Retrenchment of IT employees: an in-depth Study

Retrenchment is a common practice in corporate sectors due to various economic constraints and corporate tactics. This means that corporate employees under IT sectors often get laid off by companies. This article discusses the same and the laws that concern it. For eg, what exactly constitutes a lay off. The article, via landmark case laws also talks about various measures and procedures to be followed by companies.

In the 21st century, Globalization induces labor market flexibility which India is yet to attain due to its unyielding labor 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 of IT employees. So, let’s discuss this.

What is Retrenchment?

Ordinarily, retrenchment is the discharge of surplus labour by the employer. According to Black’s Law Dictionary, Retrenchment means the layoff of employees that are forced by the company’s economic position. Section 2 (oo) of the Industrial Disputes Act, 1947 defines Retrenchment as

  1. ” 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 voluntary retirement of the workman, or
  2. retirement of the workman on reaching the age of superannuating if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or
  3. 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; or
  4. termination of the service of a workman on the ground of continued ill-health;

Some landmark case laws

The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and others had restricted the definition 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 the retrenchment of IT employees means the termination by the employer of the service of a workman as surplus labor.

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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 no exceptions. So, retrenchment means termination of a worker’s services for any reason whatsoever, other than those specified in Section 2(oo).[1]

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

Apart from the issue of definition, what is critical is that an employer must carry out retrenchment (other than dismissal on grounds of misconduct), as per the requirements of section 25F of the ID Act. This provision provides for the employer to fulfill certain conditions before retrenching any employee. It states that no workman employed in any industry that has been in continuous service for not less than one year under an employer shall be retrenched by that employer until-

  1. the workman has been given one-month’ s 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:
  2. 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
  3. 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.
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Every State also has a legislation called The Shops and Establishments Act which contains provisions for notice for termination of employment either with or without cause. Some States simply do not allow terminations except on grounds of proven misconduct or indiscipline. The notice requirements under these legislations are also mandatory and need to be carefully studied in each case. Notice requirements and conditions of this legislation must be strictly observed lest breach of the prescribed procedure leads to the termination being adjudged as invalid. Employee terminations are the most litigated battlefields for employers.[2]

The IT sector is not exempted from labor laws as such and so is the retrenchment of IT employees. However Karnataka Government(where most of the IT Industries are situated renewed the blanket cover to IT Industries for a period of five years in 2013 from the provisions of The Industrial Employment (Standing Orders) Act 1946. The act requires employers to define and inform workers on the terms and conditions of employment on their premises. Such an exemption is not available anywhere else in India. Also since labor laws apply to the category of establishment, The Factories Act is not applicable.

Apart from this, the central government has in order to boost Startups have exempted them from 9 labour laws for a period of 3 years. These laws are:

  1. Industrial Disputes Act, 1947
  2. Trade Unions Act, 1926
  3. Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act,1996
  4. Industrial Employment (Standing Orders) Act, 1946.
  5. Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979,
  6. Payment of Gratuity Act, 1972,
  7. Contract Labour (Regulation and Abolition) Act, 1970,
  8. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and,
  9. Employees’ State Insurance Act, 1948.[3]

Also read The General Manager, Southern Railway v. Rangachari


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

[2]http://www.mondaq.com/india/x/443750/employee+rights+labour+relations/Mandatory+Requirements+For+Retrenchment+Under+Employment+Laws+In+India#linkedincompany

[3] https://www.quora.com/Why-is-the-IT-sector-exempted-from-the-application-of-labor-laws