RETRENCHMENT AND LAY OFF

Retrenchment in labor law is the termination of an

employee's service for any reason other than
disciplinary action. It's often due to economic
reasons, such as company restructuring, mergers,
or cost-cutting measures.
What's covered by the Industrial Disputes Act of
1947?
 The Industrial Disputes Act of 1947 (ID Act)
governs retrenchment in India.
 The ID Act defines retrenchment in Section
2(oo).
 The ID Act outlines conditions that
 The ID Act outlines conditions that employers
must meet before retrenching an employee.
 The ID Act gives employees and management
the power to raise industrial disputes if the
employer doesn't comply with the
retrenchment provisions.
 completed year of service.
 Employers may also provide additional
compensation, such as bonuses, gratuities, and
unpaid wages.
 entitled to half of their average monthly salary
for each completed year of service.
  Employers may also provide additional
compensation, such as bonuses, gratuities, and
unpaid wages.

n labor law, a "lay off" refers to a temporary

suspension of employment for a worker listed on
an industrial establishment's muster roll, where an
employer is unable to provide work due to reasons
beyond their control, like shortage of raw
materials, power failure, machinery breakdown, or
natural calamities, essentially meaning the
employee is not terminated but is not provided
work for a period while still remaining on the
payroll and usually receiving a portion of their
wages as compensation; this is defined under
Section 2(kkk) of the Industrial Disputes Act, 1947.
Key points about layoff:
 Temporary suspension:
Unlike retrenchment, which is permanent
termination, a layoff is a temporary suspension
of work.
 Reasons beyond control:
The employer must demonstrate that the
reason for the layoff is beyond their control.
 Compensation:
 Laid off employees are usually entitled to
receive a portion of their wages as
compensation during the layoff period.

 Must be on muster roll:

Only employees listed on the company's
muster roll can be laid off.

INTRODUCTION

The Industrial Disputes Act, 1947 (the “Act”)

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
establishment1.
“Industrial Dispute” is defined under Section 2(k) of
the Act. It lays dow n 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 industry2.
The present bulletin touches upon the meaning of
lay-off as per the Act and deals w ith the issue of
compensation resulting from such lay-off. Since
most establishments are interested in knowing the
monetary impact of laying-off workmen while
reducing headcount, this bulletin provides an
insight on that process.
1. Meaning of lay-off and continuous service

Previously, lay-off was a practice that had no

provision for compensation. However, in 1953, the
President promulgated the Industrial Disputes
(Amendment) Ordinance which made a provision
for payment of compensation for lay-off. This
ordinance was repealed and replaced by Indu strial
Disputes (Amendment) Act, 1953.
Lay-off is a practice whereby the employer cannot
give employment to workmen for various reasons
including shortage of raw materials, coal or power,
accumulation of stocks, break-down of machinery
etc, or for any other connected reason. It has been
defined under Section 2(k k) of the Act. If a
workman, whose name is on the muster rolls of the
industrial establishment presents himself for work
and is not given
employment within two (2) hours of presenting
himself, he shall be deemed to have been laid-off
for that day.
All industrial establishments in India have to
ensure compliance with the various labour
legislations, including the Act. The application of
the provisions pertaining to lay-off is restricted by
virtue of Section 25A. It states that industrial
establishments with below fifty (50) workmen on
an average per working day in the preceding
calendar month, or industrial establishments which
are of a seasonal character, or industrial
establishments to which Chapter 5B3 of the Act
applies, will not be bound by Section 25C to 25E
(both inclusive). This implies that suchworkmen:
 will not be entitled to any compensation for

being laid off.

 will not be entered into the muster rolls of

the employer.

 will not fall under any of the exceptions to

avail compensation.

It is important to note that workmen are entitled

for compensation only if they have been
in continuous service. Defined under section 25B of
the Act, a workman is said to be in continuous
service if he provides uninterrupted service, which
includes interrupted service due to sickness,
accident, strikes which are not illegal, lock out or
cessation of work not due tothe fault of the
workman. In other words, the durationwhen the
workman is out of the office on account of illness is
not excluded while computing continuous service.
The service is construed as continuous for a period
of 1 year if the workman works in the previous year
for:
 190 days- below the ground in a mine.

o 240 days- in any other job.

The service is construed as continuous for a period

of 6 months if the workman works in the preceding
6 months for:
 95 days- below the ground in a mine.

o 120 days- in any other job.

In Sur Enamel & Stamping Works Ltd v. Their

Workmen4, the Supreme Court held that before a
workman can be considered to have completed
“one year of continuous service” in an industry, it
must be shown that he was employed for a period
of at least twelve (12) calendar months and during
those twelve
(12) calendar months he had worked at least two
hundred and forty (240) days.
2. Compensation for Lay-Off

Laying-off workmen results in depriving them of

the opportunity to work and earn wages 5.
Therefore, it becomes the duty of the employer to
provide compensation to the workmen if their case
falls within the scope of the Section 25C 6 of the
Act. However, no compensation can be aw arded in
advance of
actual lay-off on grounds of social justice 7. This
particular section states that any workman:
 whose name is borne on the muster-rolls of

an industrial establishment and,

 who has completed atleast one (1) year of

continuous service under the employer,

shall be paid compensation for the period during

which he was laid-off, which shall be equal to fifty
(50) percent of the total of the basic wages and
dearness allowance that should be payable to him
had such workman not been so laid-off.
Maintaining muster-rolls is a universal practice by
industrial establishments. Its purpose is to record
the attendance of workmen employed. However,
the purpose is not limited to the same. It also
acquires importance with respect to lay-off of
workmen. If the name of the workman is not
mentioned on the
muster-rolls of an establishment, he cannot get
laid-off under the Act. According to Section 25D, it
is the duty of the employer to maintain muster-
rolls of workmen and failure to comply with this
provision can attract penalty under Section
31(2)8 of the Act.
If during the one (1) year period of continuous
service, the workman is laid-off for more than forty-
five (45) days, no further compensation will be paid
if there is an agreement in that respect between
the workman and the employer. Upon the expiry of
this period, the employer can retrench the
workman and the compensation then paid would
exclude the amount already paid during the forty-
five (45) day period of lay- off.
Further, if the workman is a “badli” workman or a
casual workman, he would fall outside the ambit of
Section 25C. However, if a “badli” workman has
completed one (1) year of continuous service in the
industrial establishment, he will be treated as a
permanent workman for all purposes9.
3. Workman not entitled to Compensation

Section 25E of the Act highlights situations when a

workman is not entitled to compensation even
after being laid-off. This section 25E works like an
exception to Section 25C. A workman is not
entitled to compensation if:
 he refuses to accept any alternate

employment offered by the employer in the

same establishment, or in any other

establishment of the same employer,

provided such establishment is within a five

(5) miles radius from the previous

establishment. Further, such alternate

employment should not call for any special

skill or experience and the employer must

pay at least the same wages as were

previously paid to the workman.

  he does not present himself for work at the

establishment at the appointed time during

normal working hours at least once a day;

 such lay-off is due to a strike or slowing-dow

n of production by workmen in another part

of the establishment.

The burden of proof is on the employer to show

that the workman is disentitled to claim
compensation because his case falls under the
purview of Section 25E10.
4. Special Provisions relating to Lay-Off

Section 25M in Chapter 5B11 of the Act further

points out that prior approval from the
“appropriate government” is required to lay-off a
workman when the industrial establishment (not
being of a seasonal character or in which work is
performed only intermittently), has more than
hundred (100) workmen employed on an average
per working day for the preceding twelve (12)
months. The appropriate government has the final
authority to decide whether the establishment is in
fact seasonal or not and such decision shall be
final12. It also provides stringent penalties for
contravention of the provisions13 of Chapter 5B
along with providing compensation to the workman
for any “illegal” lay-off14.
CONCLUSION

While setting up any industrial establishment in

India, lay-off provisions acquire importance
especially since most labour law legislations are
very pro-workmen. Laying-off is a power in the
hands of the employer but it has to be exercised
judiciously in accordance with the applicable legal
regulations. The monetary penalty for
contravention of these provisions is not a lot but it
can impact the establishment’s goodwill and
reputation. Further, improper laying-off of workmen
can lead to strikes and lock-outs, which can result
in significant busines loss for the establishment.
Therefore, there is reason enough for every.
1 It is defined under Section 2(ka) of the Act. It
states that any establishment or undertaking in w
hich any busines , trade, or manufacturing
(collectively know n as “industry”) is carried on is
an industrial establishment. How ever, if any unit of
an establishm ent
can be severed as an industry, then it will be
deemed to be a separate industrial establishm ent.
Also, the dominant nature of the activities will have
to be considered if the establishm ent carries on
more than one activity.
2 In Bangalore Water Supply v. A. Raja ppa, AIR
1978 SC 548, 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 predom inant
nature of the services w i l be the true test to
determine an industry. The w hole undertaking w ill
be an “industry” although those w ho are not
workmen by definition may not benefit by status.
3 This chapter deals w ith special provisions
relating to lay-of f, retrenc hment, and closure in
certain establishments. It applies to industrial
establishments in which have atleast 100 w
orkmen employed on an average per w orking day
for the preceding 12 months. 4 (1963) 2 LLJ 367,
379 (SC), per Das Gupta J.
5 Zandu Pharmaceutical Ltd. v. RN Kulkarni & Co
(1966) 1 LLJ 560, 562 (Bom), per Mody J.
6 This section deals w ith the right of compensation
for workmen who are laid-off.
7 KT Rolling Mills v. MR Meher (1962) 2 LLJ 667
(Bom) (FB), per Shah J; Central India Spg, Wvg &
Mfg. Co. Ltd v. Industrial Court
(1959) 1 LLJ 468 (Bom) (DB), per Mudholkar J.
8 Section 31(2) provides for a penalty of Rs. 100 to
cover those offences for w hich no specific penalty
is provided.
9 English Electric Co. of India Ltd v. Industrial
Tribunal Madras (1987) 1 LLJ 141, 153 (Mad) (DB),
per Chandurkar CJ.
10 In RS Rekchand Mohota Spg and Wvg Mills Pvt
Ltd v. Labour Court 1968 Lab IC 480, 484 (DB), per
Paranjpe J and Zandu Pharmaceutical Works Ltd v.
RN Kulkarni & Co (1966) 1 LLJ 560, 562 (Bom), per
Mody J, it was held that it is open to the employer
to repudiate the claim (of the w orkman for
compensation) by showing that the w orkman w as
disentitled to claim compensation because his case
falls w ithin any of the three clauses of Section 25E
of the Act.
11 ibid., at 3
12 Section 25K(2) in Chapter 5B of the Act.
13 Section 25Q in Chapter 5B states that w here an
employer lays-off a w orkman under Section 25M w
ithout prior permission of the
“approp riate government ,” he shall be punishable
w ith imprisonment for a term w hich may extend
to 1 month, or w ith fine w hich may extend to Rs.
1000, or w ith both.
Clearly, the mere fact that lay-off takes place w
ithout the required permission is reason enough to
attract the penalty under Section
25Q. There is no need to establish any intention.
14 Section 25M(8) of the Act states that the
employer w ill be liable to the w orkmen for “all the
benefits under any law for the time being in force
as if they had not been laid-off” for the period of
such illegal lay -off i.e. cont rary to provisions of
Chapter 5B.
0S H A R E S
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works committee is a statutory body in an
industrial establishment that aims to resolve
conflicts between workers and employers. It is
established under the Industrial Disputes Act,
1947.
Responsibilities Promote good relations between
the employer and employees, Comment on
matters of common interest, Compose differences
of opinion, Prevent and settle industrial disputes,
and Serve as a grievance resolution mechanism.
Composition
 The committee is made up of representatives
from both the employer and employees
 The number of representatives of workmen on

the committee should not be less than the

number of representatives of the employer
Formation
The employer is required to form a works
committee if they have more than 100
employees
 The employer should select the employees in

consultation with the Union

Meeting frequency
 The committee must meet at least once in
three months
  Acts administered by the IR/PL Section 186 |
Ministry of Labour & Employment|Government
of India
31 Mar 2023

Ministry of Labour & Employment

 Section 3 in The Industrial Disputes Act, 1947 -
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Section 3 in The Industrial Disputes Act, 1947

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