Navigating Mass Layoffs in India: Legal Compliances and Considerations

Shreyika Walia

October 12, 2023

Navigating Mass Layoffs in India: Legal Compliances and Considerations

Mass layoffs have emerged as a strategy for organizations to enforce substantial reductions in the company’s workforce. This strategy is often deployed to navigate economic challenges and restructuring. While mass layoffs are not inherently illegal, the complex actions are subject to a strict legal framework.

The Industrial Disputes Act, of 1947 (“ID Act”) is a key legal framework governing layoffs in India. This legislation outlines the procedures and precautions for workmen as well as employers when going through layoffs, retrenchments, and closures. This framework is binding on companies with a significant workforce promoting employee welfare and fair treatment.

Layoffs under the Industrial Dispute Act

Layoffs occur when the employers are unable, refuse, or fail to provide employment to their workmen temporarily in its industrial establishment due to reasons beyond an employer’s control such as lack of power or raw materials, breakdown of machinery, natural calamities, or any other related reason.

Workmen affected by such layoffs are entitled to receive compensation during the period of layoff. The calculated compensation is equal to 50 (fifty) percent of the total of the basic wages and dearness allowance that would have been payable to such workman had he/she not been laid off. However, as per relevant provisions of the ID Act, there are certain conditions precedent for providing compensation to such workmen including but not limited to the following:

  1. There must be an existing inability, failure, or refusal on the part of the employer to provide employment to the workmen;
  2. The workman’s name should be borne on the muster rolls of the industrial establishment;
  3. The workman should have completed not less than one year of continuous service under the employer.

However, the workman who has been laid off shall not be entitled to receive any compensation in the following cases:

  1. If such workman denies accepting any alternate employment opportunity in the same industrial establishment or another establishment under the same employer subject to further conditions;
  2. If he does not present himself for work at the establishment at the appointed time during the normal working hours at least once a day;
  3. If such laying-off is due to a strike or slowing-down of production on the part of workmen in another part of the establishment.

Notwithstanding anything to the contrary, the accrued compensation due in case of a layoff shall not apply to industrial establishments (i) where less than 50 (fifty) workmen on an average have been employed on each working day in the preceding calendar month; (ii) where seasonal or occasional work is carried out; and (iii) that come under the purview of chapter VB of the ID Act.

Relevant provisions of the Industrial Dispute Act prohibit employers from laying off workmen in industrial establishments with over 100 (hundred) workmen and those that are not seasonal in nature. In such cases, employers must obtain prior permission from relevant authorities stating the reasons for layoff. Employers may lay off only when there is a natural calamity, shortage of power, fire, or explosion. The relevant authorities have the discretion to either grant or refuse such an application for a layoff and make inquiries to ensure the genuineness and adequacy of the reasons for the layoff. In the event the appropriate government does not communicate its order within 60 (sixty) days from the date of such application, the permission shall be deemed to have been granted on the expiry of the mentioned period.

Retrenchment

It is pertinent to note that there lies a significant difference between layoffs and retrenchment. Under the ID Act, retrenchment has been defined as the termination by an employer for any reason, otherwise than as a punishment inflicted by way of a disciplinary action but does not include (i) voluntary retirement; (ii) retirement on reaching the age of superannuation; (iii) termination due to non-renewal of employment contract; or (iv) termination due to continued ill health.

A workman who has been in continuous service for not less than one year under an employer shall not be retrenched unless and until the workman has been given one month’s notice in writing indicating the reasons for retrenchment or the workman has been paid compensation at the time of retrenchment in accordance with the relevant provisions of the ID Act or a notice is service to the appropriate Government in the prescribed manner under the ID Act.

Layoff- Legal or illegal?

Layoffs occur for many reasons beyond an employer’s control however, employers are required to adhere to specific conditions such as notifying the relevant government authorities with proper reasoning and ensuring compliance with the provisions stipulated under the ID Act. In order to avoid legal complications, employers must carefully comply with the provisions of the Industrial Dispute Act that aim to protect the interests of workmen and ensure job security.

The ID Act provides remedies for workmen who have been laid off, retrenched, or wrongfully terminated without following proper procedures which may include compensation or reinstatement.

Layoffs become illegal in cases where employers fail to adhere to the prescribed procedures or fail to provide proper and timely notice to the workmen. Such non-compliance with the provisions can result in legal action including penalties and fines.

Conclusion

Navigating mass layoffs in India requires a deep understanding of the ID Act and its intricate provisions. The ID Act intends to safeguard both employers and workmen, ensuring that the layoffs are conducted transparently and in a fair manner. Employers should consider conditions, compensation, and proper procedures while also being aware of the conditions where layoffs are prohibited and the remedial measures that are available to the employees. Both the employees and workmen can navigate through the layoffs by ensuring compliance and understanding the nuances of the law.

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