Private andConfidential NOTE To Contagious Online Media Network Private Limited From Ajay Raghavan Trilegal Date 7 June 2017 Subject Note on law around termination on account ofredundancy This note provides an overview ofthe legal regime governing the termination of services of employees on accountof redundancy, as well as practical insight on the process normally followed byemployers in India. 1.
OVERVIEWWhilethere is no statutory definition of redundancy, it is normally understood as asituation when there is surplus of labour/employees due to various factors,such as cessation of a particular type of business, introduction of newtechnology, reorganization of business etc. The procedure to be followed forsuch terminations and the payments to be made vary depending on a number offactors, such as (a) place of employment; (b) length of service; and (c)position and role of the individual within the organization i.e. whether theindividual is a ‘workman’ as defined under the Industrial Disputes Act, 1947 (ID Act). 2. PROCESS – RETRENCHMENT DUE TOREDUNDANCY WHERE EMPLOYEE IS A ‘WORKMAN’ Thestatutory processes under the ID Act are only applicable with respect toemployees who fall under the definition of a workman1.
The services of a workman may be terminated by following the procedure set outbelow: Lastin First out’ Rule (LIFO) Asper the ID Act, the employer must follow the LIFO rule while selectingthe workmen whose services will be terminated. The LIFO rule mandates that anemployer who intends to terminate the services of a workman who belongs to aparticular category of workmen in the establishment and is a citizen ofIndia, would ordinarily be required to firstretrench the workman who was lastemployed in that category of workmen. Identifying Workmen in the sameCategory – The first step to following theLIFO rule involves identifying the individuals who would fall within the samecategory of workmen. Courts in India have broadly laid down the following testsfor determining whether the workmen would be considered as belonging to aparticular category or not: · whetherthe workmen were recruited specifically for performing a particular function;· whetherthe services of the workmen were transferable from one post to another;· whetherthe services of the workmen are interchangeable;· whetherthe jobs and duties performed by workmen in different categories werestrikingly separate, and the performance of functions in one category requiredany specific skill or training;· whetherthe workmen were getting same scale of pay. Ordinarily,where employees are specifically appointed for a role and the job duties areseparate, each such role or group of roles will be a distinct or separatecategory. However, where skill sets are largely similar and employees aretransferred from one role to another, the entire group will be treated as onecategory.
Preparing and Displaying aSeniority List – Once the workmen have been classified based on category,the employer would need to prepare a list of all workmen in the particularcategory from which retrenchment is contemplated, arranged according toseniority of service in that category. Further, the employer would also be required to post copiesof such lists on the notice board in a conspicuous place in the officepremises, at least 7 days before the actual date of termination. Employerscan deviate from the LIFO rule, in some situations, if they can justify this onreasonable grounds and such reasons are recorded in writing.
Some reasonablejustifications include efficiency, trust worthiness, the workman’s possessionof a special aptitude or skill etc. Do note that these would be valid only as longas there is reliable evidence, preferably in the recorded history of theworkmen concerned, showing their inefficiency, unreliability or habitualirregularity. There have been cases where courts have held that a failure tofollow the LIFO process while terminating employment for a redundancy wouldinvalidate the termination.
GovernmentNotification Incases where the termination is on grounds of redundancy, notice must beprovided to the appropriate government authority in the prescribed format,informing them of the termination. However, we have seen cases where courtshave held that a failure to provide such notice to the government would beconsidered an irregularity but would not invalidate the entire termination. 3. PAYMENTS – RETRENCHMENT DUE TO REDUNDANCYWHERE EMPLOYEE IS A ‘WORKMAN’ We have set out below the exitpayments that would need to be paid upon retrenchment of a workman-levelemployee: 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 ofretrenchment compensation and notice or notice pay (in the table above) is acondition precedent to termination on grounds of redundancy and must be paid tothe workman on or before the proposed date of termination. Failure to do socould potentially invalidate the termination. 4.
PROCESS- RETRENCHMENT DUE TO REDUNDANCY WHERE EMPLOYEE IS NOT A ‘WORKMAN’ In theevent the employee identified for termination on the grounds of redundancy isnot a workman as per the ID Act, the termination will be primarily governed bycontractual terms and conditions and the provisions of the applicable Shops andEstablishments Act. For non-workmen, there would not be a requirement to followthe procedures set out in the previous section or pay the retrenchmentcompensation. However, these individuals would still be entitled to notice orpayment in lieu of such notice and the other severance payments set out in theabove table.1 Theterm workman is defined as any person employed in any industry to do anymanual, unskilled, skilled, technical, operational, clerical or supervisorywork for hire or reward, whether the terms of employment be express or implied,but does not include, inter alia, anysuch person who (a) is employed mainly in a ‘managerial or administrativecapacity’; or (b) being employed in a ‘supervisory capacity’, draws wagesexceeding INR 10,000 per month. In order toassess whether or not an employee can be classified as a ‘workman’, it would benecessary to look at the nature of work undertaken by the employee and his/herrole and responsibilities. Practically, the definition of ‘workman’ covers amajority of the workforce except for a few mid and senior level employees whoperform mainly supervisory or managerial roles, and hence fall within theexceptions described in the definition.
It would therefore be important toassess the role of the individuals within the organization and determinewhether they can be classified as a workman or if they would fall within any ofthe exclusions.