Termination of Service, Layoffs and Retrenchments - Legal Viewpoint

This article contemplates and articulates the broad legalities and operational standpoint on Termination of employees from Service, Lay-off, and Retrenchment so as to allow the business management to make well-informed decisions weighing legalities against business objectives. Law provides broad-level directives and guidelines which companies shall have to oblige and comply with, without compromising the interests of the subject matter of the Act (welfare of workforce). Employment and Labour laws are a cumbersomely clumsy, yet comprehensive compendium of labour Acts applicable to deal with the law relating to employment and labour aspects. The common objective of all is to provide safeguard and protection to varied kinds of the workforce, be it an employee, workman, contract employee, etc., working in varied lines of business at different levels from daily wager to contract labour and all kinds of employees in between. Apparently, although different laws govern varied kinds of the workforce, these laws have effectively achieved the main objective of providing protection to a varied workforce. In a basic sense, this law governs the relationship between the employer-employee, covering the workforce in varied spectrums. 

The government has been working to enact uniform labour code to condense varied employment legislations at central and state levels to bring in comprehensive legislation to simplify compliances for employers and thereby achieve better workforce protection.

The definitions of lay-offs and retrenchment are specifically covered under the Industrial Disputes Act, 1947. However, while determining the termination of service of employee it is pertinent to delve into the spectrum of Labour and Employment Acts and regulations which are prevalent in India in order to take statutorily compliant decisions taking into account the business objectives of the company.

INDUSTRIAL DISPUTES ACT, 1947 - (The ID Act)

The law relating to lay-offs and retrenchment is specifically expounded under Chapter VA (Entitled, Layoff and Retrenchment) and Chapter VB (Concerning, Special provisions relating to Lay-Off, Retrenchment, and Closure in Certain Establishment) of the Industrial Disputes Act, 1947. These two chapters in ID Act elaborately delineates provisions relating to Lay-offs and Retrenchment.

It is imperative to understand the applicability of the Act, since the objective, purpose and applicability of every act are different, and so contemplating and analyzing the applicability of relevant law to the issue in hand is the key to arriving at a targeted solution. The ID Act is applicable to a certain class of workmen as defined under Section 2(s) of the Act. “Workman” means

"Any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute”

Further, notably, there are certain exclusions to the definition of a workman, and according to the Act, Workman who is,

(i) in a managerial or administrative capacity; or

(ii) employed in a supervisory capacity, draws wages exceeding ten thousand rupees per mensem, or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature, are express exclusions to the definition.

As such, this Act does not become applicable to the sizable spectrum of employees working in various organizations or companies either due to their nature of work or earning being at a higher scale.

This Act has provided lucid definition to the words “lay-offs” and “retrenchments” under Section 2(kkk) and Section 2(oo) of the Act and the extract thereof is below.

"Lay-Off (with its grammatical variations and cognate expressions) means the failure, refusal or inability of an employer on account of shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery [or natural calamity or for any other connected reason] to give employment to a workman whose name is borne on the muster rolls of his industrial establishment and who has not been retrenched."

Explanation: Every workman whose name is borne on the muster rolls of the industrial establishment and who presents himself for work at the establishment at the time appointed for the purpose during normal working hours on any day and is not given employment by the employer within two hours of his so presenting himself shall be deemed to have been laid-off for that day within the meaning of this clause:

Provided that if the workman, instead of being given employment at the commencement of any shift for any day is asked to present himself for the purpose during the second half of the shift for the day and is given employment then, he shall be deemed to have been laid- off only for one-half of that day 

Provided further that if he is not given any such employment even after so presenting himself, he shall not be deemed to have been laid-off for the second half of the shift for the day and shall be entitled to full basic wages and dearness allowance for that part of the day.

“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-

(a) voluntary retirement of the workman; or

(b) 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 in that behalf; or

(c) termination of the service of the workman as a result of the 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

(d) termination of the service of a workman on the ground of continued ill-health"

The law relating to lay-off and retrenchment is effectively applicable for the workman in industrial establishment, as defined under the Act, and effectively, the scope and validity of these provisions to said workman are categorically restricted to certain persons employed in an industry subjected to exclusions as delineated under the definition of the workman. 

Bare reading of the Act clearly indicates that employees working in companies with salaries higher than the limit applicable for the workman, or who are in managerial or administrative capacity does not fall within the ambit of the scope of the said Act. Given the exclusions, the scope and applicability of the Industrial Disputes Act are limited to the workman as defined under the said Act.

THE SHOPS AND ESTABLISHMENT ACT, 1988 (The SE Act)

The SE Act regulates the law relating to the regulation of employment and conditions of service of workers employed in shops and establishments for matters connected therewith and incidental thereto. This is a state enacted law and every state enacts its own Act. This Act has vast applicability as the words” commercial establishment” and “shops” have wide applicability covering businesses and organizations in varied sectors and industries.

As per the Act, the term Commercial Establishment means “an establishment which carries on any trade, business, profession or any work in connection with or incidental or ancillary to any such trade, business or profession or which is a clerical department of a factory or an industrial undertaking or which is a commercial or trading or banking or insurance establishment and includes an establishment under the management and control of a co-operative society, an establishment of a factory or an industrial undertaking which falls outside the scope of the Factories Act, 1948, (Central Act 63 of 1948), and such other establishment as the Government may, by notification declare to be a commercial establishment for the purposes of this Act but does not include a shop.”. The meaning of word Shops means “any premises where any trade or business is carried on or where services are rendered to customers and includes a shop run by a Co-operative Society, an office, a storeroom, godown, warehouse or workplace, whether in the same premises or otherwise, used in connection with such trade or business and such other establishments as the Government may, by notification, declare to be a shop for the purposes of this Act, but does not include a commercial establishment”. 

It is important to understand the sect of employees who are governed by the said Act, and the definition of Employee under the SE Act means “A person wholly or principally employed in, and in connection with, any establishment and includes an apprentice and any clerical or other staff of a factory or industrial establishment who fall outside the scope of the Factories Act, 1948; (Central Act, 63 of 1948).”, and the said definitions had certain stipulated exclusions. This definition widely encompasses employees in organized as well as unorganized sectors which relatively include higher income groups.

Contextually, understanding the exemptions to the Act is equally important to apply the relevant labour Act righteously to any given situation. Under the said Act, Section 79 deals with exemptions to the applicability of the Act, and the exemptions delineated under the Act are “employees in any establishment in a position of management and having control over the affairs of the establishment, whose average monthly wages exceed sixteen hundred rupees”. 

In “T. Prem Sagar vs The Standard Vacuum Oil Company Madras and Others”, the apex court had laid down certain tests to ascertain whether an employee is in a position of management and extract of the judgment is provided below. 

“So, in order to determine whether a person is in a position of management or not, the factors to be considered are whether the person had the power to operate on the  Bank account, whether he could make payments to third parties and enter into agreements with them on behalf of the employer, whether he was entitled to represent the employer to the world at large in regard to the dealings of the employer with strangers, whether he had the authority to supervise the work of the clerks employed in the establishment, whether he had control and charge of the correspondence, whether he could make commitments on behalf of the employer, whether he could grant leave to the members of the staff and hold disciplinary proceedings against them and whether he had the power to appoint members of the staff or punish them. The salary drawn by an employee may have no significance and may not be material though it may be treated theoretically as a relevant factor.”

The apex court had emphasized the applicability of the tests laid out under the said judgment that they should be considered against the facts of the case, particularly taking into account the nature and scope of work of the employee in the broader perspective of his/her work functions and responsibilities. 

In accordance with provisions of the SE Act, in case any employee falls within the purview of the SE Act, the employer shall have to strictly comply with obligations of serving of notice period or alternatively pay wages in lieu thereof to employees in case employee is terminated of services of employment.   

LAW APPLICABLE FOR MANAGERS AND SUPERVISORS

Considering the limited construct of the word “Workman” under the Industrial Disputes Act, the applicability and enforceability of ID Act are limited (as aforementioned). Now the majority of Multinational Companies, Start-ups, Information Technology and IT-Enabled Services (ITES), and industrial establishments have the manpower of varied spectrum of employees, operating at different levels. No single Act may be applicable to all kinds of manpower, and so it is important to delve into various labour and employment Acts that are prevailing. 

Further, from the preceding analysis, it is evident that lay-off and retrenchment of workman would be dealt as per the provisions of the Industrial Disputes Act, and the Shops and Establishment Act stipulates provisions concerning termination of services of employees. However, the applicability of the Act would differ on a case-to-case basis depending on the nature of the job, income, nature of work, exemptions provided under the Act, etc., and therefore, application of relevant labour and employment Act is critical.

Nevertheless, it is important to note that the Shops and Establishment Act does not apply to the employees in any establishment in a position of management and having control over the affairs of the establishment, whose average monthly wages exceed sixteen hundred rupees. However, employees falling under the purview of the SE Act would be governed with regard to matters of Wages, Conditions for termination of services appeals, suspension, and terminal benefits, under Chapter VIII of the said Act.

Particularly, where Act is applicable to employees Section 47 of the Telangana Shops and Establishment Act stipulates conditions for terminating the services of an employee, payment of service compensation for termination, retirement, resignation, disablement, etc., and payment of subsistence allowance for the period of suspension. Pursuant to the said provision, “no employer shall, without a reasonable cause terminate the service of an employee who has been in his employment continuously for a period of not less than six months without giving such employee at least one month notice in writing or wages in lieu thereof and in respect of an employee who has been in his employment continuously for a period of not less than one year, a service compensation amounting to fifteen days average wages for each year of continuous employment”. While the said provision under the Act is illustrative, the above extract of the Section highlights that serving of notice period is mandatory for termination, retirement, resignation, disablement etc.,. Therefore, the companies will have to consider the mandatory notice period and service compensation guidelines illustrated under the said provision.

It is imperative to also take into account that evidently, hordes of the workforce falls to the exemptions of the Industrial Disputes Act and the Shops and Establishment Act, 1988, as a result of an employee being in the position of management or extensive salary packages, etc., In such a scenario, the governing document will be the Employment Agreement and applicable company policies, as the may be agreed between employer and employee. 

EMPLOYMENT AGREEMENT

The law prescribes the compliance framework and guidelines for companies to adhere to and comply with. However, companies may set-up pragmatic and workable workforce management and operational framework keeping in compliance with the applicable legal framework. In the event of any doubt, apropos the minimum compliance standards and framework, it is prudent to delve into the Acts and legal precedents before taking any decision. 

“Ideally, the Employment Agreement should strike a balance between the applicable legal framework and interests of the company”

The employment agreement is an important document, as it legally binds and governs the relationship between employer and employee. So, if the employment agreement had legally enforceable provisions in line with applicable laws, then the employer's decisions in regard to termination of an employee from service will be governed by the provisions of this Employment Agreement.   

GALVANIZING EFFECT OF COVID-19

In the wake of the outbreak of the novel COVID-19 pandemic and declaration of WHO that it is global health pandemic, the governments across global have taken unprecedented measures and many countries including India have locked down their nations restricting trade and commerce. Indisputability, lockdown measures although it helped nations to minimize the damage or loss of lives to a greater effect, yet this pandemic leads to the onset of economic crisis and market meltdown creating an adverse ripple effect across the global economies. The restrictions imposed by governments resulted in impacting the businesses in all areas ranging from exports/imports, transport, logistics, productivity, investment, etc.,. In other words, the market is in standstill mode with uncertainties leering from all corners of the world. With unpredicted and unprecedented meltdown, it is becoming difficult to ascertain the future. 

The companies started experiencing less revenues and cash crunches due to steep plunge in the business operations, and virtually the businesses are preparing for a market meltdown by taking expeditious remedial steps. The major cost for any company is Human Resources and second, technological advancement. With clampdown of global operations, projects ramp down is underway and eventually, the companies would enter into cost-cutting mode and may result in laying-off and retrenchment of an employee in order to sustain the crisis.

In case companies are taking steps of lay-offs, retrenchment, and termination of services, then it would be prudent of Companies to follow legalities and be compliant so as to avoid the influx of litigation that may arise as a result of illegal termination of employment. Simple measures will mitigate future litigation expenses. 

CONCLUSION

Employer-employee or Employer-workman relationship is regulated by various labour and employment laws. However, in the context of lay-offs, retrenchment, and termination of services of an employee, predominantly, two Acts, namely the Industrial disputes Act and the state relevant Shops and Establishment Act governs and stipulates the law and procedures pertaining thereto. The ID Act governs the relationship between workman-employer and the SE Act of employee-employer. However, there is a class of employees who do not fall within the ambit of both acts due to depending facts such as remuneration, type of employment, nature of work, etc. Therefore, there is no straight forward formula for determining the applicability of provisions and so it is important to delve into applicable law and precedents so as to get a legal solution. 

Companies as a practice enter into an employment agreement and bind their employees to comply with various company policies (such as leave policy, maternity policy, etc.). However, execution of employment agreement does not absolve the obligations of the company to comply with applicable Act and regulations, and it is imperative that employment agreement should be drafted and amended from time-to-time in strict compliance with applicable amending regulations. Employment Agreement which is not in line with applicable law may fall to the ground in the eyes of the law. From a high-level perspective, the employment agreement and company policies applicable to its employees play a vital role in streamlining the management of human resources, without compromising on legalities surrounding thereto. As such, companies should audit the human resources portfolio and accordingly implement an effective employment agreement that works both statutorily and organizationally.  This employment agreement will govern the procedure of lay-offs, retrenchment, and/or termination of services, in case the ID Act and the SE Act are not applicable to particular class of workforce.

Authored by: RAMYA KUNAPAREDDY

Corporate and Litigation Lawyer, Hyderabad

Disclaimer: The content of this article is solely the author’s personal analysis and interpretation. In case you wish to act upon the basis of the content of this article, please seek legal advice. The author shall not be responsible for any loss you may incur as a result of your actions relying upon this content. The content herein is the copyright of the author and is informational and shall not be used for commercial purposes other than for personal reading.