A

PROJECT

ON

“RETRENCHMENT IN ORGANIZATIONS”

In partial fulfillment of the requirements for Academic Project for the award of the degree of

MASTER OF Laws

By:

DECLARATION
This project report entitled “Retrenchment in the organizations” has been submitted to Gujarat
Technological University, Ahmedabad, in partial fulfillment for the award of degree of Master of
Business Administration. We, the undersigned hereby declare that this report has been

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completed by us under the guidance of Prof. Swati Patel (Faculty Member, Shri Jairambhai Patel
Institute of Business Management & Computer Applications, Gandhinagar).

The report is entirely the result of our own efforts and has not been submitted either in part or
whole to any other institute or university for any degree.

Names of the Student with Signature:

Date:

Place:

PREFACE
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 “True learning is borne out of experiences and observation”

Theoretical study gives us the conceptual clarity while practical study states about it and
how it can be performed in real life. Theoretical study does give us the knowledge about
corporate world, but without the practical exposure one cannot be total in the same field.

Learning and practical exposure are the two crucial and ever-helping aspects in all
phases. Practically is of sublime importance for managing performance. An army cannot got to
war field without adequate and proper training. Similarly, for survival in management you must
have practical insight balanced with theoretical background.

So, practical training and research work is included as a part of MBA’s curriculum in
which student has to undertake practical exposure of the subject.

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 INDEX

1. Introduction……………………………………………………………………………….6

2. Retrenchment according to the Industrial Disputes Act……………….8

3. Live case of retrenchment………………………………………………………….15

4. Some landmark case laws…………………………………………………………..17

5. Conclusion………………………………………………………………………………….18

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 6. Bibliography……………………………………………………………………………….19

INTRODUCTION
Retrenchment is nothing but a dismissal for operational reasons, which can include a variety of
reasons such as the financial decline of a business, an employer deciding to increase profits of
his business or a part thereof, the introduction of new technology that results in a decline in
positions or structural changes such as the transfer of a part of the business of the employer.
Retrenchment is also known as a "no fault dismissal". Due to the fact that it is in essence still a
dismissal, the requirement of "fair labour practices" still applies.

Fair labour practices are the constitutional right of every employee. The Constitution, by way of
section 23(1) (a), specifically declares that every person has a fundamental right to fair labour
practices. In the context of retrenchment, expression is given to this in the Labour Relations Act
by affording an employee the right not to be unfairly dismissed and an employer the right to

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dismiss an employee for a fair reason based on the employer's operational requirements and in
accordance with a fair procedure.

The Labour Relations Act 66 of 1995 (LRA) codifies the requirements for retrenchments by way
of section 189 and 189A. Employers cannot achieve a fair retrenchment process without
following the requirements of the LRA as it underlines the constitutional right to fairness.
Section 189 therefore regulates the exercise of the competing fundamental rights of an
employee not to be unfairly dismissed and that of an employer to dismiss for operational
reasons.

Because retrenchment is a "no fault" dismissal and because of its human cost, the LRA places
particular obligations on an employer, most of which are directed toward ensuring that all
possible alternatives to dismissal are explored and that the employees to be dismissed are
treated fairly.

Section 189 and 189A places a high value on consultations, in fact, if the employer fails to
consult with employees on retrenchment, it will be an unfair retrenchment and the employer
will face re-instatement or a compensation order. The purpose of consultation is to enable the
parties, in the form of a joint problem-solving exercise, to strive for consensus, if that is
possible.

It is required of the parties to attempt to reach consensus on, amongst other things,
appropriate measures to avoid dismissals. In order for this to be effective, the consultation
process must commence as soon as a reduction of the workforce, through retrenchments or
redundancies, is contemplated by the employer, so that possible alternatives can be explored.
The employer should, in all good faith, keep an open mind throughout and seriously consider
alternative proposals put forward. If this is not done and the employer made the decision
before the process commenced, it will render the retrenchment substantively unfair

The list of measures to avoid dismissals is vast and dependent on the employer and the industry
the employer is operating in. Examples thereof are:

o measures to increase productivity;·

o short time;·

o rationalizing costs and expenditure;·

o increase or decrease in shifts and length of shifts;·

o decreasing the number of contractors or casual labourers;·

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 o using employees to perform the functions performed by contractors or casual
labourers·

o outsourcing a function to its own staff after the employees have formed themselves into
a company;

o skills development to enable employees to move into different positions;·

o stopping overtime or Sunday work·

o bumping·

o reducing wages (by agreement)·

o early retirement offers or schemes·

o moratoriums on hiring new employees·

o gradual reduction of workforce by way of natural turnover·

o extended unpaid leave or temporary lay-off

If one or more employees are to be selected for dismissal from a number of employees, the LRA
requires that the criteria for their selection must be either agreed with the consulting parties
or, if no criteria have been agreed, be fair and objective criteria. An example of fair selection
criteria is "LIFO", which means that the last employee in, therefore the one with the least
amount of service, is the first employee to be chosen for retrenchment. This criterion is based
on years of service and not on any subjective means such as the performance or disciplinary
record of the employee, which will be unfair.

Employees dismissed for reasons based on the employer's operational requirements are
entitled to severance pay of at least one week's remuneration for each completed year of
continuous service with the employer, unless the employer is exempted from paying severance.

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 RETRENCHMENT ACCORDING TO THE ID ACT
 Definition:

There are a host of legal provisions which govern the practice of retrenchment. Section 2 (oo)
of the Industrial Disputes Act, 1947 defines Retrenchment as –

“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

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 (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

(bb)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

(c)termination of the service of a workman on the ground of continued ill-health.

The definition of retrenchment was not included in the Industrial Disputes Act, 1947 in its
original form. It was inserted by Amendment to the Act in 1953. Thus the Industrial Disputes A
ct, 1947 provides for certain conditions in which the termination of employment would not be
considered as retrenchment. It is intersting to note here that the provision (bb) to Section 2(oo)
was inserted later through the Amendment Act 49 of 1984. Section 2(oo)(bb) provides that
termination of employment on non - renewal of employment agreement upon its expiry shalll
not be considered as ‘retrenchment’. Before this provision was added to the Act, the Courts
were of the opinion that non - renewal of such contracts of employment would constitute
retrenchment for the purpose of this Act. This opinion was expressed by the Supreme Court in
Hindustan Aluminum Corporation v. State of Orissa. It was later realized that the judgment was
a bad judgment and the provision (bb) was subsequently added to the section.

 Conditions precedent to retrenchment of workmen:

Section 25F provides the conditions precedent to retrenchment. According to this section the
employer must satisfy the following conditions before retrenching an employee employed for a
period of continuous period of not less than one year –

(a) the workman has been given one months notice in writing indicating the reasons for
retrenchment and the period of notice has expired, or the workman has been paid in
lieu of such notice, wages for the period of the notice:

(b) the workman has been paid, at the time of retrenchment, compensation which shall
be equivalent to fifteen days average pay [for every completed year of continuous
service] or any part thereof in excess of six months;and

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 (c) notice in the prescribed manner is served on the appropriate Government [or such
authority as may be specified by the appropriate Government by notification in the
Official Gazette].

Calculation of average pay is done by dividing the last drawn monthly salary by 25 and then
multiplying the dividend by 15 for every completed year of continuous work.

 Procedure for calculation of retrenchment compensation

While effecting retrenchment of the workmen, it is obligatory on the part of the employer to
pay retrenchment compensation at the rate of 15 days wages (for every completed yaer) to be
calculated at the last drawn salary of an employee. The calculation of compenstation is to be
based from the date of appointment and in case an employee has completed 240 days, he will
be entitled to 15 days retrenchment compensation besides one month’s noice or salary in lieu
thereof as if he has worked for one year. 240 days includes Sundays or off days as well as
festival or national holidays.

In case an employee has worked for more than one year, the procedure is that in case the
subsequent period of one year is less than six months then it will be counted as one year for
calculation of compenstation. While making calculations the period of notice is also to be taken
into consideration.

 Procedure of retrenchment
Section 25G lays down the procedure of retrenchment. Where any workman in an industrial
establishment, who is a citizen of India, is to be retrenched and he belongs to a particular
category of workmen in that establishment, in the absence of any agreement between the
employer and the workman in this behalf, the employer shall ordinarily retrench the workman
who was the last person to be employed in that category, unless for reasons to be recorded the
employer retrenches any other workman. The employer is also required to maintain a seniority
list of the workmen. The system of last in first out is to be followed in retrenching workmen.

 Consultation Procedure

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When an employer considers retrenching workers because of operational needs, he must, in
writing, consult –

-the people mentioned in the collective agreement; or

-workplace forum; and

-the registered trade union of affected workers; or

-if there is no trade union, the workers or their representatives.

The employer and the consulting parties must agree on: ways of -

-avoiding or minimising retrenchments;

-changing the timing of retrenchments;

-reducing the effects of retrenchment;

-choosing which workers to retrench; and on

-severance pay.

Employers must give the consulting party written notice and information on:

-reasons for an intended retrenchment;

-why a specific retrenchment method was used;-

-how many workers are employed;

-how many workers are to be retrenched;

-how many workers were retrenched in the previous 12 months;

-when retrenchments will take place;

-what assistance the employer intends to give retrenched workers; and

-possible re-employment.

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An employer must allow a consulting party to respond to a retrenchment notice. If the
employer disagrees with the response, he must state why. If the consulting party responds in
writing, the employer must respond in writing.

Organisations with More Than 50 Workers

When an organisation has more than 50 workers, the minimum number of workers that may be
retrenched is –

Minimum Number of Workers Considered for Retrenchment

-50 – 200: 10

-200 – 300: 20

-300 – 400: 30

-400 – 500: 40

-500 or more: 50

If more than 50 workers are to be retrenched, then that number must be added to the number
of workers retrenched in the previous 12 months. The total number must be equal to or more
than the relevant number shown in the table above.

Disputes

If a dispute arises as a result of retrenchments,

-workers may strike;

-an employer may lock workers out; and

-the parties may agree to change the consultation or facilitation periods.

Facilitation

The Commission for Conciliation, Mediation and Arbitration (CCMA) must appoint a facilitator
15 days after a retrenchment notice if requested by –

-the employer; or

-most of the retrenched workers.

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If a facilitator is appointed, and 60 days have elapsed since the date of the retrenchment notice
-

-the employer may give notice to end the job contracts (see the Basic Guide to Termination);

-the registered trade union or the workers may give 48 hours’ (or 7 days’ for public servants)
notice of a strike; or

-refer the dispute to the Labour Court.

If an employer gives notice before the above periods have elapsed, workers may give notice to
strike.

If a facilitator is not appointed –

-a party may not refer a dispute to a council or the CCMA unless 30 days have elapsed from the
date of giving notice.

-and once 48 hours or 7 days (for public servants) have elapsed,

-the employer may give notice of retrenchment;

-workers may give notice of a strike; or

-workers may refer the dispute to the Labour Court.

If an employer gives notice of retrenchment before the above periods have elapsed, workers
may give notice to strike.

Referral to Labour Court

If an employer’s retrenchment procedure is unfair, a consulting party may apply to the Labour
Court, within 30 days after the employer’s notice, to order the employer to –

-comply with a fair procedure;

-prevent him from retrenching a worker; or

-re-employ a worker; or
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-award compensation to a worker.

If a party has already referred a retrenchment dispute to the Labour Court, it may not give
notice to strike.

If a party has already given notice to strike, that party may not refer the dispute to the Labour
Court.

Secondary Strikes

14 days’ written notice must be given for holding secondary strikes. During this period the
dispute must be referred to the CCMA. After this period has elapsed, the workers have the
right to strike.

 Section 25H: Re-employment of retrenched workmen

Where any workmen are retrenched, and the employer purposes to take into his employment
any persons, he shall, in such manner as may be prescribed, give an opportunity to the
retrenched workmen who are citizens of India to offer themselves for re-employment, and such
retrenched workmen who offer themselves for re-employment shall have preference over
other persons.

Section 25H was inserted in the Industrial Disputes Act by the Amendment Act of 1953. It
prescribes that if the employer proposes to employ new hand, then he has to provide an
opportunity to the retrenched workman and preference is to be given to such workman over
other person. This provision provides the benefit only to the retrenched workman. If the service
of a workman is terminated otherwise than on retrenchment, he would not be entitled to re-
employment under this section. Section 25H is to be looked along with S. 25G which provides
that the last employed person will be retrenched first and the principle, ‘last come first go’
enunciated therein, is having its application to a particular category of workman. Therefore, the
retrenched workman would be re-appointed in the same category.

 Section 25Q: Penalty for retrenchment without previous permission:

Any employer who contravenes the provisions of section 25M or of section 25N shall be
punishable with imprisonment for a term which may extend to one month, or with fine which
may extend to one thousand rupees, or with both.

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 LIVE CASE OF RETRENCHMENT
Validity of the retrenchment challenged under Chapter 5B of the ID Act.

As on 28th April, 2004, 85 regular workmen were employed in the factory. 48 of them were
retrenched basis LIFO on 29th April, 2004. Other temporaries and casuals were not considered
in this calculation of total workmen under Chapter 5B. This is the point of contention from the
union and they want retrenchment to be deemed illegal.

Conciliation proceedings ensued and a meeting was held with DLC. Our lawyer, covered up the
issue. But the union was not satisfied and conciliation proceedings failed. Hence the matter was
referred to the labour court. This was the point where 48 were involved. (May 2004)

Re-employment was offered on temperory basis for an order Dec 2005 @ 75% of their last
drawn wages. Agreement signed with union in Form H. After the order was fore closed by the
customer on 10th March, 2006, they were asked to stop reporting to work. They refused to
leave the premises and Gherao and the plant had to be shut down for 10 days. Temp lock out
declared. Retrenched people approached the ALC and were directed to the DLC. DLC asked
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both parties to pursue the proceeding in the court as the matter was still pending before the
labour court. Same DLC, unofficially, had a meeting with Union and Management and helped
come up with the VRS scheme. DLC acted in good faith on his personal visit and VRS scheme
was outcome of oral negotiation with the Union, Management and the DLC. The worked out
scheme was 45 days wages for every year of service and one time payment of Rs. 1000. 14 out
of the 48 people opted for this scheme in July 2006. Later on small batches came in to avail the
VRS scheme and finally 22 people opted for the same as on March 2007

The remaining 26 people were again called back for re-employment on temporary basis for
another order on 11th July, 2007. They refused to accept the re-employment offer demanding
permanent employment as against the temporary employment provided for the particular
order.

26 people were still contesting the cases in the court. In March 2008, during negotiation with
the union, one time payment was increased to Rs. 15000. This time 16 people availed the
scheme on 31st March, 2008

Finally, 10 remained. They are still fighting the case. The case is in cross-examination stage.

Negotiation efforts at right intervals were carried out. First through the Union leaders and then
on a one-on-one basis with the HR Manager. It has been amply communicated to them about
the condition of the company and how it is in their best interest to take the settlement. The
negotiations were in a dead lock.

During end of July, another scheme was worked out for the remaining 10 where they were
offered approximately Rs. 40,000/- as one time payment. This worked out to be roughly 50%
higher than the total settlement amount previously offered. Extensive interactions and
negotiation efforts have not been successful. They are demanding a very high compensation of
Rs. 3-5 Lacs or re-instatement.

This a case that we are currently contesting in the court. Kindly give your inputs.

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 SOME LANDMARK CASE LAWS
The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and othershad restricted
the defintion of ‘Retrenchment’ under S.2(oo)(bb) to occur only when there is a ‘discharge of
excess labor’ by the employer. Later the Supreme Court in State Bank of India v. N. Sundara
Money, Punjab Land Development and Reclamation Corporation Ltd., Chandigarh v. Presiding
Officer, Labour Court, Chandigarh and subsequent decisions rejected the narrow interpretation
adopted by the Court in the earlier decision and held that any retrenchment, as defined in
Section 2(oo), means 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 and those
expressly excluded by Clauses (a), (b) and (c) of the definition. In view of these decisions, it
cannot be said that retrenchment means termination by the employer of the service of a
workman as surplus labor.

The Supreme Court excluded closure from the scope of retrenchment in Hariprasad Shivshankar
Shukla vs. A.D. Divelkar. Further, in the State Bank of India vs. Sundara Money, the Supreme
Court adopted the literal meaning of retrenchment, which is exhaustive and comprehensive
and held that the expression "for any reason whatsoever" was very wide and admitted almost

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no exceptions. So, retrenchment means termination of a worker's services for any reason
whatsoever, other than those specified in Section 2(oo).

The Bombay High Court, in State Bank of India v. Sundaramony held that wherein the court held
that an analysis of the definition reveals four essential ingredients, namely

1) There must be a termination of the service of a workman.

2) The termination must be by the employer,

3) For any reason whatsoever, and

4) Otherwise than as by way of punishment inflicted by way of disciplinary action.

CONCLUSION
Globalization induces labour market flexibility which India is yet to attain due to its unyielding
labour law system. It has started making attempts to achieve full employment of all resources
and optimal social welfare but several issues are left unanswered, including retrenchment.

Ordinarily, retrenchment is discharge of surplus labour by the employer. According to Section

2(oo) of the Industrial Disputes Act, 1947 (IDA), retrenchment is the termination of service of a
worker "for any reason whatsoever", but excludes termination by way of punishment inflicted
pursuant to disciplinary action, voluntary retirement, retirement on reaching the age of
superannuation if the contract of employment contained such stipulation, non-renewal of the
contract of employment, and continued ill health.

Retrenchment may be due to inevitable reasons including rationalization or installation of new

labour-saving machinery. An employer has a right to organize his business in any lawful manner
he considers best and courts cannot question its propriety. If re-organization results in surplus

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employees, no employer is expected to carry their burden. There is consensus of judicial
opinion in deciding retrenchment on the facts and circumstances of each case.

Courts have decided that termination of services due to loss of confidence in an employee,
inefficiency or misconduct does not amount to retrenchment. Termination for unauthorized
absence from duty, discontinuance of service of casual, daily employees, invalid initial
appointment, compulsory retirement, and closure or transfer of business have been held to be
retrenchment.

Indian employers have responded to the restrictive retrenchment laws in several ways including
the greater use of contract, temporary and/or casual labour, the use of golden handshakes, and
setting up production in states where labour is not organized. The government is pursuing
privatization and disinvestment. Any anomaly in retrenchment laws, which address the basic
functioning of companies, needs the immediate attention of lawmakers

BIBLIOGRAPHY
http://www.citehr.com/200387-retrenchment-case-study.html

http://ezinearticles.com/?Effective-Ways-to-Overcome-Retrenchment&id=3822278

http://www.legalservicesindia.com/article/article/retrenchment-under-industrial-dispute-act-
1947-773-1.html

https://digitalcollections.anu.edu.au/bitstream/1885/41932/1/dp_58.html

http://en.wikipedia.org/wiki/Retrenchment

Labour and Industrial Laws by P.K. Padhi (2nd edition)

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