Severance Pay in India: Is It Required When a Business Closes in Maharashtra?

Can anyone help me regarding severance pay rules in India? Is it mandatory for an employer to pay severance pay to employees when they are closing their business and asking their employees to leave from their end? Is there any law for that?

My query is for a company which comes under the shop & establishment (Maharashtra state).

Severance Pay and Retrenchment Compensation

Severance pay refers to the compensation payable to the employee by the employer in the event of discharge from employment at the instance of the employer. Under the Industrial Disputes Act, 1947, it is called retrenchment compensation. It is computed based on the length of service rendered and the last drawn wages/salary. It is 15 days of average wages for every year of completed service under the same employer.

It is mandatory that the employee likely to be retrenched must be served with one month's notice or one month's pay in lieu thereof and be paid the retrenchment compensation thus calculated above.

Employee Termination and Legal Compliance in Uttar Pradesh

You have not disclosed the strength of your employees, especially in the workman category, and the nature of the business. This information is crucial for us to provide a correct response to your query. It is important to note that the closure of any industrial establishment is not permitted, making it impossible to terminate employees with notice pay. Under the Uttar Pradesh Industrial Disputes Act, there are specific provisions for 'Closure' and 'Retrenchment' that strictly apply to the workmen category.

You may consider implementing a strategy to remove only the Staff Management employees in compliance with their appointment letters if they do not fall under the workman category. Terminating any workman without obtaining permission for closure would be considered illegal and punishable.

Regards,

RDS Yadav
Director,
Future Institute of Management and Technology
Labour Law Adviser
NAVTARANG HR SERVICES
[Email Removed For Privacy Reasons]
[Phone Number Removed For Privacy-Reasons], [Phone Number Removed For Privacy-Reasons]

You can be dealt with under the below provisions:

Definition of Retrenchment (Section 2(oo))

“Retrenchment” means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but doesn't include:

(a) Voluntary retirement of the workman; or
(b) Retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or
(bb) Termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
(c) Termination of the service of a workman on the ground of continued ill-health.

Here, in our scenario, retrenchment would be the appropriate course.

Payment Terms for Retrenchment Compensation

Section 25N also lays down the conditions precedent to retrenchment:

1) No workman employed in any industrial establishment to which this Chapter applies, who has been in continuous service for not less than one year under an employer, shall be retrenched by that employer until:

(a) The workman has been given three months' notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice.

Section 25F defines that the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months.