Lay-off, retrenchment and closure - Labour and Industrial Law I

← All Labour and Industrial Law I topics Past papers

On this page

1. Definitions
2. Lay-off under Chapter IX
3. Retrenchment under Chapter IX
4. Closure under Chapter IX
5. Chapter X: establishments with 300 or more workers
6. Problem
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

Three ways a job is lost without misconduct. A lay-off is a temporary inability to give work; retrenchment is termination of surplus workers; closure is the permanent shutting of the place of work. The Code keeps two tiers, as the old Act did: Chapter IX (old Chapter VA) for all, and Chapter X (old Chapter VB) for larger establishments, where government permission is required. The threshold for Chapter X has risen from 100 to 300 workers.

1. Definitions

Lay-off — section 2(t) (old section 2(kkk)): failure, refusal or inability of an employer, on account of shortage of coal, power or raw materials, accumulation of stocks, breakdown of machinery, natural calamity or any other connected reason, to give employment to a worker on the muster rolls who has not been retrenched. A worker who presents himself at the appointed time and is not given work within two hours is deemed laid off for the day (half a day if called for the second half of the shift).
Retrenchment — section 2(zh) (old section 2(oo)): termination by the employer of a worker's service for any reason whatsoever, otherwise than as punishment by disciplinary action. It excludes voluntary retirement; superannuation; non-renewal of a contract on expiry or its termination under a stipulation in it; completion of a fixed term employment; and termination on the ground of continued ill-health.
Closure — section 2(h) (old section 2(cc)): permanent closing down of a place of employment or part of it.
Continuous service — section 66 (old section 25B): uninterrupted service, including interruptions for sickness, authorised leave, accident, a legal strike or a lock-out not due to the worker's fault. A worker is deemed in one year's continuous service if he actually worked 240 days (190 below ground in a mine) in the preceding twelve months, counting lay-off days, paid leave, accident absence and maternity leave.

The width of “retrenchment” was settled in State Bank of India v. N. Sundara Money, 1976 INSC 3, (1976) 1 SCC 822, where an automatic termination at the end of a short appointment was held to be retrenchment, and confirmed by a Constitution Bench in Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court, 1990 INSC 186, (1990) 3 SCC 682: retrenchment means termination for any reason other than the listed exceptions, and is not confined to discharge of surplus labour. The earlier narrow view in Hariprasad Shivshankar Shukla v. A.D. Divelkar, 1956 INSC 72, AIR 1957 SC 121 (retrenchment requires a running business and surplus labour, so closure of the whole business is not retrenchment) explains why closure has its own sections. Parliament's response to the wide reading was the exception for non-renewal of a contract, added to the old section 2(oo) in 1984; the Code adds completion of fixed term employment.

2. Lay-off under Chapter IX

Sections 67 to 69 do not apply to establishments under Chapter X, or to those with fewer than fifty workers on average in the preceding month, or to seasonal or intermittent establishments (section 65; old section 25A). “Industrial establishment” here means a factory, mine or plantation.

A worker (not a badli or casual worker) on the muster rolls with one year's continuous service who is laid off gets compensation equal to 50 per cent of basic wages and dearness allowance for every day of lay-off except weekly holidays (section 67; old section 25C).
If lay-off exceeds forty-five days in twelve months, compensation for the further period may be excluded by agreement, and the employer may instead retrench under section 70, setting off lay-off compensation paid.
No compensation if the worker refuses suitable alternative work in the same establishment or within eight kilometres at the same wages, fails to present himself once a day, or the lay-off is due to a strike or go-slow in another part of the establishment (section 69; old section 25E).
The employer must maintain a muster roll even during lay-off (section 68; old section 25D).

3. Retrenchment under Chapter IX

Conditions precedent — section 70 (old section 25F). No worker with one year's continuous service may be retrenched until:

(a) he has been given one month's notice in writing stating the reasons, or paid wages in lieu;
(b) he has been paid, at the time of retrenchment, compensation equal to fifteen days' average pay (or more if notified) for every completed year of service or part over six months; and
(c) notice has been served on the appropriate Government or the specified authority.

Clauses (a) and (b) are mandatory conditions precedent; a retrenchment without them is void and the worker is treated as continuing in service, with reinstatement the normal relief (Sundara Money).

Last come, first go — section 71 (old section 25G). Where a worker who is a citizen of India belonging to a particular category is to be retrenched, the employer shall, in the absence of agreement, ordinarily retrench the last person employed in that category, unless he records reasons for departing from the rule.

Re-employment — section 72 (old section 25H). If within one year of retrenchment the employer proposes to employ any person, he must give retrenched workers who are citizens of India an opportunity to offer themselves, and they get preference.

Transfer of undertaking — section 73 (old section 25FF). On transfer of ownership or management, workers with a year's service are entitled to notice and compensation as if retrenched, unless service is uninterrupted, terms are no less favourable, and the new employer is liable for compensation on the basis of continuous service.

Worker re-skilling fund — section 83 (new). The employer must contribute fifteen days' wages last drawn for every retrenched worker to a fund set up by the appropriate Government, and that amount is credited to the worker's account within forty-five days of retrenchment. This is in addition to retrenchment compensation.

4. Closure under Chapter IX

Sixty days' notice to the appropriate Government, stating reasons, before an intended closure (section 74; old section 25FFA). Not needed where fewer than fifty workers were employed on any day in the preceding twelve months, or for construction projects.
Every worker with a year's service gets notice and compensation as if retrenched (section 75(1); old section 25FFF). If closure is due to unavoidable circumstances beyond the employer's control, compensation is capped at three months' average pay; financial loss, accumulated stock, expiry of a lease or licence, or exhaustion of minerals do not count as such circumstances.
Mines closed on exhaustion of minerals and construction projects completed within two years have special rules (section 75(2) and (4)).

5. Chapter X: establishments with 300 or more workers

Chapter X (old Chapter VB, sections 25K to 25S) applies to a factory, mine or plantation, not seasonal or intermittent, with not less than three hundred workers (or a higher notified number) on average per working day in the preceding twelve months (section 77). The old threshold under section 25K was one hundred.

Lay-off only with prior permission of the appropriate Government, except for shortage of power or natural calamity (and fire, flood, gas or explosion in a mine, where permission to continue must be sought within thirty days) (section 78; old section 25M).
Retrenchment only after three months' notice (or wages in lieu) and prior permission, with compensation of fifteen days' average pay per year (section 79; old section 25N).
Closure only on application for prior permission made at least ninety days before (section 80; old section 25-O).

In each case the Government hears the employer, the workers and persons interested, considers the genuineness and adequacy of the reasons and the interests of workers (and for closure, of the general public), and passes a reasoned order. If it does not communicate an order within sixty days, permission is deemed granted. The order binds for one year, subject to review or reference to a Tribunal, which must decide within thirty days. Action without permission, or after refusal, is illegal and workers are entitled to all benefits as if it had not happened. Penalty: fine Rs 1 lakh to Rs 10 lakh, and on repetition up to Rs 20 lakh or six months' imprisonment (section 86(1)–(2)).

Constitutionality. The original section 25-O was struck down for want of reasons, appeal or time limit in Excel Wear v. Union of India, 1978 INSC 192, (1978) 4 SCC 224. The recast provisions were upheld: section 25N in Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., 1992 INSC 164, (1992) 3 SCC 336, and the amended section 25-O in Orissa Textile and Steel Ltd. v. State of Orissa, 2002 INSC 31, (2002) 2 SCC 578. Sections 78 to 80 keep the safeguards these cases required (reasoned order, hearing, review, time limit).

Trap. More favourable rights under any other law, award, contract or standing order survive (section 76(1) proviso). And for Chapter X establishments, sections 66, 71, 72, 73 and 76 of Chapter IX also apply (section 82), so last-come-first-go and re-employment rights operate there too.

6. Problem

A factory employing 350 workers terminates 40 workers, each with three to six years' service, saying they are surplus. It pays one month's wages in lieu of notice and fifteen days' average pay per year, and informs the Government. Is the retrenchment valid?

Issue. Which chapter applies, and whether its conditions were met.

Law. Chapter X applies to a factory with 300 or more workers (section 77). Section 79 requires three months' notice or wages in lieu, and prior permission of the Government; section 79(7) makes retrenchment without permission illegal. Section 83 requires contribution to the re-skilling fund.

Application. With 350 workers, the factory is under Chapter X, not section 70. One month's notice and mere intimation to the Government satisfy section 70 but not section 79: the employer needed three months' notice and prior permission. Under the old Act the same factory would have been under Chapter VB as well (threshold 100), so the result does not change, but the section number does. Last-come-first-go under section 71 also applies through section 82.

Conclusion. The retrenchment is illegal from the date of notice; the workers are entitled to continue with full benefits as if no notice had been given, and the employer is liable to a fine under section 86(1).

How this is examined

As essays: “Define retrenchment and state the conditions precedent to a valid retrenchment”, “Distinguish lay-off, retrenchment and closure”, or “Explain the special provisions relating to lay-off, retrenchment and closure in certain establishments.” Short notes: lay-off compensation, last come first go, continuous service, worker re-skilling fund. A retrenchment problem is set almost every year.