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Law of Retrenchment
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Law of Retrenchment
Law of Retrenchment

Industrial Disputes Act (ID Act) was enacted in 1947.  The object of the statute was to make provisions for the investigation and settlement of industrial disputes and for certain other purposes.

Due to adverse business conditions, as a cost-cutting measure, lay off and retrenchment was affected on a large scale. The retrenchment was effected on the ground of surplusage. Then there was no provision for payment of any compensation to mitigate the rigour of unemployment occasioned due to lay off and retrenchment. To ameliorate this, Industrial Disputes Act was amended by Act No.XLIII of 1953 inserting definitions of retrenchment and layoff and making provision for compensation in this regard. The term retrenchment was defined as follows: -

“2(oo) retrenchment means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include –

  1. voluntary retirement of the workman; or
  2. retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned  contains a stipulation on that behalf; or
  3. termination service of a workman on the ground of continued ill-health”

Retrenchment was originally construed as termination of service of workmen on account of surplusage for any reason whatsoever. The termination of service inflicted by way of disciplinary action, voluntarily retirement, superannuation and termination on the ground of continued ill-health were excluded from the provisions of the term retrenchment.

Chapter VA was inserted to provide for procedure as to retrenchment, payment of retrenchment compensation and for reemployment of retrenched workman when fresh recruitments were made. As per Section 25F, it must be given one month notice or payment of wages in lieu of notice and payment of retrenchment compensation at the rate of 15 days wages for every year of service or any part in excess of six months.

In 1976 by Act No.32 of 1976, chapter VB was inserted in the Industrial Disputes Act for restricting lay off and retrenchment in factories mines and plantations employing not less than 100 workmen in a year. As per 25N in chapter VB provided for applying and obtaining prior permission from the appropriate government before effecting lay off or retrenchment. The notice rate was enhanced to three months salary but, the compensation rate remained the same. The layoff or retrenchment effected without observing the above provisions is illegal and the employer will be liable to pay full wages as if there was no layoff or retrenchment.

As per the ruling of the Supreme Court in State Bank of India vs. Sundara Mani (1976), 1 LLJ 453 the legal concept of retrenchment has undergone a drastic change. It was laid down that any sort of termination for any reason whatsoever except the excluded categories would amount to retrenchment and attract the rigour of provisions of retrenchment. It was laid down that the termination need not be for the ground of surplusage so as to constitute retrenchment. Thus termination of service of a workman for any reason other than termination by way of disciplinary action, voluntary retirement, termination by way of superannuation and termination on the ground of continued ill-health amounted to retrenchment. This has created anomalous results. The termination of service of a workman engaged on a contract basis amounted to retrenchment as it was not excluded from the purview of retrenchment. Termination of service of probationer amounted to retrenchment as such termination was not one coming within the excluded category. Therefore, for effecting the termination of service of such workman, the provisions of retrenchment were attracted, failure of compliance of which invalidated such termination. In a view to rectifying this anomalous situation, a new sub-clause namely (bb) was inserted in Section 2 (oo) of the Industrial Dispute Act, by Act 49 of 1984.

Now Section 2(oo) defining the term retrenchment runs as follows: -

“ 2(oo) - retrenchment means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include –

  • voluntary retirement of the workman; or
  • retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation on that behalf; or
  • termination of service of the workman as a result of non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein: -or
  • termination service of a workman on the ground of continued ill-health.”

In view of the introduction of sub-clause (bb) in section 2 (oo), the termination of service of a workman as a result of non-renewal of the contract of employment on its expiry or termination service of workman invoking a term under the contract of employment will not amount to retrenchment. A workman appointed for one year contract of service on termination on expiry of one year contract cannot complain that he was retrenched. A probationer, when discharged for non-performance, cannot complain that he was retrenched. Therefore in such cases, the provisions of retrenchment are not attractive as they would come within the exclusion part under 2(oo)(bb). The procedure and conditions as to the implementation of retrenchment need not be followed with regard to the terminations coming within the category of 2 (oo) (bb).

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