Retrenchment Compensation for Non-Performers: Is It Required or Just Recommended?

Hello,

I request you to please guide me on whether it is recommended or a legal requirement to pay retrenchment compensation to non-performing employees who, after failing the performance improvement plan, decide to move out of the organization. Additionally, please suggest the best approach or legal recommendations towards helping the organization and the non-performing 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 up to 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. The only thing to be noted is that you should not terminate an employee for non-performance without giving him an opportunity to improve.

Performance Measurement and Termination Process

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 informed at the beginning of the performance cycle about their Key Result Areas (KRAs)? If they failed to meet the KRAs, did you issue a warning letter? In the warning letter, did you state that if the performance does not improve, their services may be terminated? If, despite the warning letter, the employee has failed to improve, you may terminate their services. However, to be on the safer side, it's better to conduct a domestic inquiry. The domestic inquiry should be free and fair and should not be compromised in any way.

Understanding Legal Terms

Lastly, familiarize yourself with legal terms like "retrenchment." Cases of separation arising from poor performance are different from retrenchment.

Thanks,
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 is in place), or is it a common practice across organizations? Could you please refer to 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 insights. I understand from your post that if an employee is given an adequate chance, we may not need to pay severance pay (I also note that "retrenchment compensation" is not the appropriate term to use in this context). Thank you for highlighting the Domestic Enquiry process. I look forward to further guidance on my follow-up queries 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 misconduct. Even when an employee is removed due to misconduct, he/she is eligible to receive the salary until their last working day. There must be genuine grounds for the forfeiture of salaries and wages.

In this particular case, you are required to pay the employee their salaries and wages until their last working day. Any underpayment is considered illegal.

Thanks,

Dinesh Divekar

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

Regards,
Manisha

Understanding Retrenchment Under the ID Act

The term "Retrenchment," as defined in the ID Act, means the termination of service of a workman for any reason whatsoever, other than as a "punishment inflicted by way of disciplinary action." It specifically excludes termination of employment by resignation by the workman himself, retirement upon reaching the age of superannuation, termination as a result of non-renewal of the contract of employment, or termination on the grounds of continued ill-health. The Act does not specifically deal with non-performance as a reason for termination.

Supreme Court Observations on Misconduct

The Supreme Court has observed that misconduct, on the basis of which disciplinary action of termination from service is taken against a worker, shall include any act on the part of the worker that is against the code of conduct of the establishment. Obviously, an employee is expected to perform and produce results. If he does not produce results or acts differently, it should be considered negligence or dereliction of duty. The courts will not direct the employer to retain a non-performing worker. Therefore, if you have evidence to show that the worker was given enough opportunities to improve, there is nothing wrong in terminating without paying retrenchment compensation.

Different Judicial Interpretations

However, in some other judgments, such as 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 observations by the court were different. The court expanded the meaning of "for any reason whatsoever" in the definition of retrenchment and interpreted it as any reason other than those specifically mentioned, i.e., termination on the grounds of continued ill-health, non-renewal of the contract, or dismissal on the grounds of misconduct.

Defining Misconduct and Non-performance

Now, we have to decide what all will come under misconduct. In my opinion, all acts of an employee that deviate from the code of conduct are misconduct. An employee is expected to perform a given task, and if he fails to do so, it constitutes dereliction of duty. Therefore, non-performance is also considered misconduct. If you have provided opportunities and there is evidence to show a 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 non-performance cases (who were given enough opportunities for improvement in a fair manner), it will somehow demean a pay-for-performance work culture.

Many Thanks!
Regards,
Manisha