Setting the ContextCOVID-19 has caused widespread and long-lasting impact on the economy as a whole and employment sector in particular. With the primary focus to contain the spread of the disease, the Central Government and the State Government had been taking various measures, including declaring situation based partial or complete lockdown across the states. Under these circumstances, companies have been unable to engage fully in manufacture or deliver services from their factories or office locations, for infrastructure and security reasons. Budgets were scaled down leading to absolute stoppage of work in few cases. As a consequence, several organisations have faced severe financial crisis, leading to serious setback in its business, operation and revenue. With these compelling circumstances, companies have been finding it extremely difficult to make pay–out of salary to their employees. This has resulted in many unfilled positions resulting in unutilized seats and a continued work from home policy to contain costs. In many cases, due to logical constraints arising out of the lock down and stringent norms prescribed by the Government for containing COVID, some of employees have remained unproductive. The Management of several organizations have been finding it imperative to procced to measures to prevent them from leading towards closure. Some of the prominent measures, inter alia, adopted by organizations is restructure of business verticals, moving out of rented infrastructures and reducing manpower strength on account of loss of business and redundancy of several positions and roles. Employers have been specifically facing dilemmas as regards the possible routes of reducing manpower in their organizations, with least exposure to risk of non-compliance and prosecution. This write-up delves into the scheme of downsizing of organizations as generally understood by the employers and the compliant way of proceeding towards it under different scenarios.
Options On Desk: BasicsThe primary means of downsizing of organizations is to reduce manpower by way of separation of employees from the organization through termination. There is a usual tendency to understand termination, lay off and retrenchment as inter-changeable terms. In the United States (US), lay-off connotes termination of employment. The concept of lay-off under the Indian law is different from as understood in US. Under the Indian law, lay-off means inability of the employer to provide employment to the employees on the rolls on account of shortage of raw material, power or for any other business–related reasons. Thus, the employee continues to be on the rolls of the company. The law permits the employer to lay-off such employees and pay 50% of the Basic wages and Dearness Allowance (DA) as applicable as lay-off compensation. In the Indian context, as the employee continues to be on the rolls of the Company in the case of lay off, it wouldn’t lead to permanent downsizing of organizations, in its real sense. Hence, if the company arrives at a view that on account of the reduction of work, it cannot afford to continue certain number of employees. The Company may choose to separate such surplus employees from the Company through ‘retrenchment’. Retrenchment is the recognized mode of reducing the manpower which ensures organisation’s objective of achieving optimum utilization of the existing manpower. Hence, while layoff is a temporary measure, in the case of retrenchment, the employee will be no more in the service of the company and there will be permanent reduction in the manpower. When companies choose to adopt the route of termination of its employees on account of surplusage, the procedure prescribed under the Industrial Disputes Act, 1947 (the ID Act) has to be followed. Notably, the ID Act has been subsumed under the Industrial Relations Code, 2020 (the IR Code). The Code was passed by the Lok Sabha on September 22, 2020 and the Rajya Sabha on September 23, 2020 and received the Presidential assent on September 29, 2020. However, rules in respect of the Codes and date on which the Code would come into force are yet to be notified by the Government of India. The rules, wherever required, will be notified by the Government of India and along with such notification the date on which these Code will come into force will also be notified by Government of India. Section 2(oo) of the ID Act defines ‘retrenchment’ as termination brought about by the employer for any reason whatsoever, other than dismissal by way of punishment, retirement, etc. The Code retains the definition of retrenchment, as stated in the ID Act, with an additional provision of termination of service of the worker as a result of completion of tenure of fixed term employment. Workman or Non-Workman: This law of retrenchment is applicable to ‘workman’ as defined under the ID Act. The term has been replaced with ‘worker’ under the IR Code, while largely retaining the original meaning. The non-workmen or non-worker, as the case may be, will not be governed by the law of retrenchment and in their case, the terms and conditions of appointment will apply. As the law relating to retrenchment is applicable to workmen only, it becomes essential for companies to determine whether an employee falls in the said category. There is a tendency amongst employers to refer to the designation or salary of the employee as a determinant to arrive at the required finding. However, neither the designation nor the salary drawn by the employee may be the material criteria to decide whether the employee is a workman or not in terms of the law. The dominant consideration is the nature of work performed by the employee. If the employee is a direct contributor, he will be treated as workman as defined under the ID Act or ‘worker’ under the IR Code. In such cases, the procedure prescribed under the ID Act or the IR Code, as the case may be,has to be followed in terminating his services on the account of surplus. However, in cases where the employee is occupying the supervisory or managerial position, the provisions of the Act or the Code are not applicable. Their service conditions are governed by the Contract of employment and may be terminated in accordance with the procedure for termination laid down under the contract of employment.
Demystifying the legal RequirementsThe procedure for Retrenchment which is required to be followed by company would vary depending upon the number of workmen employed in the Industrial Establishment. The provisions of Chapter VA of the ID Act are applicable to industrial establishments in which less than 50 workmen have been employed on an average working day in the preceding calendar month or which are of seasonal character or in which work is performed only intermittently. In such cases, the company may retrench the workmen without any permission from the Government. However, once the process of retrenchment is completed, the necessary information shall have to be sent by the establishment to the State Government concerned. Section 25-G of the I.D Act lays down the procedure to be followed for retrenchment. The Section provides that the retrenchment shall be category-wise and the employer shall first retrench the workmen who was the last person employed in that category. In other words, the Section lays down that the ‘last come – first go’ and ‘first come – last go’. The section, however, gives certain discretion to an employer to deviate from this rule. If an employer chooses to depart from this rule, the section requires that the employer must record his reasons for such departure in writing in the notice or order of retrenchment itself. The reason given should stand the test of reasonableness and fairness. The employer should be able to satisfy the Court or any other forum and produce reliable evidence to justify the departure from the rule. To illustrate, an employee who has been identified as a non- performer may be retrenched and his junior who is a better performer can be retained. Non-performance of the employee should be supported by the documentary evidence in the form of targets given to him, his achievement, assessment of performance by the competent authority, etc. It should be shown that the employee had been given opportunity to improve by pointing out the areas which requires improvement. If the employee had been put on performance improvement programme, the relevant documents with respect to same should also be preserved. Section 25-H of the Act lays down that the retrenched workmen shall be given an opportunity to offer himself for re-employment in case the Company wants to fill up the retrenched posts in cases where retrenchment was resorted to on surplus age of Manpower. In view of the above provisions, before effecting retrenchment the seniority list should be prepared category-wise and then the retrenchment may be effected. In the case of Retrenchment of workmen, Section 25-F of the Act requires that along with the termination letter, the employee must be paid the following amounts:
- One month salary in lieu of notice or one month’s notice. However, if the appointment letter provides for longer notice period, the same will be applicable.
- Retrenchment compensation @ 15 days salary for each completed year of service or part thereof in excess of six months. The IR Code stipulates that compensation to be paid to the worker, at the time of retrenchment, shall be equivalent to fifteen days’ average pay, or average pay of such days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months.