Private a situation when there is surplus of

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To                       Contagious Online Media Network Private Limited

 

From                  Ajay Raghavan                                                          Trilegal

                          

Date                   7 June 2017

 

Subject  
             Note on law around termination on account of
redundancy

 

This note provides an overview of
the legal regime governing the termination of services of employees on account
of redundancy, as well as practical insight on the process normally followed by
employers in India.

 

1.             
OVERVIEW

While
there is no statutory definition of redundancy, it is normally understood as a
situation when there is surplus of labour/employees due to various factors,
such as cessation of a particular type of business, introduction of new
technology, reorganization of business etc. The procedure to be followed for
such terminations and the payments to be made vary depending on a number of
factors, such as (a) place of employment; (b) length of service; and (c)
position and role of the individual within the organization i.e. whether the
individual is a ‘workman’ as defined under the Industrial Disputes Act, 1947 (ID Act).

 

2.             
PROCESS – RETRENCHMENT DUE TO
REDUNDANCY WHERE EMPLOYEE IS A ‘WORKMAN’

 

The
statutory processes under the ID Act are only applicable with respect to
employees who fall under the definition of a workman1.
The services of a workman may be terminated by following the procedure set out
below: 

 

Last
in First out’ Rule (LIFO)

 

As
per the ID Act, the employer must follow the LIFO rule while selecting
the workmen whose services will be terminated. The LIFO rule mandates that an
employer who intends to terminate the services of a workman who belongs to a
particular category of workmen in the establishment and is a citizen of
India, would ordinarily be required to first
retrench the workman who was last
employed in that category of workmen.

 

Identifying Workmen in the same
Category – The first step to following the
LIFO rule involves identifying the individuals who would fall within the same
category of workmen. Courts in India have broadly laid down the following tests
for determining whether the workmen would be considered as belonging to a
particular category or not:

 

·        
whether
the workmen were recruited specifically for performing a particular function;

·        
whether
the services of the workmen were transferable from one post to another;

·        
whether
the services of the workmen are interchangeable;

·        
whether
the jobs and duties performed by workmen in different categories were
strikingly separate, and the performance of functions in one category required
any specific skill or training;

·        
whether
the workmen were getting same scale of pay.

 

Ordinarily,
where employees are specifically appointed for a role and the job duties are
separate, each such role or group of roles will be a distinct or separate
category. However, where skill sets are largely similar and employees are
transferred from one role to another, the entire group will be treated as one
category.

 

Preparing and Displaying a
Seniority List – Once the workmen have been classified based on category,
the employer would need to prepare a list of all workmen in the particular
category from which retrenchment is contemplated, arranged according to
seniority of service in that category. Further, the employer would also be required to post copies
of such lists on the notice board in a conspicuous place in the office
premises, at least 7 days before the actual date of termination. 

 

Employers
can deviate from the LIFO rule, in some situations, if they can justify this on
reasonable grounds and such reasons are recorded in writing. Some reasonable
justifications include efficiency, trust worthiness, the workman’s possession
of a special aptitude or skill etc. Do note that these would be valid only as long
as there is reliable evidence, preferably in the recorded history of the
workmen concerned, showing their inefficiency, unreliability or habitual
irregularity. There have been cases where courts have held that a failure to
follow the LIFO process while terminating employment for a redundancy would
invalidate the termination.

 

Government
Notification

 

In
cases where the termination is on grounds of redundancy, notice must be
provided to the appropriate government authority in the prescribed format,
informing them of the termination. However, we have seen cases where courts
have held that a failure to provide such notice to the government would be
considered an irregularity but would not invalidate the entire termination.

 

3.      
PAYMENTS – RETRENCHMENT DUE TO REDUNDANCY
WHERE EMPLOYEE IS A ‘WORKMAN’

 

We have set out below the exit
payments that would need to be paid upon retrenchment of a workman-level
employee:

S. No.

Termination Payment

Description

1.

Wages

Accrued
but unpaid wages till the termination date.

2.

Notice
pay

Payment
in lieu of notice (if notice is not served).

3.

Retrenchment
Compensation

Equivalent
to 15 days’ average pay for every completed year of service or any part of a
year in excess of 6 months. This is payable if the individual has completed 1
year of continuous service (defined as 240 days in a year) with the employer. 

4.

Leave
encashment

Wages
in lieu of accrued but unavailed privilege leave. 
 
The
leave provisions set out under contract and company policy would need to be
considered. For your reference, under the S Act, employees in
commercial establishments are entitled to about 18 days of annual leave in a
year (1 day’s leave for every 20 days of work). Further, employees are
entitled to carry forward up to 30 days of accrued and unused annual leave to
the following year.

5.

Contractual
Dues

This
would include any additional payments that have been contractually agreed
(such as contractual bonus).

6.

Gratuity

If
the employee has rendered 5 years of ‘continuous service’ (which has been
interpreted as 4 years and 240 days), gratuity is payable at the rate of 15
days’ wages for every completed year of service or any part thereof in excess
of 6 months. Gratuity is calculated based on the wages last drawn by the
employee. Further, the gratuity payable is subject to a cap
of INR 1,000,000, unless the company, as a general practice, does not limit
the gratuity to INR 1,000,000. Gratuity payments would need to be calculated
only on the basic and dearness allowance components of the employee’s salary.

 

Please note that the payment of
retrenchment compensation and notice or notice pay (in the table above) is a
condition precedent to termination on grounds of redundancy and must be paid to
the workman on or before the proposed date of termination. Failure to do so
could potentially invalidate the termination.

 

4.       PROCESS
– RETRENCHMENT DUE TO REDUNDANCY WHERE EMPLOYEE IS NOT A ‘WORKMAN’

 

In the
event the employee identified for termination on the grounds of redundancy is
not a workman as per the ID Act, the termination will be primarily governed by
contractual terms and conditions and the provisions of the applicable Shops and
Establishments Act. For non-workmen, there would not be a requirement to follow
the procedures set out in the previous section or pay the retrenchment
compensation. However, these individuals would still be entitled to notice or
payment in lieu of such notice and the other severance payments set out in the
above table.

1 The
term workman is defined as any person employed in any industry to do any
manual, unskilled, skilled, technical, operational, clerical or supervisory
work for hire or reward, whether the terms of employment be express or implied,
but does not include, inter alia, any
such person who (a) is employed mainly in a ‘managerial or administrative
capacity’; or (b) being employed in a ‘supervisory capacity’, draws wages
exceeding INR 10,000 per month.

In order to
assess whether or not an employee can be classified as a ‘workman’, it would be
necessary to look at the nature of work undertaken by the employee and his/her
role and responsibilities. Practically, the definition of ‘workman’ covers a
majority of the workforce except for a few mid and senior level employees who
perform mainly supervisory or managerial roles, and hence fall within the
exceptions described in the definition. It would therefore be important to
assess the role of the individuals within the organization and determine
whether they can be classified as a workman or if they would fall within any of
the exclusions.

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