Laws Relating To Retrenchment

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This Article is written by DEEPANJALI TIWARI,  3rd year law student pursuing B.A. LLB, from Asian Law College, Noida, Uttar Pradesh affiliated with Chaudhary Charan Singh University.


When the business of industry, firm or any organization falls low owing to a change like laborers, retrenchment becomes a permanent means of decreasing surplus employees. The term retrenchment can be referred to as the permanent termination of the employment of the employee or a worker by his or her employer for any reason or circumstance, but other than disciplinary action.

In India, as per Section 3(1) of the Industrial Disputes Act of 1947,  industries with more than a hundred employees, these industries must obtain government approval before making any redundancies or retrenchments, and employees are entitled to three months notice of any such action.

Meaning Of Retrenchment

The term “retrenchment is defined in Section 2 (ooo) of the Act as follows: 

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 action and it does not include the following situations:

  • When a worker voluntarily retires.
  • When a worker retires upon reaching the age of superannuation, provided that the employment contract includes such a provision.
  • When a worker’s service is terminated because the employment contract expires and is not renewed or if the contract contains a provision for termination in such cases.
  • When a worker’s service is terminated due to ongoing health issues.”

Onus to Proof

In Batala Co-operative Sugar Mills Ltd. vs. Sowaran Singh, AIR 2006, it has been held by the Supreme Court that the onus of proof that the workmen worked for 240 days in 12 calendar months lies on the workman and not on the employer. Thus the direction to reinstate the workman for violation of Section 25F of the Industrial Dispute Act was set aside. The onus to prove the justification of retrenchment lies on the employer and it is for the workman to prove that he was unfairly retrenched.

Essentials Of Retrenchment 

The Bombay High Court, in the case of State Bank of India v. Sundaramony held that 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.

Scope Of Retrenchment 

In State Bank of India v. N. Sundara Money, it has been held that to retrench means to cut down. One cannot retrench without trenching or cutting. Dictionaries are not to be regarded as dictators of statutory construction where the benign mood of law and more emphatically the definition clause furnishes a different denotation. ‘Retrenchment’ is therefore no longer terra incognita but an area covered by an expansive definition. It means ‘to end, conclude, cease’. An employer has no doubt the right to terminate the services of a workman. His power to retrench presents no difficulty for any reason whatsoever as mentioned in Section 2(oo) of the Act, but it must be exercised bona fide.

In Basi Light Railway Co. Ltd. v. K.N. Togekar, the definition of the word ‘Retrenchment’ has also been given a wide meaning by the Supreme Court. Sub clauses (a), (b) and (c) of Section 2(oo) of the Act apply to a running or continuing business only, but whether inserted by way of abundant caution or on account of excessive anxiety for clarity, they merely exclude certain categories of termination of service from the ambit of the definition. They do not necessarily show what is to be included within the definition. 

Retrenchment Reasons in the Eyes of the Law

In labor law, there are specific reasons that may justify retrenchment or workforce reduction. These reasons are typically governed by employment laws and regulations in a given jurisdiction. While the specific legal provisions may vary from one country to another, common reasons for retrenchment in labor law include:

Economic Necessity: Economic difficulties, such as financial losses, declining revenue, or a need to reduce costs to remain competitive, are often valid reasons for retrenchment. Employers may need to downsize their workforce to sustain their business operations.

Technological Advancements: Advancements in technology can make certain job roles obsolete. In such cases, employers may need to retrench employees whose skills are no longer required due to automation or technological changes.

Restructuring and Reorganization: When organizations undergo significant restructuring, mergers, acquisitions, or changes in business strategies, retrenchment may be necessary to align the workforce with the new organizational goals and structure.

Reduction in Work Volume: A decrease in the volume of work, orders, or business activity can lead to retrenchment as employers may not require the same level of staffing.

Plant Closure: In some cases, the closure of a plant or facility may necessitate the retrenchment of employees working at that location. This is often due to financial or strategic reasons.

Business Closure: When a business is no longer viable and is being shut down, retrenchment is often the outcome. Employers may need to terminate employees due to the closure of the business.

Loss of Contracts or Clients: If an organization loses significant contracts, clients, or customers, it may lead to a reduction in revenue and necessitate workforce retrenchment.

Redundancy: The term “redundancy” refers to situations where an employee’s job role is no longer required due to a restructuring, change in processes, or the cessation of a specific function. Redundancy can be a valid reason for retrenchment.

Exclusion from Retrenchment

Certain classes of termination of services are not included within the meaning of retrenchment for the purpose of this Act. These are discussed below:

Voluntary retirement of the workman: It means the conditional retirement under the rules. The primary difference between voluntary retirement and retrenchment is that in the former the workman sets the ball in the court of the employer, and in the latter case the reverse course is found. Similarly, voluntary retirement is an act of the workman, while dismissal or removal from service is an act of the employer. 

No Retrenchment In Case Of Termination: The simple termination of service cannot be deemed to be retrenchment in view of the definition of Section 2(oo) of the Act. 

Discharge due to ill health is not retrenchment: The reason is obvious. One whose service had been terminated, on ground of physical unfitness or ill health would not be offered re-employment. It was because his physical condition prevented him from carrying out the work which he had been given that he had to leave and no question would arise to ask such a person to take up the work again 

Transfer Into Subsidiary Company Is Not Retrenchment: An employee transferred to a subsidiary company with his consent was paid retrenchment compensation by the new company on his termination. Refusal by the principal company to re-employ does not amount to retrenchment. 

Closure Of Business: When there was a termination of service on bona fide closure or transfer of business, it cannot be said to be retrenchment within the meaning of expression in Section 25F of the Act.

Termination Due To Disciplinary Proceedings: In the case of  State Bank of India v. Workmen of State Bank of India, AIR 1990, It was held that the termination of service of the bank employee under the Sastry Award as a result of the disciplinary proceedings is not retrenchment. 

Termination After Retirement Not Retrenchment: An employee after his retirement on superannuation was given a fresh appointment for a term. Termination of his services on expiry of that period does not amount to retrenchment. Such employment cannot be regarded as employment contemplated under Section 2(oo) of the Act. 

Conditions Precedent To Retrenchment 

Section 25F defines all the circumstances and conditions for retrenchment of an employee. However, these requirements apply if the employee has worked for at least one year without interruption at the time of dismissal. The requirements for compliance with valid reductions are:

  • 1 The employer must notify the employee in writing the reasons for the retrenchment before the end of the month. A dismissal shall not take effect until the worker is notified of the dismissal.
  • If the employer fails to notify the employee, the employee is responsible for paying compensation for this action
  • 2 The worker must be paid remuneration equal to 15 days’ annual wages for his one year of continuous employment in the industry, or any portion thereof exceeding her six months.
  • 3 Relevant notices will be served on the relevant government or agency in the manner specified in the Official Gazette
  • 4 Employers must apply for a retrenchment permit to the government and relevant authorities in the prescribed manner and present a copy of this permit to the employee as published in the Official Gazette.
  • 5  If an employer seeks approval of a retrenchment procedure, the government will conduct an investigation into the procedure and, after giving the employer a reasonable opportunity to be heard, will grant or deny approval of the procedure in its discretion.  Corresponding orders will be submitted to employers and employees.
  • 6 Governments must follow the principles of natural justice and conduct investigations with transparency and impartiality. The government must notify the employer of the order within 60 days after the employer applies for the permit to the government or relevant authorities. An order is considered complete if it is not placed within 60 days from the expiration date.
  • 7 Any order issued by any government or particular authority, whether approved or denied, shall be final and binding on all parties and shall be in force for one year from the date it is sent to the parties.
  • 8 If an employer challenges a government order, it will be referred to the court for a decision, and the court must decide on the matter within 30 days.
  • 9 If an application for authorization to retrenchment is denied by the government, it is considered illegal.

Procedure For 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.

The principle of ‘FIRST COME, LAST GO’ & ‘LAST COME, FIRST GO’ can only be applied if the worker has been classified under different categories of the workmen employed in any industry or establishment. The principle states that in the case of retrenchment, the employer has the power to decide which of the employees are to be retrenched. The rule acts as a healthy safeguard if there is any kind of discrimination against the worker in case of retrenchment. The principle will not be applicable if:

  • If there is any type of agreement between the employer and the employee.
  • For any other reason, the employer considers necessary. 


It’s important to note that labor laws and regulations governing retrenchment can vary widely from one jurisdiction to another. In many cases, labor laws require employers to follow specific procedures when conducting retrenchment, such as providing advance notice to affected employees, offering severance packages, and consulting with labor unions or employee representatives. Additionally, anti-discrimination and anti-retaliation laws protect employees during the retrenchment process.

Employers must always ensure that any retrenchment is conducted in compliance with relevant labor laws, is well-documented, and is carried out in a fair and non-discriminatory manner. Failure to do so can result in legal consequences and damage to the organization’s reputation.

Reference Links

  1. Textbook on Labour & Industrial Law, By Dr. H.K. Saharay.