Dinesh Divekar
Business Mentor, Consultant And Trainer
Industrial Relations And Labour Laws

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Hello, Request you to please guide me if it is recommended or is it a legal requirement to pay retrenchment compensation to nonperforming employees who after failing the performance improvement plan decide to move out of the organization? Also, please suggest the best approach or legal recommendations towards helping the organization and the nonperforming employee in the event of the employee failing the performance improvement plan.
If you have documented his performance or non performance and he was aware that his performance was not upto the expectations and he was given opportunities to improve, you can terminate him without paying any retrenchment compensation. In order to make the termination legally safe for you, you should document all and only thing to be noted is that you should not terminate an employee for non performance without giving him an opportunity to improve.
Dear Manisha,
How did you measure the performance of the employee, what was the frequency, who measured it and who validated it? Was the process transparent? Was the employee communicated at the beginning of the performance cycle on his KRAs? If he failed to attain the KRAs then did you issue him the warning letter? In the warning letter, did you write that if the performance is not improved then his services are liable for the termination?
If in spite of the issue of the warning letter, if the employee has failed to improve then you may terminate his services but on the safer side, better to conduct the domestic enquiry. The domestic enquiry should be free and fair and should not be vitiated in any way.
Lastly, apprise yourself about the legal terms like "retrenchment". Cases of separation arising out of poor performance are different from retrenchment.
Dinesh Divekar

Great. Thank you very much. This is helpful. One last clarification around this please - is this a legal recommendation for not paying retrenchment compensation to nonperforming employees (provided all related documentation in place) or is it a common practice across organizations. Could you please refer the applicable Labor Law around this topic so it helps me understand in detail. Thank you very much for responding to my initial query.
Thank you Mr. Dinesh for sharing your inputs. I understand from your post that if employee is given adequate chance we need not pay severance pay (I understand from your post that retrenchment compensation is not right word to use in this context). Thank you for highlighting Domestic Enquiry process in this context. I look forward to further guidance on my follow up queries please posted right before this one.
Thank you.

Dear Manisha,
Removal of an employee on account of poor performance is different from the removal on account of some misconduct. Even when an employee is removed on account of misconduct, he/she is eligible to get the salary till his/her last working day. There have to be genuine grounds for the forfeiture of the salaries and wages.
In the case at hand, you need to pay him salaries and wages till his last working day. Short payment, by any means, is illegal.
Dinesh Divekar

Thank you Mr. Dinesh for sharing additional inputs on this. I am also of the same view of not making any short payments to nonperformance cases. If you could please guide me to the applicable labor law related to handling exits of nonperformance cases that will be of great help.

The term Retrenchment as defined in the ID Act means termination of service of a workman for any reason whatsoever, otherwise than as a 'punishment inflicted by way of disciplinary action'. It specifically excludes termination of employment by resignation by workman himself, retirement on reaching the age of superannuation, termination as a result of non- renewal of contract of employment or termination on the ground of continued ill- health. The Act does not specifically deals with non performance as a reason for termination.
The Supreme Court has observed that misconduct on the basis of which a disciplinary action of termination from service is taken against a worker shall include any act on the part of the worker which is against the code of conduct of the establishment. Obviously, an employee is expected to perform and give results. If he does not give result or act differently, it should come under negligence or dereliction of duty. The courts will not direct the employer to keep a non performing worker. As such if you have evidences to show that the worker was given enough opportunities to improve, there is nothing wrong in terminating without paying retrenchment compensation.
However, in some other judgement,like Karnataka State Road Transport Corporation v. M. Boraiah and another, Punjab Land Development and Reclamation Corporation v. The Presiding Officer, Labour Court, Chandigarh etc the observation by the Court was different. The Court expanded the meaning of "for any reason whatsoever"in the definition of retrenchment as interpreted it as any reason other than those specifically mentioned,ie, termination on the ground of continued ill health, non renewal of contract or dismissal on the ground of misconduct.
Now we have to decide what all will come under misconduct. In my opinion all acts of an employee which deviate from the code of conduct are misconduct. An employee is expected to do a given work and if he does not do that it is dereliction of duty. As such non performance is also a misconduct. Now you have given opportunities and there are evidences to show the deviation from work. What else is required?

Thank you Mr. Madhu for sharing detailed insights. This is indeed very helpful. Also, I am of the view that if organizations pay severance for nonperformance cases (who were given enough opportunities for improvement in a fair manner) it will somehow demean a pay for performance work culture.
Many Thanks!

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