Facing Rising Labor Costs: What Are the Best Retrenchment Options for My Manufacturing Company?

Respected Seniors,

I have a private limited manufacturing company started 35 years ago by my uncle. I took over the management 4 years ago. Our labor costs have been increasing, especially over the last 5 years. We follow all rules, including paying double OT, VDA, PF, ESI, etc. Now, due to the rising labor costs, our company has been unable to pay salaries for the past few months. Ultimately, we have determined that retrenchment is the only option to reduce our costs. I have been exploring various strategies to retrench our labor force and I have found your forum to be very informative.

Options for Retrenchment

Please provide information on the retrenchment costs for the following options that I have considered so far:

Option 1: Relocate the major manufacturing to a different location outside our state, leading to a natural reduction in the workforce, and operate parallel plants as part of a contingency plan.

Option 2: Close the existing setup completely and reopen in the same location under the same company name.

Option 3: Shut down the current setup entirely and reopen in a different location under the same company name.

Option 4: Transfer the management - Outsourcing.

Kindly advise on the pros and cons, including retrenchment costs, associated with each option mentioned above concerning labor issues. Additionally, please suggest any other available options.

Could you also recommend consultants or advocates who specialize in the Industrial Disputes Act (IDA) and have experience with the aforementioned options?

I would be grateful for your valuable insights.

Thank you for providing a platform like this.

Best Regards,

G V Krishna Reddy

You haven't mentioned much about the type of workforce you currently have—since the options realistically open to you will depend a lot on this factor. A few queries:

1. Are they unionized—formally or informally?
2. What is the general qualification profile of the employees?
3. Do you have any specific time frame in mind to implement this?
4. Do any of the employees know about this Plan of Action (PoA) or was this discussed informally within the company?
5. What is the company employee strength—blue-collar, executives, and management staff?

Prima facie, Option 2 could be practically tough to implement—even if the employees aren't unionized. Please confirm the above points and also suggest waiting for others' responses—there are quite a few members in citeHR who are adept at legal aspects.

Regards,
TS

As per TS Qs, here are my answers:

1. Yes, they are formally unionized.
2. The general workmen qualification is between 10th class to a degree. However, they are blue-collar employees.
3. Yes, I do have a specific time frame - within 6 months.
4. Nobody in the workforce knows this PoA - but informally, 1 or 2 people discussed it, not about the options.
5. Company Strength - Blue-collar - 85; Staff - 20; Management - 6.

Replies to Sri V. Harikrishnan's Queries:

1. The number of workmen is 85.
2. Our company is a manufacturing company that manufactures auto components - it should come under Factory, I guess.

Based on my queries, please let me know the best strategy to implement our PoA.

Thank you once again!

Best Regards, GVKR

Dear Mr. G.V. Krishna Reddy,

Understanding Retrenchment Laws

There are many rules and a set of laws entwined in the process of retrenchment. Under the Industrial Disputes Act of 1947, no employer can close an establishment, declare a lockout, or retrench any labor without obtaining prior approval from the specified Government Authority.

Please find the link below on Labor Retrenchment Laws and their effects on wages and employment, which might be of use to you:

[Employment, Labor Laws and Labor Markets in India](http://www.scribd.com/doc/17454299/Employment-Labor-Laws-and-Labor-Markets-in-India-by-Tarun-Das)

Regards,

I have gone through your post. Your problem is more with a lack of strategic foresight than the rising labor cost. But then why is the labor cost rising? What have you done to contain this cost in the last four years? Why are sales not rising corresponding to the rising labor cost?

As of now, your thought process is restricted only from the Industrial Disputes Act (IDA) point of view. Keep this act aside for a while. Suppose you do the retrenchment. But then will the retrenchment solve your problem permanently? What is the guarantee that you will not face the same problem again, say after 1-2 years?

Why is there no demand for your product? What efforts have you made to build your brand? Why is there no brand pull?

What about the quality initiatives? Why are these not helping you to keep the rising cost at bay?

What is the level of inventory of raw materials? What percentage is this inventory against sales? What tools do you use to keep the inventory levels minimum? In fact, if you manage the inventory judiciously, you will be able to unblock the working capital, and it will help you to tide over the rising labor cost.

What is the inventory of finished goods? What percentage is this inventory against sales? Has the inventory of finished goods been piled up because of improper demand forecasting? What is the ratio of sales volume per employee?

Rather than retrenchment or closure of the business, I recommend you concentrate on how to increase sales. If you have not paid salaries to the employees, then it goes without saying that you have not paid the vendors/suppliers as well. If you only look from the retrenchment point of view, your accounts payable will remain as they are.

I am against retrenchment or relocation because the cost of labor will remain the same whether you are at the current place or somewhere else. Marginally, it may reduce but certainly not drastically enough to tide over the current crisis. "Cheap labor" produces "cheap quality products," and you may make a note of this.

Regards,
Dinesh V Divekar