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Everything you need to know about Retrenchment in India

Companies often fail to consider the legal requirements to be carried out before retrenching their employees. Read everything about retrenchment.
Written by:
Swati Shalini
Published on

Terminating employees is common in the private sector where corporates relieve employees who fail to fulfill the performance standards of the company, do not follow the company’s moral and ethical code of conduct or fail to work with their team. Terminations are often carried out hastily by the HR department of a company attributing to pressure from stockholders, or as a tactic to cut down expenses. 

For more adept legal help or information about retrenchment in India, connect to us for an expert legal consultation.

Retrenchment is one of the ways companies use to terminate employment when the company is forced to downsize its number of employees. Subsidiary companies of Multinational Corporations often resort to retrenchment to deal with their expenditure on human resources. However, companies often fail to consider the legal requirements to be carried out before retrenching their employees.

Retrenchment means terminating an employee due to the surplus of labor or incapacity of employees to match the performance standards of the company. The Industrial Dispute Act, 1947 deals with employment-related disputes in India and Section 2(oo) of the Act states that ‘retrenchment means termination of service of a workman by an employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. However, the following are not covered within the meaning of retrenchment:

  • Voluntary retirement of a workman

  • Retirement of workmen on reaching the age of superannuation if the employment agreement contains a provision regarding superannuation

  • Termination of service of a workman due to the nonrenewal of employment agreement

  • Termination on groundS of continued ill-health

The Industrial Disputes Act states that an employer can retrench an employee for any reason. The Supreme Court has held that the mere act of striking off an employee’s name from the employee roll for being absent from office without leave is also retrenchment. As per the apex court’s decision, there is no economic or other requirements to be there for retrenching an employee. A labor lawyer in Delhi can give you the most accurate advice about retrenchment in India.


Nevertheless, the employer has to execute retrenchment in accordance with Section 25F of the Industrial Disputes Act. The section states that a workman employed in any industry working continuously for at least 1 year cannot be retrenched unless the following conditions are fulfilled: 

  • The employee has been served a notice of 1 month in writing that states the reasons for retrenchment.

  • The employee has been paid wages for the notice period.

  • The employee is paid compensation equivalent to the average pay of 15 days for every year completed in continuous service. The period of 6 months or more is considered equivalent to a year for calculation of retrenchment compensation.

Under the employment laws in India, non-payment of retrenchment compensation invalidates retrenchment. For calculating retrenchment compensation, the employer has to consider the different components of wages basic salary, dearness allowance, gratuity, and other allowances given under the definition of wages laid down by Section 2(RR) of the Industrial Disputes Act. A labor lawyer in Mumbai can give you the most accurate advice about retrenchment in India.

An industrial unit which employs 100 employees or more, has to fulfill certain additional conditions for retrenchment of the employee. Under Section 25N of the Industrial Disputes Act, an application has to be filed with the State Government that states the reason for the retrenchment of employees. The State Government has the discretion to grant or withhold its permission after enquiring about such retrenchment.

There are different Shops and Establishments Acts for each state that regulate termination of employment. Some states have prohibited termination of employment except due to misconduct or lack of discipline. A labor lawyer in Pune can give you the most accurate advice about retrenchment in India.

Section 25G of the Industrial Disputes Act lays down the procedure of retrenchment, which states that an employer can terminate the employment of the last employee hired by way of retrenchment. If any other employee is retrenched, then the employer has to specify the reason for doing so. For this, the employer is required to maintain a seniority list of its employees. A labor lawyer in Gurgaon can give you the most accurate advice about retrenchment in India.

For more queries or confusion regarding the legal nitty-gritty of retrenchment in India, ask for expert legal advice from us now!

The employers have the right to organize their workforce as fit for the company and no one, including the courts, have the authority to question its validity. An employer cannot be forced to bear the burden of surplus employees and therefore, retrenchment becomes the only viable option to reduce the financial burden of the workforce. However, the retrenchment of employees must be carried out after consulting an employment lawyer in Hyderabad to avoid any legal dispute with employees. 

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