of the Industrial Disputes Act, 1947. It refers to the termination of a workman's service by the employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action.
Essentially, retrenchment occurs when there is a surplus of labor in an organization. However, the legal definition specifically excludes:
Voluntary retirement.
Retirement upon reaching the age of superannuation.
Termination due to non-renewal of a contract.
Termination on grounds of continued ill-health.
Procedure for Retrenchment
The Act prescribes a strict procedure to ensure that retrenchment is not used as a tool for victimization. The procedure differs based on the size of the establishment.
1. Conditions Precedent (Section 25-F)
For establishments employing fewer than 100 workmen, an employer must fulfill these three conditions before retrenching a workman who has been in continuous service for at least one year:
One Month’s Notice: The workman must be given one month’s notice in writing indicating the reasons for retrenchment, or wages in lieu of such notice.
Retrenchment Compensation: The workman must be paid compensation equivalent to 15 days' average pay for every completed year of continuous service or any part thereof in excess of six months.
Notice to Government: A notice in the prescribed manner must be served on the Appropriate Government.
2. The "Last Come, First Go" Rule (Section 25-G)
In the absence of any agreement to the contrary, the employer must follow a fair and objective selection process:
The Rule: The employer shall ordinarily retrench the workman who was the last person to be employed in that specific category (Seniority-based).
Exceptions: The employer may depart from this rule for reasons recorded in writing, such as retaining a junior with specialized skills that a senior lacks.
3. Re-employment of Retrenched Workmen (Section 25-H)
Retrenched workmen have a "Right of Recall." If the employer seeks to hire new persons in the future, they must give the retrenched workmen an opportunity to offer themselves for re-employment. These workmen must be given preference over other applicants.
Special Provisions for Large Establishments (Chapter V-B)
Under Section 25-N, industrial establishments (factories, mines, or plantations) employing 100 or more workmen face stricter requirements:
Prior Permission: The employer must apply to the Appropriate Government for permission at least 90 days before the intended date of retrenchment.
Three Months' Notice: Instead of one month, the workman is entitled to three months' notice or wages in lieu.
Government Inquiry: The government will hold an inquiry, giving both parties an opportunity to be heard, and may grant or refuse permission based on the genuineness of the employer's reasons and the interest of the public.
Consequences of Non-Compliance
If the employer fails to follow the procedure (e.g., fails to pay compensation or take prior permission), the retrenchment is considered void ab initio (illegal from the beginning). In such cases, the workman is typically entitled to reinstatement with full back wages.
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