Understanding Termination vs. Retrenchment: Can You Share Real-Life Examples?

Difference Between Termination of Employment and Retrenchment

Would you please let me know the difference between termination of employment and retrenchment with examples?

Thank you.

Hi, simply speaking, termination of employment means "to put an end to the contract of service for whatsoever reason." While retrenchment is merely an instance of termination, it is related to the concept of a surplus of the workforce. If the company justifiably feels that it has more manpower than required and cannot provide work to all employees, retrenchment can be effected. It has to adhere to the principle of "last come, first go." These are the very broad outlines.

Regards,
Ravindra Pund

All cessations of service are terminations of employment, whereas retrenchment is a term used in the Industrial Disputes Act, 1947 (section 2(oo)) to denote such kinds of termination of employment for any reason other than dismissal or discharge from service as a measure of punishment, retirement on reaching the age of superannuation or voluntary retirement, non-renewal of a fixed-time contract on its expiry, or termination of the service of a workman on the grounds of continued ill-health. Therefore, if an employee's service is terminated on the basis of being surplus, he is said to have been retrenched. Similarly, if the fixed-term contract is not renewed, his employment comes to an end, and that is considered termination of employment. If an employee is found guilty of any misconduct, his services will be 'terminated' and not retrenched, and so forth.

Regards,
Madhu.T.K

Normally, termination is for disciplinary grounds, in which the company will send the person on the same day of the issue of the letter and pay for the notice period. Retrenchment means sending out a person from employment with a notice period service, which may be on completion of work, due to redundancy, slowdown, etc.

In both cases, the expelled person will receive all the financial benefits as per their eligibility and length of service. In the case of resignation, they will not receive notice pay and retrenchment compensation but will be eligible to receive leave encashment (leave pay), gratuity, and bonus.

Regards

Understanding Retrenchment and Termination Under the ID Act

Retrenchment is a statutory termination of service of workmen under the ID Act. I agree with Mr. T. Madhu regarding the gist of section 2 (oo) of the ID Act, which defines the parameters of 'retrenchment'.

Basically, any termination of the workmen other than by way of punishment through disciplinary action and the four exempted situations will be construed as retrenchment, regardless of the nomenclature.

Compensation Entitlement for Retrenched Workmen

What is relevant concerning retrenchment is that a workman retrenched after completing one year (240 days) is entitled to compensation as required under section 25F of the ID Act. In case the employer fails to pay retrenchment compensation as required under section 25F of the Act, the relief for the terminated employee is reinstatement with back wages. Hence, employers and HR Managers should be on guard!

Termination: Applicability and Types

Regarding termination, it is applicable to both workmen covered under the ID Act and any other employee not covered under the ID Act.

Types of Termination

Termination could be of two kinds, namely (i) termination simpliciter and (ii) termination consequent to disciplinary action.

In the case of termination simpliciter, the employer must provide notice pay as per the Terms of Appointment/Service Contract/Company Standing Orders along with statutory benefits such as Gratuity, EPF as applicable, and leave encashment, if any.

If an employee is terminated following disciplinary action, they typically forfeit gratuity. In such a situation, it would be wise for the employer/HR managers to consult legal experts before issuing termination orders, as any terminated employee following disciplinary action is likely to approach courts. Even a procedural mistake in terminating an employee consequent to disciplinary action will have a nullifying effect in court.

Regards,
A. Irudayam
Advocate - High Court - Madras
[Phone Number Removed For Privacy Reasons]

A company is experiencing a slowdown with operational losses for over a year. However, the management did not terminate any employees. Recently, a major client terminated its contract with the company, and due to further financial strain, the management is now unable to sustain certain employees on its payroll.

Termination or Retrenchment?

Can the services of selected employees be terminated by paying them their dues and one month's notice period salary? If yes, should it be considered termination or retrenchment, and how should it be worded in their final letter? Please advise.

In such cases, the termination will be retrenchment only. Therefore, in addition to notice pay, compensation at the rate of 15 days' pay for every completed year of service is required to be paid. Furthermore, intimation or permission, depending on the number of employees employed, is also required.

Service Letter Considerations

In a service letter, it is always desirable to show that the employee was retrenched due to reasons beyond the control of the management.

Regards,
Madhu.T.K

Legal Requirements for Retrenchment

This is a case of retrenchment only. To make it a legal retrenchment, the employer is required to follow the following conditions:

1. Comply with the procedure under Section 25G of the ID Act, inasmuch as the retrenchment of workmen must be in the order of employment in a particular category. Essentially, the longest-serving workmen must be the last to be retrenched.

2. Comply with the three conditions under Section 25F of the ID Act.

Non-compliance with the above provisions will lead to a remedy of reinstatement, and hence, employer beware.

Regards,
A. Irudayam