DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

ACADEMIC SESSION: 2017-18

LABOUR LAW

TOPIC: RETRENCHMENT LAW IN INDIA- A CRITICAL ANALYSIS

SUBMITTED TO: SUBMITTED BY:

Dr. Vikas Bhati Saurav Singh

Asstt. Professor (Labour law) B.A. L.L. B. (Hons.)

Dr. Ram Manohar Lohiya National 6th Semester

Law University, Lucknow enroll-150101119

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 ACKNOWLEDGEMENT

I express my gratitude and deep regards to my teacher Dr. Vikas Bhati for giving me such a
challenging topic and also for her exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.

Lastly, I thank almighty, my family and friends for their constant encouragement without
which this assignment would not have been possible.

Saurav Singh

B.A. LL.B. (Hons.), Section – B

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TABLE OF CONTENTS

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Retrenchment Law In India - A Critical Analysis.

Introduction.

Section 2 (oo), deals with the definition of the term retrenchment. Retrenchment means the
termination by the employer of the service of the workman, for any reason whatsoever, otherwise
than as a punishment inflicted by way of disciplinary action, but does not include:

a. Termination by the way of punishment inflicted pursuant to disciplinary action.

b. Voluntary Retirement of the workman.

(bb). Termination of the service of the workman as a result of the non-removal 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; c. Retrenchment of the
workman by reaching the age of superannuation if the contract of employment between the
employer and the workman contains stipulation in that behalf: or
d. Termination of the service of a workman on the ground of continued ill health.

The definition expressly provides for the exclusion of certain cases. It may be noted that sub
clause (bb), speaking of contractual termination, has been inserted by the Amending Act 49 of
1984. Previous to 1984, even that amounted to retrenchment. It does not matter why the
employer discharges the surplus, if the other requirements of the definition are fulfilled1.

In many cases the courts have held that the employer is justified in retrenching "the dead weight
of uneconomic surplus" provided that the employer acts bonafide and not for the purpose of
victimization of his employees. The power of retrenchment is to be used reasonably only for the
purpose of rationalization of surplus and uneconomic labour. It should be noted that even a
temporary worker can claim retrenchment compensation if he is retrenched. Retrenchment,
without a reason, is no retrenchment, but once the conditions contained in the definition are

1
Malhotra, O.P; “The Law of Industrial Dispute”; pg. 354.
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satisfied, it does not matter why the employer chose to discharge the surplus2. Before a
retrenchment, compensation has to be paid to him under Section 25F or 25N of the Act.

Unarguably, retrenchment policy is a major concern to the employers and the employees both
alike. Employers, inevitably look for an easy retrenchment policy favourable to their business
motives. On the other hand, employees vulnerable at the hands of their employers, look for
protection in the labour laws. Understandably, both the concerns should be met and a balanced
policy should be the answer. A stringent policy is not the most prudent solution even if labour
welfare is the predominant intention because in the long run employers will cut down on
employees and unemployment, poverty would be rampant.

In the opinion of the researcher, the law in India regarding retrenchment is very stringent and
economically unsound. It is submitted that such a stringent law of retrenchment would be
adverse to investments and hence, lead to low opportunities of employment. On one hand, one
must protect the labourers by laws such that they are not exploited and on the other, if the labour
law is strict, investment would be low, leading to poor employment opportunities for the
labourers. Also, India is favoured for foreign investments because of its cheap and abundant
labour supply, hence, if the same is made adverse to the interests of the entrepreneurs, the
economy would lose sizeable investments, employment opportunities and revenue.

1. Excluded cases under section 2(oo)- An analysis of the law and comments on its
stringency.

This chapter shall attempt to understand the law on retrenchment with case analysis and then
analyze whether the law is too stringent . The definition of retrenchment in section 2 (oo)
contemplates that the termination must be mainly on grounds of economy either for paucity of
production because of lack of consumption of raw materials or over production or for any reason
whatsoever, it must be done by the employer, it must not be by way of punishment or
disciplinary measure and it must be the termination of surplus labor.3

2
Shenoy, Sandip; “Laws relating to retrenchment” at
www.ourkarnataka.com/Articles/law/retrenchment.htm.
3
Workmen of Subong Tea Estate v. Subong Tea Estate, (1964)1 L.L.J.333.
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The SC has expressed the view that the term “retrenchment” cannot have a wider meaning than
its ordinary meaning. The SC has observed in the case of Pipraich Sugar Mills Ltd. V. Pipraich
Sugar Mill Mazdoor Union4 that, “retrenchment connotes in its ordinary acceptation that the
business itself is being continued, but a portion of the staff or labour force is discharged as
surplusage . It would be against the entire scheme of the Act to give the definition clause relating
to retrenchment such a meaning as would include within the definition of termination of all
workmen by the employer when the business ceases to exist…” Retrenchment as defined in
section 2(oo) and used in section 25 F, has no wider meaning than the ordinary accepted
connotation of the word, it means the discharge of surplus labour or staff.

The SC has further observed that, “it cannot be doubted that the entire scheme of the Act
assumes that there is in existence an industry and then proceeds on to provide various steps
being taken when a dispute arises in that industry. Thus, the provision of the Act relating to lock
out, strike, lay off, retrenchment, conciliation and adjudication proceedings, the period during
which the awards are to be in force, have meaning only if they refer to an industry which is
running and not one which is closed. In our interpretation in no case, is there any retrenchment
unless there is discharge of surplus labour or staff in a continuing or running industry.”5

The sum and substance of these judgments of the SC has been that in case of closure of an
industry there is no retrenchment and as such termination of service of workmen in case of
closure is not covered by the definition of retrenchment. To circumvent these decisions, the
legislature had to insert Section 25FFF of the Act by Sec. 3 of the Industrial Disputes
(Amendment) Act, 1957. But the effect of the SC judgment still holds good and by section
25FFF of the Act the consequential effect of the SC judgment as to payment of retrenchment
compensation has been nullified.

In several cases, it has been observed that it does not appear that for effecting retrenchment, the
concern must be a going one. But in a process of judicial interpretation, this element in the
concept of retrenchment has been introduced and a limitation into the definition has been
imposed finally by the SC in a process of judicial interpretation. Further limitation to the

4
1956 S.C.R. 872
5
Hari Prasad Shivashankar Sukla v. A.D. Divakar, 1957 S.C.R. 121.
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definition has been that retrenchment must be in relation to surplus labour for the purpose of
economy of the industry. This element also not appears from definition itself. The definition by
itself is wide enough to include all sorts of terminations other than cases excluded by the
definition itself. Thus, the judiciary has narrowed the definition of retrenchment.

Exception to all sorts of terminations being retrenchment are as follows:

1. Termination by way of disciplinary measure on grounds either of misconduct or

insubordination or any other reasons is not retrenchment and is not within the meaning of
the definition. It means dismissal, removal and not retrenchment. Voluntary retirement of
the workmen would not be retrenchment but forced retirement can be retrenchment.
Basic conception is that the retrenchment must flow from the volition of the employer but
if retirement is due to the volition of the workmen it will not be retrenchment.6
2. Retirement on reaching the age of superannuation if there be any contract of employment
between the employer and workmen and a stipulation to that effect would not be
retrenchment. In case there is no stipulation of the age of superannuation the termination
of employee’s service after few years is covered by the term “retrenchment”.7
3. Contractual termination would not be retrenchment. This clause has been inserted by the
Amending Act 49 of 1984. It purports to exclude from the ambit of the definition of
retrenchment, (1) termination of the service of a workman as a result of the non renewal
of the contract of employment between the employer and the workman concerned, on its
expiry or (2) termination of the contract of employment in terms of a stipulation
contained in the contract of employment in that behalf.8
4. Termination of the service of the workmen on the ground of continued ill health would
not be retrenchment.9

Legislature has imposed these four classes of limitation and the judiciary has further added to
it in the process of judicial interpretation.

6
See section 2(oo)(a) of the Industrail Disputes Act, 1947.
7
See section 2(oo)(b)of the Industrail Disputes Act, 1947.
8
See section 2(oo)(bb) of the Industrail Disputes Act, 1947.
9
See section 2(oo)(c) of the Industrail Disputes Act, 1947.
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 Is the law on retrenchment in India too stringent?

The Industrial Disputes Act, 1947 was the first legislation on exit, layoff and closures, initially
applied with different degrees of severity to firms employing between 50-100 or more workers.
First, when it came to operation, the IDA, did not restrain employers from laying off or
retrenching workers or closing down unprofitable business provided they notified workers and
the unions in advance. The provisions relating to payment of compensation for lay off and
retrenchment came in 1953. Amendment in 1964 standardized the compensation at 15 days
average pay for every year of continued service and required the employer to give the worker
and the government a month’s notice.

Currently, the IDA(Chap. V-A) requires an establishment employing 50 or more workers, in case
of valid retrenchment to provide the workers with 30 days notice and 15 days pay for every year
of continuous work by the workmen at the firm. In case of closure or sale, it must fulfill same
conditions unless the successor takes on these obligations (Section 25FF and 25FFF). For an
establishment employing 100 or more workers the IDA, under Chapter V-B, requires prior
permission from the government before firm closure or retrenchment.

Application for retrenchment and lay off with government seldom succeeds and firms do not
make too many such applications. This is evident from a subsection in Indian Labor Year Book,
’92.

“During the period Jan-Aug’ 92, four proposals, two each for retrenchment and lay off were
received for consideration by the ministry of Labour. One proposal seeking permission for
retrenchment was rejected. Whereas the other remained under consideration of the government.
One proposal for lay off was withdrawn while the other was found to be not maintainable.”

The IDA did not restrict completely the right of the employees to close an unprofitable business.
The amendment in 1957 required the employer to compensate the workers affected by closure
the same way as if they were retrenched. Each of the three amendments of the Act in 1972, 1976
and in 1982 seemingly gave greater protection to workers than the preceding one. In the current
amended version employers employing 100 or more workers must give notice of a closure to
workers or their representatives and to the government, 90 days prior to the date of the intended

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closure. The employer in his request, has to state in detail the reasons for closing down business.
The government enquires into them, hears both parties and either grants or refuses the
permission to close, usually the latter. Refusal has to be communicated to the parties in writing
within 60 days of the notice from the employer. Employers with 50-99 workers need only to
notify the government, while those with less than 50 employees need not even do that to close
their business. However, in practice, workers in such firms can appeal to other laws such as
Indian Contract Act, 1872 to resist dismissal.

Such being the law on retrenchment in India, it would not be far stretched to allege that the laws
on retrenchment are rigid and cumbersome on the employers. Some recent data compiled by the
World Bank collate the level of rigidity of hiring and firing rules in different nations -100 being
the score of the highest conceivable rigidity. India is among the most rigid countries with a score
of 48. China has a score of 30, Korea 34, Norway 30, and Singapore close to 0.10Thus, statistics
and figures also prove a case in point.

An incident that further harps on the problems faced by the employers due to stringency in labor
laws is the Honda case. Honda said its 50 workers who were suspended for indiscipline will not
be reinstated pending an independent inquiry - an issue that caused bloody clashes between its
workers and police. Honda took a stand of not allowing the suspended workers into gates until
the third party inquiry is completed and management gets the report.11The trouble at the group's
two-wheeler unit began when some 2,000 workers protested a lockout of the factory and
dismissal of some colleagues. This was followed by clashes with the police that left scores
wounded after some irate workers vandalized civic facilities, police vehicles and shops.

Clearly, such incidents are not conducive to the growth of economy and entrepreneurship in
India. Blame largely sits on the strict and inflexible labor laws in our country. It is not submitted
that the interests of the labor should be sacrificed at the altar of development, what is suggested
is that a balance must be reached, because if the employers are unhappy with the labor laws,

Basu, Kaushik; “Why India needs a labour law reform” at

10

www.news.bbc.co.uk/1/hi/world/south_asia/4103554.stm.

11
Sinha, Anurag, “Turning the tide of labour unrest in India” at
www.mba.iiita.ac.in/augsept05/Labor.htm.

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consequences like low foreign investment, low employment of laborers would follow which is
all the more disadvantageous to the laborers in the long run. The next chapter shall argue
whether a more flexible law would be better for the employers, employee and the economy in
general.

Should the law on retrenchment in India be made more flexible?

Stringency in labour laws bring its own set of problems. An amendment made to the IDA in the
mid-1980s requires that any firm employing more than 100 workers needs to get permission
from the state government before retrenching workers. This piece of legislation meant to protect
labour welfare has a downside. If, the business is in a downswing the employers cannot retrench
extra workforce and are compelled to carry the extra workforce making it difficult to channelise
capital in better investments. This would in the long run, compel the employers to hire less
labourers even in the upswing so that they do not face problems of cut down in a downswing.
Also, because of unemployment of labourers and high demand for jobs, the wage will fall
drastically. If such a course of event follows, paradoxically, the protective laws to the labourers
would backfire and hit them very hard.

This chapter shall make a thorough insight into the functionality of the current labour legislation
and analyze the pros and cons of the law. It will also reason whether a flexible labour law will be
more beneficial over a stringent one to both the economy and the labourers.

To begin with, many observers have given different views to stress that India’s labour
legislations has hurt India’s overall growth and efficiency. Lucas,1988; Ahluwalia,1991;
Pappola,1994 and Basu,1995 have shown that the labour legislations have actually hurt the very
labourers they intended to protect. According to Nickel,1986, rigid retrenchment laws increased
the costs of adjusting a firm’s employment level and led firms to consider not only current
market conditions but also future labour needs while, taking their labour decisions. A firm will
not recruit labourers in upturn if it anticipates cost in reducing workforce in subsequent
downturn.12

12
Sharma, Alakh; “Flexibility, employment and labor market reforms in India” at www.
idrinfo.idrc.ca/archive/corpdocs/124089/60657.pdf.
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Pappola,1994; Ramasay,1984; Datta 1994; and Amthur 1989, argue that employers in India have
responded to strict labour laws by greater use of temporary and casual labour, adopting labour
saving technology, expansion in leasing in capacity of small firms, setting up production where
labour laws are not organized, increasing use of bribery and corruption to avoid the legal
consequences of retrenchment. Fallon and Lucas,1991, examined the job security regulations in
India and Zimbabwe, two countries with very restrictive labour retrenchment laws. They found
that retrenchment laws reduced the demand for workers for any given level of output in
particular they estimated that in India the 1976 amendment to IDA, 1947 reduced demand for
labor by 17.5%, increasing pressure on unorganized sector to absorb excess labor supply.

Apart from this, several other points can be advanced to illustrate how the rigid labor laws are
posing problems and how they can be corrected with a flexible policy.

First, the loss of huge foreign investments. Labor-intensive manufacturing exports require
competitive and flexible enterprises that can vary their employment according to changes in
market demand and changes in technology, so India remains an unattractive base for such
production in part because of the obstacles to flexible management of the labor force. MNCs
offer the capital, international market access and technology that India lacks.13

Also, a lot of investment flows to China, which has a much flexible labour policy than ours. In
today's globalised world, with volatile and shifting demand, firms have responded to this by
keeping their labor forces as small as possible. An injection of flexibility in labor market
regulation can attract foreign capital, create jobs and unleash higher growth.

Second, in this context, the example of China may be given which has drastically changed its
system of labour market from a rigid security of employment to one in which labour is extremely
mobile. It has greatly helped China in generating employment as well as successfully
redeploying workers who were laid off in the process of restructuring of enterprise. It is argued
that more than 100 developing countries have reformed their labour policy in response to
competitiveness in the globalised era, but India has remained among a few countries with a rigid
system of labour protection. On this basis, the East Asian economies achieved growth rates
consistently above 6 per cent a year, and China managed growth in excess of 10 per cent a year

13
Bajpai, Nirupam; Sach, Jeffrey; “The Hindu”, “Foreign Direct Investments in India-II”; July
1st 2000.
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in the 1990s. Malaysia, to cite another example, shifted its labour policies and has a GDP growth
of 8 per cent a year now.

Thirdly, large firms in India are not allowed to retrench or layoff any workers, or close down the
unit without the permission of the State Government. This is very much in line with the job
security provided to public sector employees. Most importantly, the continuing barrier to the
dismissal of unwanted workers in Indian establishments with 100 or more employees paralyses
firms in hiring new workers. This law, though benefits the labourers who are immediately
employed, affects adversely the multitudes of others who are unemployed and are seeking jobs in
a market with few vacancies. Stringent policies result in employer’s reluctance to hire labourers
reducing scope of job creation even more.

Fourth, present Indian labour laws leave no room for free contracting. Suppose a firm wants to
manufacture a product that has volatile demand - like fashion garments. This firm may want to
offer workers higher wages but make it clear to them that they could be given a month's notice
and asked to leave. Such a contract will have no legal standing because the IDA specifies in
advance how and when workers may and or may not be retrenched. Hence we do not see such
contracts. Such contracts would help the employers and employees alike because employers
would recruit workers meeting their specific needs whereas employees will get high wages and
at least some form of employment.

Fifthly, with such cushioning labour laws, the employers are complacent with low incentive to be
inventive and enterprising. High security adversely affects the general entrepreneurial climate
where it is required that the employees keep reinventing themselves to increase productivity.

Sixthly, the labour law have been much politicized. For instance, during the NDA government it
had expressed its willingness to amend ID Act and to free employers from the restrictions on
them in the chapter. It was proposed to give an additional retrenchment compensation of 45 days
wages for every completed year of service. But trade unions were opposed to it14. The political
parties weighed the pros and cons of labour amendments in the light of the following points:

 They might lose the political support of worker.

Sinha, Anurag, “Turning the tide of labour unrest in India” at

14

www.mba.iiita.ac.in/augsept05/Labor.htm.
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  They will get financial support from employers to meet election expenses.

Clearly, such self centered objectives while framing labor laws serves everyone but the nation!

Some proposed suggestions to the existing law on retrenchment.

After an elaborate mention of points and views as to why a rigid policy is not the best answer to
the labourers and the Indian economy, an attempt is made by the researcher to lay down certain
suggestions which could lead to better labour laws for all parties concerned.

Given that the reform of labour law is, contrary to popular perception, in the interest of the
workers, what government needs to do is have this topic debated and explained to the workers,
such that they do not oppose, but advocate it. However, the reform will need a substantial
amount of intellectual input and complimentary policies for providing social security and welfare
to workers.

One way to maintain the balance of control at the workplace between the employers and the
trade unions would be to develop well specified procedures to retrench employees. Such
procedures do not provide flexibility to the employers to retrench arbitrarily. Hence, it could
protect the balance significantly. Some mechanism could be developed whereby, the company
retrenching the employees will take an undertaking that whenever it needs to diversify or need
more manpower, it shall give preference to the workers it is retrenching at present. Companies
could also opt for unconventional problem solutions.

* Cutting working hours of workers to avoid possible retrenchments, transfer or redeployment of

labour from excessive labour to labour deficient units.

* Labour can be given three to six weeks break and encouraged to go in for skill enhancement. It
will lead to gain from both sides: personal growth for the employee and the employer can put to
use worker's enhanced skills.

It must be recognized that labour market reforms are not going to be easy in a situation where
employment opportunities have been shrinking. Also there is a larger question of providing
social security to the workers employed in the organized sector. The vast unorganized labour
force, is denied fair wages and even modest levels of social security. Hence, labour market
flexibility must be accompanied by some kind of insurance and social security. Government

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should make all possible efforts to dispel the fears of trade unions by enlarging the scope and
coverage of the social security net. 15

Hence no solution can be reached if the stakeholders continue to take extreme positions. There
has to me a meeting ground to address everyone's interests, to the extent possible. The employers
and the employees should be made to understand that they equally need each other and the
relationship between the two can only be harmonious if they work towards defending each
other's interest rather than contesting the same. Hence employers should pay more attention to
human resource development and capacity building of their employees. Industrial bodies have to
take up workers education. Workers on the other hand realize the importance of 'no work no
wages'.

There should be a general consensus on the labor reform ideology among the major political
parties. Political leaders should look beyond their narrow interests and develop consensus for the
larger benefits of the Indian economy. Effort has to make to bring in a balanced view whereby
concerns of all the stakeholders, especially the trade unions and the employers are addressed.
This may further be strengthened through a wider debate involving academicians, legal experts,
policy makers and public at large. All the stakeholders should arrive at some consensus so that
there is something for everyone. Once such consensus is developed, it may be coupled with good
and clean corporate governance.

What is also needed now is not a law that allows employers to fire workers at will but one that
allows for different kinds of contracts. Some workers may sign a contract for a high wage but
one that requires them to quit at short notice; others may seek the opposite. This would allow
firms to employ different kinds of labour depending on the volatility of the market they operate
in.

Flexibility in hiring and firing is not the only problem. India's complex web of legislation, leads
to a system of dispute resolution that is incredibly slow. Data from the Ministry of Labour reveal
that in the year 2000 there were 533,038 disputes pending in India's labour courts; and of these
28,864 had been pending for over 10 years. If India is to be a vibrant global economy, this has to
change.

15
Naik, S.D.; “Bussinessline”; “Labour market reforms- Need for credible safety nets” on 24th
Jan, 2002
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In brief, we need to move to a system that (1) makes room for more flexible contracts in the
labour market (2) has a minimal welfare net for workers who are out of work (3) resolves labour
market disputes more quickly.

Under the socialist regimes of the post-independence era, while a right-to-work was not
guaranteed, implicitly, a right-not-to-be-fired was in place. Various political parties, particularly
those on the left, made it nearly impossible to fire employees. The consequences of low labour
productivity and lack of international competitiveness were not recognised. The way India has
shifted from socio-communistic to liberal-capitalistic policies in the last 20 years, it is only
natural that the labor laws undergo a change. Laws should cater the needs of the society and
cannot be isolated from the societal framework. The Indian economy has been rapidly moving
into capitalistic lines and hence, its time that the labour laws take an objective approach.

Conclusion

The paper argued whether the labour laws in India should be made flexible and what are the
drawbacks of a rigid labour law. It proposed a flexible labour policy with social security to the
labourers. A major reason for the high GDP growth in India has been credited to cheap labour in
India. Undeniably, India has huge labour force waiting to be tapped. India represents a growing
share of world GDP along with other developing countries like China and Brazil. We have
become more open to international trade and investment, thus creating new growth opportunities.
It is therefore crucial that India maintains a sustainable growth path, which depends to some
extent on well-functioning labour markets based on sound and efficient labour laws favourable to
the employers and employees both unlike the existing law which is more biased towards the
labourers.

It is lastly submitted that laws have to evolve with the society and must in all circumstance cater
to the societal needs. Thus, the change in the Indian economy over the last two decades that is
the transformation from a closed economy to a liberalized economy must be accompanied by the
change in labour laws, laws that are in sync with the needs and necessities of the time.

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