Concept Of Retrenchment Under Industrial Disputes Act, 1947

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ACKNOWLEDGEMENT I am very thankful to everyone who all supported me, for I have completed my project effectively and moreover on time. I am equally grateful to my teacher Dr. Jai Mala, Dr.Virender Negi and Dr. Nancy Sharma who gave me moral support and guided me in different matters regarding the topic. She had been very kind and patient while suggesting me the outlines of this project. I thank her for her overall supports. Last but not the least, I would like to thank my parents who helped me a lot in gathering different information, collecting data and guiding me from time to time in making this project unique.

TABLE OF CONTENTS INTRODUCTION TO INDUSTRIAL DISPUTES ACT, 1947............................................................................3 INTRODUCTION TO RETRENCHMENT.....................................................................................................5 CONDITION PRECEDENT TO RETRENCHMENT.........................................................................................9 PROCEDURE OF RETRENCHMENT.........................................................................................................12 CONCLUSION........................................................................................................................................14 WEBLIOGRAPHY...................................................................................................................................16

INTRODUCTION TO INDUSTRIAL DISPUTES ACT, 1947 The Constitution of India provides the jural basis for laws regulating employment and labour in India. The fundamental rights enshrined in the Constitution provide inter alia for equality before the law and for prohibition of discrimination on the basis of religion, caste, sex, etc. Similarly, the, Directive Principles of State Policy‟ laid down in Part IV of the Constitution adjure the State to inter alia ensure that all citizens have an adequate means of livelihood, right to education, and just and humane conditions of work, and to further ensure participation of workers in the management of industries. The Constitution hence places emphasis on the concept of social justice as one of the fundamental objects of State policy, and these protective provisions edify the spirit of Indian industrial laws. Labour welfare, trade union; industrial and labour disputes‟ and factories are items found in the Concurrent List of the Constitution. This means that subject to certain conditions, both the Parliament of India as well as the individual State legislatures have the power to enact laws on these matters. The ID Act and the Rules framed thereunder inter alia regulate matters relating to retrenchment, lay-off, closure, transfer of undertakings and change in service conditions. Additionally, where the employer employs 100 (one hundred) or more workmen, prior permission of the concerned State Government is required for retrenchment, layoff and closure. Labour legislation is one of the most progressive and dynamic instrument for achieving socioeconomic progress. There is no other branch of law which embraces such a wide and effective role in social engineering and social action. It is here that the Industrial law distinguishes itself from other branches of Law. The progress of a country being dependent upon the development of industry, the Industrial Laws play an important role in the national economy of a country. The Industrial Law keeps a check upon the industrial operations and makes it mandatory for the compliance of all the statutory provisions provided under the law. The Industrial Disputes Act, 1947 governs the various provisions pertaining to lay-off of workmen. The scope of this Act is to achieve harmony between employers and workmen and promote economic and social justice, thereby, classifying the Act as a welfare legislation. The preamble of the Act clearly states that the objective of the Act is “to make provision for the

investigation and settlement of industrial dispute.” This shows that the intention of the legislature is to safeguard the right of workmen and the industrial establishment. “Industrial Dispute” is defined under Section 2(k) of the Act. It lays down certain pre-requisites that must exist to constitute an industrial dispute. There can be no lay-off if the dispute does not fall within the ambit of Section 2(k). Further, the application of the Act is limited to “industries” as defined under Section 2(j). However, in cases where it is difficult to distinguish between an industrial and a non-industrial activity, the “dominant nature” of the activity helps in determining the true scope of industry. In Bangalore Water Supply v. A. Rajappa 1, the Supreme Court held that where complex activities, some of which qualify for exemption, others not, involve employees of the total undertaking, some of whom are not workmen, even then the predominant nature of the services w ill be the true test to determine an industry. The whole undertaking will be an “industry” although those who are not workmen by definition may not benefit by status. The Industrial Disputes Act, 1947 came into operation on the 1st day of April, 1947. The object of all labour legislation is to ensure fair wages and to prevent disputes so that production might not be adversely affected in Banaras Ice Factory Ltd. v Its Workmen.


A.I.R. 1978 SC 548

INTRODUCTION TO RETRENCHMENT Originally the Industrial Dispute Act did not provide for lay-off and retrenchment. The explosive situations due to enormous accumulation of stocks, particularly in the textile mills, with the consequence of probable closure, large scale lay-off and retrenchment in many mills provoked to introduce some effective measures to prevent large scale industrial unrest in the country. The ordinance promulgated for this purpose in 1953 was replaced by the Industrial Disputes (Amendment) Act, 1953 which commenced retrospectively from 24th October, 1953. Thus, Chapter V-A was introduced into the Act to regulate lay-off, retrenchment, transfer and closure of undertakings. The provisions under this Chapter have much impact on some of the rights and privileges of the employers who are subjected to certain new liabilities and restrictions in the event of lay-off, retrenchment, transfer or closure of undertakings. In 1976, a new Chapter V-B, was added to the Industrial Disputes Act incorporating more stringent conditions against lay-off, retrenchment and closure of certain establishments.

RETRENCHMENT Definitixon And Scope Of Retrenchment “Retrenchment” is defined to mean the termination by the employer of the services of a workman for any reason whatsoever except as a punishment by way of disciplinary action. However, retrenchment does not include: (i) voluntary retirement of the workman; or (ii) retirement on attaining superannuation, if a provision to this effect is stipulated in the contract of employment; or (iii) termination as a result of non-renewal of the contract of employment on its expiry or the contract being terminated pursuant to a stipulation in that behalf contained in the contract; or (iv) termination of the services of a workman on grounds of continued ill health. The Supreme Court has interpreted the exception to “retrenchment” referred to in item (iii) above in a restrictive manner in the context of permanent workmen. The Supreme Court has held that

the use of the words “such contract” means that there should be a contract of employment for a fixed term containing a stipulation that the services can be terminated prior to the expiry of the fixed term of the contract. Where there is no fixed term, the Supreme Court has held that the benefit of exemption does not apply.2 The governing piece of legislation regarding industrial disputes and grievances in India is the Industrial Dispute Act, 1947. The major problems that are being faced by these industrial setups are the problem of flagging profit reports or pressure from stockholders, and in order to solve these issues they often resort to retrenchment so that they can become financially more solvent. In layman’s idea, the term retrenchment shows the incapacity of the employers to carry on their work due to some economic grounds resulting in permanent termination of the workers which is in character of downsizing to regain stability. In retrenchment proceedings, the last to be employed will be retrenched first, and if the employer decides to recruit at a later stage, the retrenched employees have to be given preference. Retrenchment refers to discharge of surplus labour by the employer. It may be due to inevitable reasons including rationalisation or installation of new labour-saving machinery. Retrenchment may also be said as the right of an employer. An employer has a right to organise his business in any lawful manner he considered best and courts cannot question its proprietary. If reorganisation results in surplus employees, no employer is expected to carry their burden. According to Section 2(oo) of the Industrial Disputes Act, 1947, retrenchment is the termination of service of a worker "for any reason whatsoever", but excludes termination by way of punishment inflicted pursuant to disciplinary action, voluntary retirement, retirement on reaching the age of superannuation if the contract of employment contained such stipulation, non-renewal of the contract of employment, and continued ill health. The Supreme Court excluded closure from the scope of retrenchment in Hariprasad Shivshankar Shukla vs. A.D. Divelkar3. Further, in the State Bank of India vs. Sundara Money 4, the Supreme Court adopted the literal meaning of retrenchment, which is exhaustive and comprehensive and held that the expression "for any reason whatsoever" was very wide and admitted almost no


Extracted from-,-

1947.html visited on 08-04-2020. 3

AIR 1957 SC 121


1976 SCC (1) 822

exceptions. So, retrenchment means termination of a worker's services for any reason whatsoever, other than those specified in Section 2(oo). Retrenchment may be due to inevitable reasons including rationalization or installation of new labour-saving machinery. An employer has a right to organize his business in any lawful manner he considers best and courts cannot question its propriety. If re-organization results in surplus employees, no employer is expected to carry their burden. There is consensus of judicial opinion in deciding retrenchment on the facts and circumstances of each case. Courts have decided that termination of services due to loss of confidence in an employee, inefficiency or misconduct does not amount to retrenchment. Termination for unauthorized absence from duty, discontinuance of service of casual, daily employees, invalid initial appointment, compulsory retirement, and closure or transfer of business have been held to be retrenchment. The definition of retrenchment was not included in the Industrial Disputes Act, 1947 in its original form. It was inserted by Amendment to the Act in 1953. Thus the Industrial Disputes A ct, 1947 provides for certain conditions in which the termination of employment would not be considered as retrenchment. It is intersting to note here that the provision (bb) to Section 2(oo) was inserted later through the Amendment Act 49 of 1984. Section 2(oo)(bb) provides that termination of employment on non - renewal of employment agreement upon its expiry shalll not be considered as ‘retrenchment’. Before this provision was added to the Act, the Courts were of the opinion that non - renewal of such contracts of employment would constitute retrenchment for the purpose of this Act. This opinion was expressed by the Supreme Court in Hindustan Aluminum Corporation v. State of Orissa 5. It was later realized that the judgment was a bad judgment and the provision (bb) was subsequently added to the section. The Bombay High Court, in State Bank of India v. Sundara Money6 held that wherein the court held that an analysis of the definition reveals four essential ingredients, namely 1) There must be a termination of the service of a workman. 2) The termination must be by the employer, 3) For any reason whatsoever, and 5

AIR 1971 Cal 414


1976 SCC (1) 822

4) Otherwise than as by way of punishment inflicted by way of disciplinary action.

CONDITION PRECEDENT TO RETRENCHMENT Section 25F provides the conditions precedent to retrenchment. According to this section the employer must satisfy the following conditions before retrenching an employee employed for a period of continuous period of not less than one year (a) the workman has been given one months notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice: (b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days average pay for every completed year of continuous service or any part thereof in excess of six months; and (c) notice in the prescribed manner is served on the appropriate Government or such authority as may be specified by the appropriate Government by notification in the Official Gazett. Calculation of average pay is done by dividing the last drawn monthly salary by 25 and then multiplying the dividend by 15 for every completed year of continuous work. In S.M. Nilajkar vs. Telecom District Manager, Karnataka7, the Supreme Court clarified that the natural end of project-based, contractual employment was not retrenchment, provided the employee was pre-informed of the nature of the contract. However, the Supreme Court in 2003 in Pramod Jha v. State of Bihar 8 categorically observed that the underlying object of S. 25F is two-fold. Firstly, a retrenched employee must have one month's time available at his disposal to search for alternate employment, and so either he should be given one month's notice of the proposed termination or he should be paid wages for the notice period. Secondly, the workman must be paid retrenchment compensation at the time of retrenchment or before, so that once having been retrenched, there should be no need for him to go to his employer demanding retrenchment compensation and the compensation so paid is not only a reward earned for his previous services rendered to the employer but is also a sustenance to the worker for the period which may be spent in searching for another employment. Section 25N also lays down the conditions precedent to retrenchment 7

A.I.R. 2003 SC 3553


(2003) 4 SCC 619.

1) No workman employed in any industrial establishment to which this Chapter applies, who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until :(a) the workman has been given three months notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice; and b) the prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette (hereafter in this section referred to as the specified authority) has been obtained on an application made in this behalf. (2) An application for permission under sub-section (1) shall be made by the employer in the prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such application shall also be served simultaneously on the workmen concerned in the prescribed manner (3) Where an application for permission under sub-section (1) has been made, the appropriate Government or the specified authority, after making such inquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen concerned and the persons interested in such retrenchment, may, having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the workmen and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen. (4) Where an application for permission has been made under sub-section (1) and the appropriate Government or the specified authority does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days. Payment of tender of compensation after the time when the retrenchment has taken effect would vitiate the retrenchment and non-compliance with the mandatory provision, which has beneficial

purpose and a public policy behind, would result in nullifying the retrenchment. The nature of retrenchment compensation has been explained in Indian Hume Pipe Co. Ltd. v. The Workmen9 follows: "As the expression 'retrenchment compensation' indicates it is compensation paid to a workman on his retrenchment and it is intended to give him some relief and to soften the rigour of hardship which retrenchment inevitably causes. The retrenched workman is, suddenly and without his fault, thrown on the street and has to face the grim problem of unemployment. At the commencement of his employment a workman naturally expects and looks forward to security of service spread over a long period; but retrenchment destroys his hopes and expectations. The object of retrenchment compensation is to give partial protection to the retrenched employee and his family to enable them to tide over the hard period of unemployment".


1968 SCR (3) 130

PROCEDURE OF RETRENCHMENT Section 25G lays down the procedure of retrenchment. Where any workman in an industrial establishment, who is a citizen of India, is to be retrenched and he belongs to a particular category of workmen in that establishment, in the absence of any agreement between the employer and the workman in this behalf, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other workman. The employer is also required to maintain a seniority list of the workmen. The system of last in first out is to be followed in retrenching workmen. This provision imposes on the employer the "last-come-first-go" principle. This provision violates the employer's right to select among the best workers, and neutralizes the right to retain younger and better-trained workers in favour of older, less-trained ones. This principle has to be applied with respect to different categories of workers employed in an industrial establishment and any departure from the principle is possible only in the case of an agreement between worker and employer, or for any other reasons to be recorded by the employer. In Ms. Om Oil and Oilseeds Exchange Ltd., Delhi v. Their Workmen 10, the Supreme Court observed that 'last come first go' is not a 'universal principle' which would not be departed from by the management that the last should go first. The management has a discretion provided it acts bona fide and on good grounds. Judicial interpretation has reflected that the fixed-term worker has no automatic right to demand regular employment on completion of 240 days of more-or-less continuous work. Such a worker needs to make a case that the temporary status was a ploy to deprive him/her of a permanent status to which he/she was. PROCEDURE FOR CALCULATION OF RETRENCHMENT COMPENSATION While effecting retrenchment of the workmen, it is obligatory on the part of the employer to pay retrenchment compensation at the rate of 15 days wages (for every completed year) to be calculated at the last drawn salary of an employee. The calculation of compensation is to be 10

1980 SC 1454 (6)

based from the date of appointment and in case an employee has completed 240 days, he will be entitled to 15 days retrenchment compensation besides one month’s noice or salary in lieu thereof as if he has worked for one year. 240 days includes Sundays or off days as well as festival or national holidays. In case an employee has worked for more than one year, the procedure is that in case the subsequent period of one year is less than six months then it will be counted as one year for calculation of compenstation. While making calculations the period of notice is also to be taken into consideration

CONCLUSION Industry must find due emphasis, for a country to develop/prosper and be modern. It is nonrefutable that the development of industry is correlated to labour contentment. Therefore, to achieve this, our country aims to create a welfare State on a socialistic pattern of society as expressly embodied in our Constitution of India. The Industrial Disputes Act, 1947 and the timely amendments in the Act, especially the provisions relating to the retrenchment, lay-off compensation has proved to be of great advantage to the workmen, in a country like India, wherein the bulk population is constituted of the labour class. These workmen are solely dependent upon their wages for their livelihood. So taking into consideration the essence of wage earnings to the workmen for their livelihood, the legislature has amended the principal Act and inserted provisions relating to retrenchment, lay-off compensation, definition, procedure to be followed in such cases, conditions precedent for retrenchment, lay-off, right of workmen to claim compensation, exceptions to compensation, reinstatement of a retrenched workman, relief in unjustified circumstances. The insertion of chapter V-B in the year 1976 by an amendment, special provisions relating to lay-off, retrenchment has been incorporated. Employers used these weapons (Retrenchment and layoff) commonly known as the “Downsizing Policy”, to lessen their workforce due to heavy expenses, company defaulter, downs in business etc. In both techniques employees are terminated from “first come last go and last come first go method” But the difference between these two is that retrenched employees are promised legally that they will be recalled on job (last go first come method) when the conditions of business gets better but in layoff employees are terminated without any such promise after paying all their legal dues. The employees should be informed well in advance about the layoffs. Prior warning or informing about the layoffs creates a chance for the employees to revolt against the Management, cause damage or sabotage to the machinery and valuable assets of the company. This impact can be reduced by providing the employees with retraining and offering them adequate compensation and benefits. Although the Industrial Disputes Act is a piece of social beneficial legislation enacted for providing social security to the workmen, which constitutes the bulk population of the society, it

is seen that the workmen are rather targets of victimization at the hands of the mighty Management/Employer. The workmen are retrenched, laid-off and paid petty amount as compensation on the pretext of economic conditions or settlement compensation. The workmen due to sudden loss of earnings are left in the deteriorating economic conditions since their sole source of wage earnings is lost. They are victims either of the highly advanced technology, unjustified discrimination, illegal termination, etc. Although, due to retrenchment, lay-off compensation, they are compensated to some extent, but that amount is meager compare to their earnings from actual service. Most of the cases of retrenchment, lay-off are due to illiteracy, ignorance, victimization, unjustified discrimination, illegal termination at the hands of the mighty Management, flimsy role of Trade Union Officials. The Workmen are retrenched, laidoff by the Management on various pretexts of economic conditions, inability, no confidence, non-renewal of service contract, without complying with the provisions of the retrenchment and lay-off compensation as per the provisions of the Industrial Disputes Act. In such cases, only those who are vigilant of their rights and in search of justice approach the concerned authorities whereas others are ignorant of their rights and mutely sustain the injustices meted to them. Some workmen withdraw their demands and goes for petty settlement at some middle stage of the disputes, especially when they realize that they cannot succeed the mighty management.

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