Downsizing by Reduction of Manpower: Demystifying the Legal Landscape

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 consequenceseveral 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 payout 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 verticalsmoving 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 businessrelated 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 surplusagethe procedure prescribed under the Industrial Disputes Act, 1947 (the ID Act) has to be followedNotably, 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, 2020However, 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-WorkmanThis law of retrenchment is applicable to ‘workman’ as defined under the ID ActThe 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 lawThe 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 EstablishmentThe 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: 
  1. 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. 
  2. Retrenchment compensation @ 15 days salary for each completed year of service or part thereof in excess of six monthsThe 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 casethe 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 Governmentit 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 Actthe 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.  

Voluntary Separation 

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 situationIf 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. 

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B. Chandrashekar Shetty - Advocate

Mr. Chandrashekar Shetty is a Senior Labour Law Compliance Auditor at BCP Associates and has audited multiple client companies across India. He is also a member of our senior legal advisory practice. Previously he has worked as Deputy Controller, Manager-Industrial Relations and Industrial Relations Officer in KPTCL, Bangalore for more than 30 years. Prior to this, he has dealt with Legal, Personnel and IR matters including Wage Settlements, Grievance Machinery, Manpower Study and Social Security Compliances for about 10 years. He is a Faculty member of Labour Law, HRD Centre, KPTCL Bangalore.

Mr. Shetty holds a B.Com. and L.L.B. degree, Post-Graduate Diploma in Business Administration, Diploma in Public Relations from Bangalore University and PG Diploma in Industrial Relations & Personnel Management from Bharatiya Vidya Bhawan. He is enrolled as Advocate in Karnataka Bar Council and is a Govt. Arbitrator of Chit Funds in Karnataka.

S Venugopal Rao

S Venugopal Rao is an experienced labour law and service matters expert and is a member of the senior advisory team at BCP Associates. Having joined the chambers of Mr. B C Prabhakar in 2012, he is knowledgeable and well versed in multiple employment and labour law topics. S Venugopal Rao holds a Bachelor’s degree in Science from Karnataka University, Dharwar and Bachelor of Law from Bangalore University. He enrolled as advocate in Karantaka State Bar Council in 1976. He joined the chamber of Sri. Kolachalam Srinivasa Rao a leading civil advocate. After practicing for 6 years at Ballari, he joined Orient Paper Mills, Orissa (of G P Birla Group). He was designated as Manager (Law) under the Factories Act in 1995. In 1999, he joined Andhra Pradesh Paper Mills Rajahmundry as Manager Legal and was subsequently elevated as Dy. General Manager (Legal). As Factory Manager & Legal Head, he oversaw compliance of Factories Act and Rules there under towards safety, health and welfare, including compliance under Pollutions and Environmental laws and Explosives Act, etc. Additionally, he is well acquainted with Environment Management System ISO 14001: 2004, Occupations, Health and Safety Series 18000:1999. As Legal head in APPM he has briefed and appeared along with Senior Advocate before Appellate Authority constituted under Water (Prevention & Control of Pollution) Act. He retired from the services of Andhra Pradesh Paper Mills in 2011. As legal head he has handled important cases both in Labour and Civil and has experience in drafting and vetting Contracts, Agreements, Lease Agreement, Conveyance Deeds, , Affidavits and scrutiny of several legal and other documents, Preparing and settling Petitions, Appeals, Plaints, Written Statements, Rejoinders, Affidavits and Written Arguments etc. for submission/pleadings for various legal proceedings.

C K Devappa Gowda - Advocate

C.K. Devappa Gowda (CKD) is an Advocate and Labour Law expert. He holds a Bachelor’s Degree in Science from the University of Mysore and a Degree in Bachelor of Law from Bengaluru respectively. He also holds a Diploma in Social Service Administration from the National Institute of Social Science, Bengaluru. After completing his studies, he had enrolled as a Advocate and initially practiced in the Civil Code attached to the office of BCP. He then worked as Personnel Officer in Chemicals and Textile Manufacturing Industries for 5 years. Thereafter took up employment in one of the largest Public Sector Bank. He has worked in different parts of the country and has extensive experience in the cross country IR domain. The significant part of his service was at corporate level overseeing and implementing HR policies and practices and management of IR. He has been a member of personnel committee of Indian Bank Association. After retirement from service, Mr. Gowda has been working with Mr. BC Prabhakar’s firm for the last 12 years. He has expertise in all areas of people management, drafting of documents relating to service matter including the settlements under the ID Act. He has dealt with all employment laws including appearance before the Courts, Tribunal and Authorities under the different Labour Laws. Mr. Gowda is one of the senior Labour Law experts at BCP Associates.

Srijatha Ghosh - POSH Specialist & Advocate

Srijata Ghosh serves as external member on the Internal Committee of several Companies across various sectors. She handles all kinds of POSH related matters including investigations and inquiries. She provides Training on Sexual Harassment across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members on the legislation (The Sexual Harassment of Women at Workplace Prevention, Prohibition and Redressal Act, 2013). She also formulates Policies for Prevention of Sexual Harassment at Workplace (“POSH”) and advises Companies on setting up of their Internal Committees. Srijata is involved in providing Legal Advisory services on POSH and other labour law matters for various clients.

In her previous experience, she has extensively dealt with End-to-End Contract Management, Due Diligence, POSH Compliances, Legal Advisory, etc. Srijata worked with Companies like Accenture India Private Limited, Quess Corp., Capgemini Business Services (India) Limited and Pramata Knowledge Solutions Private Limited. Srijata has handled varied legal issues including drafting, vetting and negotiation of contracts, drafting policies of various organizations. She has resolved issues relating to employment laws and has worked closely with the HR teams. She has provided legal advisory services to senior management. She was also associated with Kolkata High Court in counselling clients with legal matters such as Property, Due Diligence etc. Srijata has worked in an LPO Service Firm, Manthan Legal Services Private Limited for Legal Research, depositions, medical summaries, demand drafting etc.

Srijata completed her B.A.LL.B from M. S. Ramaiah College of Law, Bangalore University in 2009. Srijata is a member of the Karnataka Bar Council since 2010. She is also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Caroline Lobo - POSH Specialist & Advocate

Caroline Lobo has been with BCP Associates for the past 2+ years. She has been handling matters and Inquiries related to the POSH Act including conducting inquiries and trainings/awareness programmes for Senior Management, employees as well as members of the Internal Committee on the POSH Legislation (The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“Act”) to address Workplace Harassment of Women. She is a member of the Internal Committee for many varied companies and organisations and has reviewed and scrutinized numerous hearings and inquiries on matters relating to sexual harassment at workplace.

She has also handled matters relating to employer-employee related Enquiries, wherein she has reviewed and conducted hearings and enquired into the matters and has guided the Internal Committee and provided guidance in providing recommendations to the management. She is also a Member of the Gender Sensitivity Sub-committee of Karnataka Employer Association (KEA).

Prior to joining BCP Associates, Caroline has has a wide range of experience in corporate, commercial and contract law, mergers and acquisition and has undertaken drafting, vetting, negotiating and finalizing legal and commercial transactions. She started her career in litigation then moved onto the Corporate sector. In the span of 13 years, she has worked at Chambers of Advocate Jayashree Murali, Krishnamurthy and Co. Legal Consultants, Colt Technology Services and Oracle India Pvt. Ltd. She always had a keen interest in Women and Child related issues. She has worked with Child Welfare Committee and NGOS’s. In addition, she has worked with Swasthi Health Resource and Centre, where she was the External member to the Internal Committee (IC). She worked closely with the committee in strategizing, planning, reviewing and implementing the assigned tasks, which included building material to raise awareness against sexual harassment at workplace. Further, she has been involved in conducting inquiries into matters related to sexual harassment at workplace.

Caroline earned her Law degree from University Law College, Bangalore, from where she graduated in the year 2005.

Manoj Kumar – Senior Associate

At BCP Associates, Manoj Kumar is involved in managing and conducting labour law compliance audits of principal employer and contractors. He is also involved in client co-ordination and conducting labour law training programs for vendors. He has conducted on-ground labour law audit for factories. Manoj also provides support in advising vendor clients on labour law queries. He completed B.A., LL.B. from BMS College of Law, Bangalore in 2016

Rashmitha Venkatachalam Das - POSH Specialist & Advocate

Rashmitha Venkatachalam Das is the External Member of the Internal Committee of several reputed Organizations across various sectors. Handling complex inquiries has been her forte and she is extremely passionate about it. She is actively involved in providing Training on Sexual Harassment (Prevention, Prohibition and Redressal) Act, 2013 across all verticals for Managers and Senior Management, General Awareness for all employees and Internal Committee members. Rashmitha possesses capabilities in delivering sessions in Hindi and Kannada, in addition to English. She has formulated Policies for Prevention of Sexual Harassment at Workplace (“POSH”), advised companies on setting up of their Committee. Rashmitha is involved in providing Legal Advisory services on POSH for various clients spread across diverse sectors. She has also been handling domestic enquiries for various clients. 

Rashmitha possesses experience both at Law Firms and Corporates in various capacities. She started her career at Krishnamurthy and Co, Legal Consultants and then moved on to work as an In- House Legal Counsel with Companies such as Biocon Limited, Columbia Asia Hospitals Private Limited, Adecco India Private Limited. With a long stint in the Corporate side, Rashmitha decided to pursue further education in Law with a specialization in Labour and Employment Laws. She has rich experience in drafting, vetting and negotiation of various types of contracts, providing legal opinions and has driven the team in formulating process and procedures and their implementation. She has drafted several employment related policies in Corporates. Rashmitha has been a part of various key committees in Organizations and assisted committees in scrutiny of documents pertaining to human organ transplant as well as clinical trials.

Rashmitha holds an LL.M. in Labour and Employment Laws from University Law College, Bangalore, which she completed in the year 2018 with Two Gold Medals. She is also a Rank Holder at the University. She has completed BA, LL.B. from Bangalore Institute of Legal Studies, Bangalore University in the year 2009. Rashmitha is a member of the Karnataka Bar Council since 2009 and also a member of the Gender Sensitivity Sub Committee of Karnataka Employer Association (KEA).

Manisha Vidyadhar – Senior Associate

At BCP Associates, Manisha Vidyadhar is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. Manisha also provides support in advising vendor clients on labour law queries.  She completed B.A., LL.B. from BMS College of Law, Bangalore in 2016.

Amrutha Ananth – Senior Associate

At BCP Associates, Amrutha Ananth is involved in managing and conducting labour law compliance audits of principal employer and contractors. She is also involved in client co-ordination and conducting labour law training programs for vendors. She has conducted on-ground labour law audit for factories. She also provides support in advising vendor clients on labour law queries.

Amrutha is also part of the labour law advisory and HR Policy practice and is actively involved in drafting opinions on various aspects of labour laws and formulate and review employment policies and procedure.

Amrutha completed B.A., LL.B. from Christ University, Bangalore in 2015. She is also a semi-qualified Company Secretary.

Sunil Arya – Principle Associate

At BCP Associates, Sunil Arya is part of the labour and employment law advisory and HR Policy practice and is actively involved in drafting and reviewing of employment contracts, opinions, HR policies, employee handbook, show cause notice, etc. for various clients spread across diverse sectors. He conducts training on labour and employment laws. Sunil is also involved in labour law compliance audits of principal employer and contractors and has conducted on-ground labour law audit for factories. In addition, he is engaged in knowledge creation and management of the firm and keenly writes on developments in labour and employment laws.

Prior to joining BCP Associates, Sunil has 10 years of post-qualification experience in diversified portfolios of advisory, drafting, policy analysis and dispute in the domains of contracts, general civil matters, employment law, competition law and construction arbitration matters. Sunil started his career as a Law Researcher in Delhi High Court. He moved on to be part of regulatory analysis team of CIRC, a unit of CUTS International. In addition, Sunil has been part of legal team of Jindal India Thermal Power Limited. He has also taught competition law, tax law and investment law at VIPS, Delhi.

Sunil holds LL.M. from The Indian Law Institute, Delhi. He is First Rank Holder in his thesis. He completed B.A, L.L.B. (Hons.) from I.P. University, Delhi. He also holds First Rank in P.G. Diploma in Competition Policy and Laws from The National Law University, Delhi.

Chandrakala K A – Principle Associate

At BCP Associates, Chandrakala has 12+ years of experience in conducting and managing labour law compliance audits of principal employer and contractors. She is also involved in co-ordination with many clients. She has conducted on-ground labour law audit for factories. She also provides support in advising vendors on labour law queries. Chandrakala is actively involved in research and providing valuable inputs to the firm pertaining to updation in labour law audit function.

Chandrakala started her career in litigation in chamber of Sri. Ashok where she was involved in drafting, pleading and appearance before Karnataka High Courts and lower courts on the criminal side.

Chandrakala completed B.A in Arts from Kuvempu University, Shimoga in 2003 and LL.B. from Mangalore University in 2006.

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