How Can We Smoothly Lay Off Bench Employees While Following Legal and Best Practices?

Dear All,

I am the HR Manager in a startup company that began its services in India in 2021. We have a few of our full-time employees on the bench for a couple of months as they have not been able to meet our clients' requirements. Therefore, our CEO would like to lay off those employees with a smooth procedure and provide them with a few benefits.

I request your guidance on the laws, procedures, or best practices to be followed when implementing the lay-off.

Best Regards,
Subbu

Layoff vs. Retrenchment

Do you want to lay off them or retrench them? A layoff is only a temporary arrangement due to reasons like the absence of projects. Laid-off employees will continue to be in service and will receive compensation equal to 50% of their salary during the layoff period. If you want to terminate their service, it should be called retrenchment. Retrenchment should be done following the procedures listed in section 25F or 25N of the Industrial Disputes Act. If you have fewer than 100 employees, you can provide one month's notice (in the prescribed form with a copy to the Labour Officer) and pay retrenchment compensation of 15 days' salary per year of service to those retrenched, which will mark the end of their service.

Handling Idle Employees

In this scenario, it seems that the techies were hired for a project that has not materialized and the employees are idle. In such a situation, they should be asked to leave. Depending on the terms of their contract, they might be on probation, so even asking them to leave without following the aforementioned procedures would be legal. If the end of their contract term is approaching, you can wait for that date and let the contract be terminated automatically due to non-renewal, which is also a viable option.

Dear Madhu,

Thank you for the information shared and the advice suggested. As stated by you, I have done some groundwork and was told that as a company under Section 25N and 25F, we are supposed to send a letter to the Labour Officer stating the reasons for lay-off. However, this case is different as our employees have worked on a project that was rolled out. Subsequently, these few employees were placed on the bench so that we could assign them to other projects with different clients, but their skills did not align with those projects. After waiting for a few months, we did not find any suitable project to place them in. Therefore, management would like to release them from the services. Would it be advisable if we give them a notice period of 15 to 30 days with pay and then relieve them from the services?

Your suggestion would be valuable in taking the next steps and addressing the dissatisfaction of the employees.

Best Regards,
Subbu

Subbhu, this is not a case of layoff but retrenchment/termination. If you don't have projects suitable for them, give them a notice of retrenchment. Legally, these employees should be the ones who joined last in that department or project. You cannot pick and choose the employees for retrenchment.

In your previous post, you mentioned that they were employees on FTE (fixed-term employment) and have worked on the project for quite a few months. Then why don't you terminate them based on the contract? Normally, the FTC is for one or two years. However, there will be a clause stating that the contract may be terminated mutually before the fixed term by providing one, two, or three months' notice from either side. You can follow that clause and send them out. By doing so, you will also be legally safe.

Dear Subbu,

As the HR Manager of a startup company, it is important to establish rules accordingly and inform candidates about the current projects your company is managing and their durations. Based on this information, you can begin recruiting individuals according to the specific project requirements. It is advisable to specify in the offer or employment letter the projects the individual will be handling and the expected duration. Such recruitment, based on project timelines, can be considered temporary employment. By clearly defining the nature of employment, potential legal complications can be avoided. The individuals working on these projects can be categorized as consultants, subject to only TDS deductions, without other benefits typical of regular employment.

Furthermore, it is important to note that multinational corporations (MNCs), corporate entities, and startups do not fall under the jurisdiction of the labor department. As a distinct entity, the decision to retain or lay off employees rests with the management. Layoffs typically occur when companies cease operations or face a shortage of projects or business opportunities. Employees or consultants affected by layoffs are entitled to one to three months' salary, as outlined in confidential documents signed by the employee/consultant.

In certain instances, layoffs may result from non-performance or underperformance by employees. Therefore, it is crucial to assess the recruitment process to ensure the right individuals are selected. Please disregard my previous email.

Kind regards

I am very sorry to differ, Dr. Raghunath. You cannot run an establishment without employees but with 'consultants' only.

Who is a consultant?
The one who advises on various issues. He will not follow your office regulations regarding office timing, leave, working hours, etc. There will be a point of contact, and whatever advice is required can be provided by him, and the consultant will report to that person only. He may come to your office regularly but will not adhere to the office timings. He will also work for other companies. You cannot exclusively hire his services; he will raise an invoice and collect his remuneration.

The above-narrated should be the arrangement with a consultant. In all other cases, the employee-employer relationship will be established, and you will have to provide him with all benefits under the labor laws.

Legal obligations for startups and MNCs
The second part of the comment is also not legally maintainable. There is no relaxation given to any startups and MNCs regarding labor laws. There may be some treatment as per state rules by separate notification. An MNC employing 10 persons will be covered by ESI, an MNC employing 20 employees will be covered by the EPF & MP Act. Women employed in a startup or MNC should be given maternity benefits. Those who leave after 5 years should be paid gratuity. You cannot simply close down your unit or retrench employees without following the Industrial Disputes Act. Simply put, there is no exemption from labor laws for MNCs or startups. If you lay off your division or department without following the provisions of the ID Act, it will be illegal. You can retrench employees if you feel that there are more employees than required for the project; it should be the last employee who joined who should be let go first, and you cannot decide who should go first. Certainly, you can take action against non-performing employees, but only after following the principles of natural justice. MNCs and startups are not exempt from the concept of natural justice in business operations.

As an HR Manager in a startup company planning to lay off employees, it's essential to follow the legal requirements and best practices to ensure a smooth and fair process. In India, the Industrial Disputes Act, 1947, governs the layoff, retrenchment, and closure of establishments. Below are some key points to consider:

Review Employment Contracts

Before proceeding with the layoff, review the employment contracts of the affected employees to ensure that the layoff is in line with the terms and conditions mentioned in their contracts.

Consult Legal Experts

Consult with legal experts or labor law consultants to understand the specific provisions and regulations applicable to your company and the affected employees. Labor laws in India can be complex, and it's crucial to comply with all relevant legal requirements.

Provide Notice Period

Generally, a notice period is required to be given to employees before implementing a layoff. The length of the notice period may vary based on the terms of the employment contract or as per the applicable labor laws.

Compensation and Benefits

Ensure that the affected employees receive all their entitlements, such as salary for the notice period, pending salary dues, and other benefits as per their employment contract and applicable laws.

Severance Package

Consider providing a severance package to the affected employees to support them during the transition period. This package could include compensation based on the years of service, gratuity, or any other benefits as per company policy or legal requirements.

Communicate Clearly

Communicate the layoff decision to the affected employees in a compassionate and transparent manner. Address their concerns and queries, and provide support during the transition.

Retention of Records

Maintain proper records of the layoff process, including communication with employees, documentation of notice periods, and settlement details.

Avoid Discrimination

Ensure that the layoff decision is not based on discriminatory grounds and is made solely on the basis of business necessity and performance.

It is crucial to consult with legal experts or labor law consultants who can guide you through the specific procedures and requirements applicable to your company and the affected employees. Implementing the layoff process in a legally compliant and empathetic manner will help maintain the company's reputation and protect the interests of both the organization and the employees.