Compliance with Labour & Retrenchment Laws in India - Hire & Fire Policy
Termination of employment needs to be in accordance with the Shops and Establishments Act as applicable to the jurisdiction where the company is situated and the Industrial Disputes Act, 1947 (hereinafter the “ID Act”). The Shops and Establishment Act usually enables the employer to discharge his employee, other than an employee engaged for a specified period or in a leave vacancy, from the service by providing the employee a thirty (30) days notice in advance or such longer period as may be required under the terms of employment or salary in lieu thereof.
The Industrial Dispute Act which is applicable to all industrial and commercial establishments defines employee/Employees and both skilled or unskilled persons may be considered as ‘Employees’.
Termination of service of a Employee (other than for specified reasons as discussed below) is referred to as ‘retrenchment’. In terms of section 2(oo) of the ID Act, retrenchment “means the termination by the employer of the service of a Employee for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include –
(a) voluntary retirement of the Employee; or
(b) retirement of the Employee on reaching the age of superannuation if the contract of employment between the employer and the Employee contains a stipulation in that behalf; or
(bb) termination of the service of the Employee as a result of the non-renewal of the contract of employment between the employer and the Employee concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein;
(c) termination of the service of a Employee on the ground of continued ill-health.”
The legal requirements with respect to termination of services are more onerous once a company employs more than 100 Employees. In terms of ID Act, if an industrial establishment employs more than 100 Employees, a company may not retrench, that is, terminate the services of any Employee who has been in continuous service for not less than one year unless the (i) Employee has been given three (3) months notice in writing indicating the reason for retrenchment and the period of notice, and (ii) the prior permission of the concerned state government has been obtained for the retrenchment (section 25N of the ID Act).
If the permission is not obtained, the retrenchment will be deemed to be illegal from the date on which the notice was given and the Employee will be entitled to all the benefits under law as if no notice had been given to him. From a practical standpoint, obtaining state government’s approval for retrenchment is considered nearly impossible due to the implications of the resulting unemployment. Therefore, companies rarely apply to the state government for permission for retrenchment. Penalty for contravening the aforesaid provisions on retrenchment is imprisonment up to one month or fine which may extend to Rs. 1000, or with both. Assuming that the state government approval is obtained, the services of the Employees can be terminated upon provision of three months’ prior notice and payment of 15 days average pay for each completed year of service in excess of six months.