Facing Layoffs in Tamil Nadu Factory: Who Should We Notify and How to Proceed?

Guidance Needed for Layoff Process in Tamil Nadu Factory

Our management was planning to lay off workers in one of the factories in Tamil Nadu, which is 25 years old. However, it has been experiencing significant losses for the past five years due to factors such as the tripling of raw material prices, power issues, and increased competition. Currently, the factory is almost generating no income for the past six months, with production at only 5 to 10% of its maximum capacity. Some key details about the factory are:

• There are 20 permanent workers, all of whom are part of a labor union.

• Management proposed downsizing the workforce by half, but the workers requested a lifetime settlement, and they all wish to leave simultaneously to avoid internal conflicts within the union.

• The average salary for the workers is Rs. 10,000, with a basic average of Rs. 5000.

• Most of the 20 workers have been with the company for 13 to 20 years.

Management is seeking guidance on the essential steps required to initiate the layoff process. Should we inform the Inspector of Factories or the Labor Commissioner about this plan? What are the grounds on which this process can be successfully carried out?

Please provide an explanation.

Thank you.

I hope that your management intends to temporarily lay off some workers due to their inability to provide work for all employees, as stated. If the reasons provided are genuine and the information is accurate, you may proceed to lay off the necessary number of workers based on their seniority, while simultaneously informing the Area Conciliation Officer and the Commissioner of Labour (Form Q1). Please note that you will be required to pay 50% of the last-drawn wages for the days of lay-off.

I advise you to urge your management to conduct a thorough analysis of the current situation. If the prospects of recovery or improvement appear bleak or unattainable, it would be advisable to consider implementing a voluntary separation scheme in consultation with the workers. Act promptly on this matter as delaying the decision may result in your establishment becoming a financial burden.

Best regards,
[Your Name]

Mr. Umakanthan's suggestion is the need of the hour. Incidentally, you mentioned that your factory (manufacturing or fabrication industry?) has been running into losses for the past five years. If so, I presume that by now your net worth should have eroded beyond restructuring, in which case it has now attained the status of a "SICK" company. If so, it should get registered with the BIFR under the SICA (if applicable to you) and apply for closure. This is a binding provision under the Companies Act as well. However, you should consult your auditors for proper guidance before making any decisions.

On the other hand, to smoothen the process, it is necessary that all employees should be settled upon reaching a mutually agreed solution. Laying off or a lockout will only add to your burden, especially if you do not have a revival plan on hand for the foreseeable near future, considering the challenging power situation and bleak monsoon in TN.

Thank you for your valuable suggestion. We are planning for a layoff at the moment and have the following queries. Could you please help us by clarifying the doubts below?

1. Does "last drawn wages" mean we need to pay 50% of their basic wages or 50% of their gross salary?
2. Should they be required to work 2 weeks (15 days) per month when there is work in the factory? If so, how many days in advance should we inform them to report to work?
3. If employees fail to show up for work during critical times in a layoff period, what actions can the company take?

The management currently does not want to resort to a lockout as they are optimistic that the situation will improve in the next few months.

Dear Stephen,

1) Lay-Off compensation = 50% of Basic + D.A only. No compensation is payable for intervening weekly holidays during the Lay-Off period.

2) During the entire period of Lay-Off, the laid-off workmen should present themselves for work at the establishment at the appointed time during normal working hours at least once a day.

3) Failure to do so will result in deprivation of compensation.

Regards.

Steps for Initiating a Layoff

Before implementing a layoff, it is essential to establish communication by informing the workers and the union through circulars. A copy of this communication should also be sent to the Assistant Labour Commissioner or Labour Commissioner, highlighting the seriousness of the factory's situation. Additionally, separate letters should be addressed to the concerned Union, with a copy marked to the ACL/DCL, indicating the inability to operate the factory/establishment.

It is advisable to hold discussions with the Union to help them understand the necessity of declaring a layoff. Layoff wages must be paid for 45 days, after which the "No work, no pay" policy will apply. The Industrial Disputes Act includes a clause for layoffs due to a shortage of raw materials or power.

Alternatively, with the Union's confidence, 50% of the workers can be engaged on a rotational basis for full working hours, while the remaining workers are laid off. However, the success of this approach depends on how effectively the HR representative can convince both the Union and the legal authorities.

Regards,
Eswararao Ivaturi.

I doubt whether the provisions of layoff in the Industrial Disputes Act apply to a factory having less than 50 workmen. Please see section 25 A(a) of the ID Act.

Regards,
Varghese Mathew

Yes, Mr. Varghese, you are absolutely correct. As per Sec. 25A(1)(a), every industrial establishment employing fewer than 50 workmen on average per working day in the preceding calendar month is exempted from the provisions of Sections 25C to 25E. However, we should acknowledge the fact that the employer has no inherent right to lay off his workmen unless it has been specifically provided for in the contract of employment or governed by the provisions of any applicable law.

Impact of Lay-Offs

The resultant effect of a lay-off is temporary unemployment and a loss of earnings for the workmen if it is genuine or malafide. Therefore, there is room for argument that such establishments employing fewer than 50 workmen have no right to lay off their workmen by virtue of the exemption granted under Sec. 25A from Sections 25C to 25E. Even the High Courts have a divided opinion on this issue. The Kerala High Court held in South India Corporation v. All Kerala Cashewnut Factory Workers' Federation [1960 (II) LLJ 103] that the bar of Sec. 25A is absolute. Conversely, the Punjab High Court held in Kundan Iron and Steel Industries [1961 II LLJ. 599] that the award granting compensation was justified because the lay-off virtually amounted to a malafide termination of the services of the workmen.

Therefore, my suggestion was not based on a legal principle but rather on the expediency of crisis management.

Discussion on Layoff Provisions

There were some discussions on CiteHR earlier which probably did not provide a definitive answer to the query. You can read from these links:
- [Legal Provisions under Industrial Disputes Act](https://www.citehr.com/16363-legal-provisions-under-industrial-disputes-act-pg2.html)
- [Layoff Rules Policy India ID Act](https://www.citehr.com/260390-layoff-rules-policy-india-id-act.html)
- [Lay Off Without Any Wages Industrial Disputes](https://www.citehr.com/141472-lay-off-without-any-wages-industrial-disputes.html)
- [Regarding Lay Off Under Factory Act](https://www.citehr.com/145359-regarding-lay-off-under-factory-act.html)

Friends can find some references regarding layoff in an establishment where the employees are less than 50 (ID Act applies only to establishments where 50 or more employees are on the roll). You can read from the following link: [Labour Bulletin](http://www.psalegal.com/pdf/LABOUR%20BULLETIN-ISSUE%20III.pdf)

Still, I feel we have to find conclusive legal provisions that apply to layoff in establishments where employees are less than 50. Until then, it's "time out time," a strategic break.

Regards,

Supreme Court Decision on Workmen Layoff

In the Supreme Court decision in Workmen v. Firestone Tyre & Rubber Co (1976 1 LLJ 493), it was held that where the number of workmen is 30, Chapter V-A is not applicable, and workmen are entitled to full wages for layoff.

Regards,
Varghese Mathew

Thank you, Mr. Varghese! This is the judgment I searched for but in vain. Generally, we find the numerical strength of the employees as one of the criteria fixed for the purpose of applicability of labor legislations, either in totality or in respect of particular chapters relating to certain conditions of employment and other aspects of managerial decisions affecting employment on a larger scale.

The various conditions of employment, per se, are not just creatures of law but originate from customs and practices followed ever since human labor started to be bartered for reward from times immemorial and later came to be codified with the metamorphosis of the relationship of hirer and the hired from that of master and servant to employer and employee with its ever-increasing complexities. The logic behind such a move is equity and social justice. That's why laissez-faire has universally given way to state intervention in matters of trade, commerce, and industrial employment. For example, payment of bonus.

Though the term "bonus" escapes a precise legal definition, literally it means "anything pleasant that is extra and more or better than expected." When the agreed due compensation part of the terms of employment is fulfilled by the employer then and there, what is the necessity of paying a bonus to the employed at the end of the year? Is it not an additional and unagreed liability imposed on him? In every economic society, the grant of festival inam to servants is a custom in vogue. In every agrarian community, the festival is associated with the harvest. When the harvest is objectively fair, the farmer comes forward to apportion a part of his harvest to all the people associated with it directly or indirectly. It is a compassionate gesture in recognition of their services. It arises spontaneously out of the employment relationship of the partners of production.

But, in the context of industrial employment as it has been obtaining ever since the Industrial Revolution, the relationship has become highly impersonal and the owner or the master of the business need not be the employer. So, legal compulsion becomes inevitable, particularly in the absence of fair or living wages after making provision for equitable dividends to the shareholders, depreciation of plant and machinery, and the future development of the enterprise. The complex nature of financial calculations in this regard makes it imperative for exempting the small enterprise and where the number of employees' criteria comes into play. It is not the intent of the law that a small employer need not pay a bonus or his employees have no right to claim a bonus. But it is an implied and positive expectation of the law that they would work it out amicably.

Similarly, when Chapter V-A of the Industrial Disputes Act is neither applicable nor the strength of workmen is 50 or above, the underlying legislative intention is that the employer and the employees would come to an amicable decision of a layoff as per their subsisting contract of employment or otherwise befitting their mutual interests. Hope, Mr. Kumar agrees with me now.

Thank you for the valuable information and practical ideas. I have one query here. During a period of layoff, can the employer appoint casual laborers for a full month and pay wages to them for dispatching the available stock to customers and performing emergency services (such as electrical work) in the factory? Unionized workers may not support this due to the potential issue where some workers receive full wages while others do not, causing internal conflict among them.

Hiring Contract Laborers During Layoff

In this scenario, can the employer hire a maximum of 6 contract laborers (2 workers per shift for 3 shifts) during the layoff period?

Regards,

Dear Stephen,

As our friend Umakant rightly said, in a unionized organization, we have to deal with and make decisions within the framework of the rules. The interpretation of rules based on the problems we face in the day-to-day organization is also crucial.

Engagement of Casual Labor During Layoff

Regarding the engagement of casual labor during a layoff period, no union leader or worker generally agrees. To address this issue, firstly, an option should be given to the existing employees to decide whether they would like to work until the available stock is dispatched. If they agree, the required number of workers can be engaged on a routine basis without giving any chance for dispute. This practical approach may be helpful.

Best regards,
Eswararao Ivaturi.