Retrenchment Law In India - A Critical Analysis. Retrenchment Law In India - A Critical Analysis.

Introduction. Section 2 (oo), deals with the definition of the term retrenchment. Retrenchment means the termination by the employer of the service of the workman, for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include: a. Termination by the way of punishment inflicted pursuant to disciplinary action. b. Voluntary Retirement of the workman. (bb). Termination of the service of the workman as a result of the non-removal 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 therei n; c. Retrenchment of the workman by reaching the age of superannuation if the contract of employment between the employer and the workman contains stipulation in that behalf: or d. Termination of the service of a workman on the ground of continued ill he alth. The definition expressly provides for the exclusion of certain cases. It may be noted that sub clause (bb), speaking of contractual termination, has been inserted by the Amending Act 49 of 1984. Previous to 1984, even that amounted to retrenchment. It does not matter why the employer discharges the surplus, if the other requirements of the definition are fulfilled .
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In many cases the courts have held that the employer is justified in retrenching "the dead weight of uneconomic surplus" provided that the employer acts bonafide and not for the purpose of victimization of his employees. The power of retrenchment is to be used reasonably only for the purpose of r ationalization of surplus and uneconomic labour. It should be noted that even a temporary worker can claim retrenchment compensation if he is retrenched. Retrenchment, without a reason, is no retrenchment, but once the conditions contained in the definitio n are satisfied, it does not matter why the employer chose to discharge the surplus . Before a retrenchment, compensation has
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to be paid to him under Section 25F or 25N of the Act. Unarguably, retrenchment policy is a major concern to the employers and the employees both alike. Employers, inevitably look for an easy retrenchment policy favourable to their

business motives. On the other hand, employees vulnerable at the hands of their employers, look for protection in the labour laws. Understandably, both the concerns should be met and a balanced policy should be the answer. A stringent policy is not the most prudent solution even if labour welfare is the predominant intention because in the long run employers will cut down on employees and unemployment, poverty would be rampant. In the opinion of the researcher, the law in India regarding retrenchment is very stringent and economically unsound. It is submitted that s uch a stringent law of retrenchment would be adverse to investments and hence, lead to low opportunities of employment. On one hand, one must protect the labourers by laws such that they are not exploited and on the other, if the labour law is strict, inve stment would be low, leading to poor employment opportunities for the labourers. Also, India is favoured for foreign investments because of its cheap and abundant labour supply, hence, if the same is made adverse to the interests of the entrepreneurs, the economy would lose sizeable investments, employment opportunities and revenue. 1. Excluded cases under section 2(oo)- An analysis of the law and comments on its stringency. This chapter shall attempt to understand the law on retrenchment with case analysis and then analyze whether the law is too stringent . The definition of retrenchment in section 2 (oo) contemplates that the termination must be mainly on grounds of economy either for paucity of production because of lack of consumption of raw materials or over production or for any reason whatsoever, it must be done by the employer, it must not be by way of punishment or disciplinary measure and it must be the termination of surplus labor.
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The SC has expressed the view that the term retrenchment cannot have a wider meaning than its ordinary meaning. The SC has observed in the case of Pipraich Sugar Mills Ltd. V. Pipraich Sugar Mill Mazdoor Union that, retrenchment connotes in its
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ordinary acceptation that the business itself is being con tinued, but a portion of the staff or labour force is discharged as surplusage . It would be against the entire scheme of the Act to give the definition clause relating to retrenchment such a meaning as would include within the definition of termination of all workmen by the employer when the business ceases to exist. Retrenchment as defined in section 2(oo) and used in section 25 F, has no wider meaning than the ordinary accepted connotation of the word, it means the discharge of surplus labour or staff.

The SC has further observed that, it cannot be doubted that the entire scheme of the Act assumes that there is in existence an industry and then proceeds on to provide various steps being taken when a dispute arises in that industry. Thus, the provision of the Act relating to lock out, strike, lay off, retrenchment, conciliation and adjudication proceedings, the period during which the awards are to be in force, have meaning only if they refer to an industry which is running and not one which is closed. I n our interpretation in no case, is there any retrenchment unless there is discharge of surplus labour or staff in a continuing or running industry .
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The sum and substance of these judgments of the SC has been that in case of closure of an industry there is no retrenchment and as such termination of service of workmen in case of closure is not covered by the definition of retrenchment. To circumvent these decisions, the legislature had to insert Section 25FFF of the Act by Sec. 3 of the Industrial Disputes (Amendment) Act, 1957. But the effect of the SC judgment still holds good and by section 25FFF of the Act the consequential effect of the SC judgment as to payment of retrenchment compensation has been nullified.
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In several cases, it has been observed that it does not appear that for effecting retrenchment, the concern must be a going one. But in a process of judicial interpretation, this element in the concept of retrenchment has been introduced and a limitation into the definition has been imposed finally by the SC in a process of judicial interpretation. Further limitation to the definition has been that retrenchment must be in relation to surplus labour for the purpose of economy of the industry. This element also not appears from definition itself. The definition by itself is wide enough to include all sorts of terminations other than cases excluded by the definition itself. Thus, the judiciary has narrowed the definition of retrenchment. Exception to all sorts of terminations being retrenchment are as follows:
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Termination by way of disciplinary measure on grounds eith er of misconduct or insubordination or any other reasons is not retrenchment and is not within the meaning of the definition. It means dismissal, removal and not retrenchment. Voluntary retirement of the workmen would not be retrenchment but forced retirement can be retrenchment. Basic conception is that the retrenchment must flow from the volition of the employer but if retirement is due to the volition of the workmen it will not be retrenchment.
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2.

Retirement on reaching the age of superannuation if there be any contract of employment between the employer and workmen and a stipulation to that effect would not be retrenchment. In case there is no stipulation of the age of

superannuation the termination of employees service after few years is covered by the term retrenchment.
3.
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Contractual termination would not be retrenchment. This clause has been inserted by the Amending Act 49 of 1984. It purports to exclude from the ambit of the definition of retrenchment, (1) termination of the service of a workman as a result of the non renewal of the contract of employment between the employer and the workman concerned, on its expiry or (2) termination of the contract of employment in terms of a stipulation contained in the contract of employment in that behalf.
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4.

Termination of the service of the workmen on the ground of continued ill health would not be retrenchment.
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Legislature has imposed these four classes of limitation and the judiciary has further added to it in the process of judicial interpretation.
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Is the law on retrenchment in India too stringent?

The Industrial Disputes Act,1947 was the first legislation on exit, layoff and closures, initially applied with different degrees of severity to firms employing between 50 -100 or more workers. First, when it came to operation, the IDA, did not restrain employers from laying off or retrenching workers or closing down unprofitable business provided they notified workers and the unions in advance. The provisions relating to payment of compensation for lay off and retrenchment came in 1953. Amendment in 1964 standardized the compensation at 15 days average pay for every year of continued service and required the employer to give the worker and the government a months notice.
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Currently, the IDA(Chap. V-A) requires an establishment employing 50 or more workers, in case of valid retrenchment to provide the workers with 30 days notice and 15 days pay for every year of continuous work by the workmen at the firm. In case of closure or sale, it must fulfill same conditions unless the successor takes on these obligations (Section 25FF and 25FFF). For an establishment employing 100 or more workers the IDA, under Chapter V-B, requires prior permission from the government before firm closure or retrenchment.
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Application for retrenchment and lay off with government seldom succeeds and firms do not make too many such applications. This is evident from a subsection in Indian Labor Year Book, 92.
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During the period Jan-Aug 92, four proposals, two each for retrenchment and lay off were received for consideration by the ministry of Labour. One proposal seeking permission for retrenchment was rejected. Whereas the other remained under consideration of the government. One proposal for lay off was withdrawn while the other was found to be not maintainable. The IDA did not restrict completely the right of the employees to close an unprofitable business. The amendment in 1957 required the employer to compensate the workers affected by closure the same way as if they were retrenched. Each of the three amendments of the Act in 1972, 1976 and in 1982 seemingly gave greater protection to workers than the preceding one. In the current amended version employers employing 100 or more workers must give notice of a closure to workers or their representatives and to the government, 90 days prior to the date of the intended closure. The employer in his request, has to state in detail the reasons for closing down business. The government enquires into them, hears both parties and either grants or refuses the permission to close, usually the latter. Refusal has to be communicated to the parties in writing within 60 days of the notice from the employer. Employers with 50 -99 workers need only to notify the government, while those with less than 50 employees need not even do that to close their business. However, in practice, workers in such firms can appeal to other laws such as Indian Contract Act,1872 to resist dismissal.
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Such being the law on retrenchment in India, it would not be far stretched to allege that the laws on retrenchment are rigid and cumbersome on the employers. Some recent data compiled by the World Bank collate the level of rigidity of hiring and firing rul es in different nations -100 being the score of the highest conceivable rigidity. India is among the most rigid countries with a score of 48. China has a score of 30, Korea 34, Norway 30, Singapore close to 0. Thus, statistics and figures also prove a case in point.
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An incident that further harps on the problems faced by the employers due to stringency in labor laws is the Honda case. Honda said its 50 workers who were suspended for indiscipline will not be reinstated pending an independent inquiry - an issue that caused bloody clashes between its workers and police. Honda took a stand of not allowing the suspended workers into gates until the third party inquiry is completed and management gets the report. The trouble at the group's two-wheeler unit began when some 2,000
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workers protested a lockout of the factory and dismissal of some colleagues. This was followed by clashes with the police that left scores wounded after some irate workers vandalized civic facilities, police vehicles and shops.
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Clearly, such incidents are not conducive to the growth of economy and entrepreneurship in India. Blame largely sits on the strict and inflexible labor laws in our

country. It is not submitted that the interests of the labor should be sacrificed at the altar of development, what is suggested is that a balance must be reached, because if the employers are unhappy with the labor laws, consequences like low foreign investment, low employment of labourers would follow which is all the more disadvantageous to the labourers in the long run. The next chapter shall argue whether a more flexible law would be better for the employers, employee and the economy in general. 2. Should the law on retrenchment in India be made more flexible? Stringency in labour laws bring its own set of problems. An amendment made to the IDA in the mid-1980s requires that any firm employing more than 100 workers needs to get permission from the state government before retrenching workers. This piece of legislation meant to protect labour welfare has a downside. If, the business is in a downswing the employers cannot retrench extra workforce and are compelled to carry the extra workforce making it difficult to channelise capital in better investments. This would in the long run, compel the employers to hire less labourers even in the upswing so that they do not face problems of cut down in a downswing. Also, because of unemployment of labourers and high demand for jobs, the wage will fall drastically. If such a course of event follows, paradoxically, the protective laws to the labourers would backfire and hit them very hard. This chapter shall make a thorough insight into the functionality of the current labour legislation and analyze the pros and cons of the law. It will also reason whether a flexible labour law will be more beneficial over a stringent one to both the economy and the labourers. To begin with, many observers have given different views to stress that Indias labour legislations has hurt Indias overall growth and efficiency. Lucas,1988; Ahluwalia,1991; Pappola,1994 and Basu,1995 have shown that the labour legislations have actually hurt the very labourers they intended to protect. According to Nickel,1986, rigid retrenchment laws increased the costs of adjusting a firms employment level and led firms to consider not only current market conditions but also future labour needs while, taking their labour decisions. A firm will not recruit labourers in upturn if it anticipates cost in reducing workforce in subsequent downturn.
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Pappola,1994; Ramasay,1984; Datta 1994; and Amthur 1989, argue that employers in India have responded to strict labour laws by greater use of temporary and casual labour, adopting labour saving technology, expansion in leasing in capacity of small firms, setting up production where labour laws are not org anized, increasing use of

bribery and corruption to avoid the legal consequences of retrenchment. Fallon and Lucas,1991, examined the job security regulations in India and Zimbabwe, two countries with very restrictive labour retrenchment laws. They found that retrenchment laws reduced the demand for workers for any given level of output in particular they estimated that in India the 1976 amendment to IDA, 1947 reduced demand for labor by 17.5%, increasing pressure on unorganized sector to absorb excess labo r supply.
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Apart from this, several other points can be advanced to illustrate how the rigid labor laws are posing problems and how they can be corrected with a flexible policy. First, the loss of huge foreign investments. Labor-intensive manufacturing exports require competitive and flexible enterprises that can vary their employment according to changes in market demand and changes in technology, so India remai ns an unattractive base for such production in part because of the obstacles to flexible management of the labor force. MNCs offer the capital, international market access and technology that India lacks.
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Also, a lot of investment flows to China, which has a much flexible labour policy than ours. In today's globalised world, with volatile and shifting demand, firms have responded to this by keeping their labor forces as small as possible. An injection of flexibility in labor market regulation can attract foreign capital, create jobs and unleash higher growth. Second, in this context, the example of China may be given which has drastically changed its system of labour market from a rigid security of employment to one in which labour is extremely mobile. It has greatly helped China in generating employment as well as successfully redeploying workers who were laid off in the process of restructuring of enterprise. It is argued that more than 100 developing coun tries have reformed their labour policy in response to competitiveness in the globalised era, but India has remained among a few countries with a rigid system of labour protection. On this basis, the East Asian economies achieved growth rates consistently above 6 per cent a year, and China managed growth in excess of 10 per cent a year in the 1990s. Malaysia, to cite another example, shifted its labour policies and has a GDP growth of 8 per cent a year now.
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Thirdly, large firms in India are not allowed to retrench or layoff any workers, or close down the unit without the permission of the State Government. This is very much in line with the job security provided to public sector employees. Most importantly, the continuing barrier to the dismissal of unwanted workers in Indian establishments with 100 or more employees paralyses firms in hiring new workers. This law, though benefits the labourers who are immediately employed, affects adversely the multitudes of others who are unemployed and are seeking jobs in a market with few vacancies. Stringent

policies result in employers reluctance to hire labourers reducing scope of job creation even more. Fourth, present Indian labour laws leave no room for free contracting. Suppose a firm wants to manufacture a product that has volatile demand - like fashion garments. This firm may want to offer workers higher wages but make it clear to them that they could be given a month's notice and asked to leave. Such a contract will have no legal standing because the IDA specifies in advance how and when workers may and or may not be retrenched. Hence we do not see such contracts. Such contracts would help the employers and employees alike because employers would recruit workers meeting their specific needs whereas employees will get high wages and at least some form of employment. Fifthly, with such cushioning labour laws, the employers are complacent with low incentive to be inventive and enterprising. High security adversely affects the general entrepreneurial climate where it is required that the employees keep reinventing themselves to increase productivity. Sixthly, the labour law have been much politicized. For instance, during th e NDA government it had expressed its willingness to amend ID Act and to free employers from the restrictions on them in the chapter. It was proposed to give an additional retrenchment compensation of 45 days wages for every completed year of service. But trade unions were opposed to it . The political parties weighed the pros and cons of
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labour amendments in the light of the following points: y y They might lose the political support of worker . They will get financial support from employers to meet election expenses.

Clearly, such self centered objectives while framing labor laws serves everyone but the nation! 2.2 Some proposed suggestions to th e existing law on retrenchment. After an elaborate mention of points and views as to why a rigid policy is not the best answer to the labourers and the Indian economy, an attempt is made by the researcher to lay down certain suggestions which could lead to better labour laws for all parties concerned. Given that the reform of labour law is, contrary to popular perception, in the interest of the workers, what government needs to do is have this topic debated and explained to the workers, such that they do not oppose, but advocate it. However, the reform will need a substantial amount of intellectual input and complimentary policies for providing social security and welfare to workers.

One way to maintain the balance of control at the workplace between the employers and the trade unions would be to develop well specified procedures to retrench employees. Such procedures do not provide flexibility to the employers to retrench arbitrarily. Hence, it could protect the balance significantly. Some mechanism could be developed whereby, the company retrenching the employees will take an undertaking that whenever it needs to diversify or need more manpower, it shall give preference to the workers it is retrenching at present. Companies could also opt for unconventional problem solutions.
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* Cutting working hours of workers to avoid possible retrenchments, transfer or redeployment of labour from excessive labour to labour deficient units. * Labour can be given three to six weeks break and encouraged to go in for skill enhancement. It will lead to gain from both sides: personal growth for the employee and the employer can put to use worker's enhanced skills. It must be recognized that labour market reforms are not going to be easy in a situation where employment opportunities have been shri nking. Also there is a larger question of providing social security to the workers employed in the organized sector. The vast unorganized labour force, is denied fair wages and even modest levels of social security. Hence, labour market flexibility must be accompanied by some kind of insurance and social security. Government should make all possible efforts to dispel the fears of trade unions by enlarging the scope and coverage of the social security net.
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Hence no solution can be reached if the stakeholders continue to take extreme positions. There has to me a meeting ground to address everyone's interests, to the extent possible. The employers and the employees should be made to understand that they equally need each other and the relationship between the two can only be harmonious if they work towards defending each other's interest rather than contesting the same. Hence employers should pay more attention to h uman resource development and capacity building of their employees. Industrial bodies have to take up workers education. Workers on the other hand realize the importance of 'no work no wages'. There should be a general consensus on the labor reform ideolo gy among the major political parties. Political leaders should look beyond their narrow interests and develop consensus for the larger benefits of the Indian economy. Effort has to made to bring in a balanced view whereby concerns of all the stakeholders, especially the trade unions and the employers are addressed. This may further be strengthened through a wider debate involving academicians, legal experts, policy makers and public at large. All the stakeholders should arrive at some consensus so that there is something for everyone. Once such consensus is developed, it may be coupled with good and clean corporate governance.

What is also needed now is not a law that allows employers to fire workers at will but one that allows for different kinds of contracts. Some workers may sign a contract for a high wage but one that requires them to quit at short notice; others may seek the opposite. This would allow firms to employ different kinds of labour depending on the volatility of the market they operate in. Flexibility in hiring and firing is not the only problem. India's complex web of legislation, leads to a system of dispute resolution that is incredibly slow. Data from the Ministry of Labour reveal that in the year 2000 there were 533,038 disputes pending in India's labour courts; and of these 28,864 had been pending for over 10 years. If India is to be a vibrant global economy, this has to change .
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In brief, we need to move to a system that (1) makes room for more flexible contracts in the labour market (2) has a minimal welfare net for workers who are out of work (3) resolves labour market disputes more quickly. Under the socialist regimes of the post-independence era, while a right-to-work was not guaranteed, implicitly, a right-not-to-be-fired was in place. Various political parties, particularly those on the left, made it nearly impossible to fire employees. The consequences of low labour productivity and la ck of international competitiveness were not recognised. The way India has shifted from socio -communistic to liberal-capitalistic policies in the last 20 years, it is only natural that the labor laws undergo a change. Laws should cater the needs of the society and cannot be isolated from the societal framework. The Indian economy has been rapidly moving into capitalistic lines and hence, its time that the labour laws take an objective approach. Conclusion The paper argued whether the labour laws in India should be made flexible and what are the drawbacks of a rigid labour law. It proposed a flexible labour policy with social security to the labourers. A major reason for the high GDP growth in India has been credited to cheap labour in India. Undeniably, India has huge labour force waiting to be tapped. India represents a growing share of world GDP along with other developing countries like China and Brazil. We have become more open to international trade and investment, thus creating new growth opportunities. It is therefore crucial that India maintains a sustainable growth path, which depends to some extent on well -functioning labour markets based on sound and efficient labour laws favourable to the employer s and employees both unlike the existing law which is more biased towards the labourers. It is lastly submitted that laws have to evolve with the society and must in all circumstance cater to the societal needs. Thus, the change in the Indian economy over

the last two decades, that is the transformation from a closed economy to a liberalized economy must be accompanied by the change in labour laws, laws that are in sync with the needs and necessities of the time.

1 Malhotra, O.P; The Law of Industrial Dispute; pg. 354. 2 Shenoy, Sandip; Laws relating to retrenchment at www.ourkarnataka.com/Articles/law/retrenchment.htm. 3 Workmen of Subong Tea Estate v. Subong Tea Estate, (1964)1 L.L.J.333. 4 1956 S.C.R. 872. 5 Hari Prasad Shivashankar Sukla v. A.D. Divakar, 1957 S.C.R. 121. 6 Dasgupta, Puspa, Commentaries on Industrial disputes Act, 1947 pg. 132. 7 See section 2(oo)(a) of the Industrail Disputes Act, 1947. 8 See section 2(oo)(b)of the Industrail Disputes Act, 1947. 9 See section 2(oo)(bb) of the Industrail Disputes Act, 1947. 10 See section 2(oo)(c) of the Industrail Disputes Act, 1947. 11 Bagri, Industrial Disputes Act,1947; pg. 999. 12 Basu, Kaushik; Fields,Gary; Debgupta,Shub; Retrenchment, labor laws and government policy:An analysis with special refernec to India at www.worldbank.org/html/prdph/downsize/docs/india.pdf. 13 ibid. 14 ibid. 15 Ibid. 16 Basu, Kaushik; Why India needs a labour law reform at www.news.bbc.co.uk/1/hi/world/south_asia/4103554.stm. 17 Sinha, Anurag, Turning the tide of labour unrest in India at www.mba.iiita.ac.in/augsept05/Labor.htm. 18 Ibid. 19 Sharma, Alakh; Flexibility, employment and labor market reforms in India at www. idrinfo.idrc.ca/archive/corpdocs/124089/60657.pdf. 20 Ibid.

21 Bajpai, Nirupam; Sach, Jeffrey; The Hindu, Foreign Direct Investments in IndiaII; July 1st 2000. 22 Ibid. 23 Sinha, Anurag, Turning the tide of labour unrest in India at www.mba.iiita.ac.in/augsept05/Labor.htm. 24 ibid. 25 Naik, S.D.; Bussinessline; Labour market reforms- Need for credible safety nets on 24 th Jan, 2002. 26 Kaushik Basu, Why Indias labour laws are a problemat news.bbc.co.uk/2/hi/south_asia/4984256.stm.