Termination of Employment in India

Retrenchment of workers in the private sector is principally governed by the Industrial Disputes Act, 1947 (the “Act”) and the employment contracts. According to Section 2 (j) of the Act, it is applicable to any industry meaning any business, trade, undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen.

Mr. Pankaj Singla
Sr. Associate
The Act defines “Workman” as any person (including an apprentice) 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 are express or implied. However, important exceptions are: 
  1. Workman employed mainly in a managerial or administrative capacity; or 
  2. Workman, being employed in a supervisory capacity, draws wages exceeding Rupees ten thousand (Rs. 10,000) per month or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.
Under the prevailing laws in India, every industrial establishment that employs more than 100 workers is under mandatory obligation to seek permission from the government before it can proceed with lay-off, retrenchment, or closure of undertaking. Any action by the employers to the contrary that results in job losses without seeking prior permission as prescribed under the act is illegal and workers are entitled to receive wages for the period of illegality. However, an industrial establishment that employs less than 100 workers may retrench its surplus employees/workers in accordance with the provisions laid down under Section 25F, 25G & 25H of the Act without seeking permission of the government. Nonetheless, employees appointed for a fixed period under the contract of fixed term may be discharged from their services without complying with the provisions contained in Section 25F of the Act and his/her services may be terminated either on the ground of expiry of the fixed period or in stipulation of the provision contained therein.

Permitted Causes of Dismissal:

1. Inefficiency 

It is an accepted fact that businesses majorly operate with an objective of earning profits among various other motives. In such a scenario, it will not be feasible for any employer to retain an employee if he has been consistently inefficient and has failed to meet organizational targets. A contract of employment these days clearly establishes the job description and the expectations which the employee will have to fulfil. Therefore, where a worker's employment was terminated on the ground of her unsatisfactory work, the court held such reason to be a valid cause.

2. Breach of Confidence or Misconduct 

Section 2 (oo) of the Act specifically excludes termination of a workman as a punishment inflicted by way of disciplinary action from the protection of the retrenchment under the Act. Therefore, any disciplinary action including for misconduct, breach of confidentiality or other vital requirements of rules of employment is allowed as a just cause for termination. The term misconduct is very subjective and therefore it is always recommended that the employer's human resource policy (rules of employment) comprehensively cover as to what conduct will tantamount to misconduct and eventually lead to termination of employment. Similarly, breach of confidentiality e.g. clientele details, technology details, chemical formulae may be a valid ground for termination.

3. Termination of the service of a workman on the ground of continued ill health is another ground recognized as a valid ground of termination.

Prohibited Termination:

Any termination that is not punishment as a result of disciplinary action or termination of the service of the workman as a result of the non-renewal 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 therein, or termination of the service of a workman on the ground of continued ill health is considered as retrenchment and hence requires proper procedure to be followed as per the provisions of the Act.

A termination which is based on no inquiry, no charge and is neither by way of punishment as a result of disciplinary action may be considered retrenchment. Section 12 (1) of the Maternity Benefit Act, 1961 makes it unlawful for an employer to discharge or dismiss a female employee on account of her absence from work due to her pregnancy or give notice of discharge or dismissal when such notice period was to expire in her absence. Therefore, the employer can issue a notice of termination to the female employee provided the expiry date of the notice issued is after her date of joining service. It is considered advisable to negotiate a voluntary exit of the employee by paying a higher financial amount over and above the statutory dues, and contractual dues, in order to avoid any legal hassles wherein the retrenchment procedure is a complex and cumbersome exercise exposing the employer to the risk of litigation.

Contractual Obligations:

The employment contracts signed between the employer and employees/workmen play a significant role in determining the terms and conditions of termination. Any procedure or terms agreed in the employment contract must be followed in order to avoid any law-suit based on contractual liability. Proper legal planning based on the law and terms of employment contracts for retrenchment/lay-off may minimise any legal hurdles and consequences. Compensation for Retrenchment: Section 25 F of the Act lays down the procedure for the retrenchment and provides for compensation for retrenched workman. The employer must satisfy the following conditions before retrenching a worker employed for a period of continuous period of not less than one year: 
  1. one month's notice in writing to the workmen indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice; (ii) payment of retrenchment compensation which shall be equivalent to fifteen (15) days average pay (for every completed year of continuous service) or any part thereof in excess of six months; and 
  2. notice in the prescribed manner is served on the appropriate government.
Depending upon the applicability, a workman may be entitled to gratuity (if served continuously for 5 years or longer) and other conditions under The Payment of Gratuity Act, 1972. Gratuity is payable at the rate of 15 days salary for per completed year of service. Similarly, statutory dues such as leave encashment and provident fund, if and as applicable, are required to be paid at the time of termination.


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