Setting the Context
COVID-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: Basics
The 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 Requirements
The 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.
The compensation indicated above is the statutory requirement and shall have to be paid besides settlement of terminal dues.
The procedure varies if the industrial establishment is a factory or a mine or a plantation. The ID Act provides for the mechanism to be followed in such establishment in which 100 or more workmen were employed on an average per working day in the preceding twelve months. The IR Code increases such threshold to 300 workers. In either case, the company will have to obtain prior permission from the appropriate Government before retrenching the workmen. The application for permission should be made to the specified authority in the prescribed form. Such application shall have to be made 90 days prior to the intended date of retrenchment and retrenchment can be resorted to only after permission is received. It is also provided that if the permission is not received within 60 days of serving the notice on the Appropriate Government, it shall be deemed that permission for retrenchment is deemed to have been granted. The workmen shall have to be given three months’ notice or pay in lieu thereof.
Specific Cases: Legal Route
Termination of Probationer
An employee is put on probation for a certain period to assess his suitability to the post. If he found suitable, he is confirmed in the post. The termination of probation may be done in accordance with the terms of appointment during probationary period. The only requirement is that if the services of the probation is terminated during probationary period, he shall have to be paid the salary in lieu of notice as per the terms of appointment. Further if the probationer has completed more than 240 days of service, he should be paid compensation at the rate of 15 days’ wages for completed year of service or part thereof. If the termination is done at the end of the probationary period, there is no requirement of giving notice or salary in lieu thereof
In few cases, the termination during the probationary period or at the end of the probationary period, as the case may be, is challenged by the employee. In such cases, the company should be in a position to justify the action on the basis of the evidence to show that his performance during probationary period was not satisfactory and the termination was the inevitable consequences thereof.
Termination of Trainees
‘Trainee’ is a person who is engaged for learning the work. Generally, they are fresh candidates from the Institute or the Colleges etc., Even those who do not have formal education may also be engaged. The period of training may be fixed by the employer at his discretion and also in accordance with Certified Standing orders, in force.
The trainees may also be terminated in accordance with the terms and conditions contained in the Letter of engagement. The disengagement of trainee may be done before the completion of the training by complying with the procedure for termination as contained in the Letter of engagement of the training. The services of trainee may also be terminated, at the end of the training period. However, if the trainee has completed more than 240 days’ service, he should be paid compensation at the rate of 15 days’ wages for every completed year of service or part thereof.
Termination on Grounds of Performance
Termination of services of an employee on the performance issue is permissible in law. Such termination is not construed as termination for misconduct. However, the company should provide opportunity to the employee to improve his performance. Employer usually place such employees on Performance Improvement Programme (PIP) with a specific instruction on the issues which he has to improve his performance. If the employee, despite such opportunities being given, fails to come up to the expectation of the company, the company at its discretion may terminate the services.
In such cases as well, the termination should be in accordance with the terms of appointment i.e. he should be given salary in lieu of notice as stipulated in the Letter of appointment. In case the employee falls under the definition of workman under the ID Act, the employer is also required to pay compensation at the rate of 15 days wages for each completed year of service or part thereof in excess of 6 months. The termination order may be accompanied by a Memorandum setting out the facts leading to placement of employee in PIP and the guidance given to him during PIP and his failure to come up to the expectation of the company.
Few companies, instead of resorting to the Retrenchment, prefer to announce a package of payment and give option to the employees to separate themselves from the service of the company on Voluntary basis. The separation package ranges from 30 days salary to 45 days or more salary for each completed year of service. The payment of higher severance package is to ensure that the scheme is attractive and the company will be able to achieve the required reduction in man power. A significant benefit of exercising the option of voluntary separation is that there will be no cause for employees to make any grievance with regard to their separation from the service of the company and thus reduce the risk with the company may be exposed, in the case of termination of employment on the ground of surplus manpower or for any other reason.
Termination on Ground of failure to resume duties on account of COVID 19
There have been cases where the employees have expressed their inability to resume duties either on account of personal reason or by pleading the prevailing Covid-19 situation. If the employees who are called upon to resume their duties fail to resume their duties on such grounds, the Company must examine such cases on its merits before resorting to measure of the termination of their services. Termination in such cases should be preceded by at least two recall notices. In the event the employee, despite receipt of such recall notices, fails to report for duty, the company may consider terminating the services having regard to the surrounding circumstances and the merits of the case. The employees will be entitled to receive all their terminal dues in accordance with the rules of the company.
– Sunil Arya, Advocate & Principal Associate