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Mass retrenchment under the code on Industrial Relations: A missed opportunity for meaningful reform

Contributed by: Samvad Partners

The Code on Industrial Relations (“IR Code”) and the allied rules are soon to be implemented in India as part of the Indian Government’s mammoth overhaul of the existing labour laws. While the labour codes have been touted as the largest labour law reform the country has ever witnessed, they are still a long way from resolving several contentious issues which have divided employers and workmen for decades.

One significant example of this is the framework for effecting mass retrenchment. The existing labour laws have been subjected to long-standing criticism by corporate India for being employer unfriendly. Some of the reasons for criticism are:

  1. Lack of uniformity: Since matters related to labour are part of the concurrent list as per Schedule 7 of the Constitution of India, both the state governments and the central government formulating laws has led to lack of uniformity in application across the country.

  2. Applicability to certain non-blue collared employees: The definition of “workman” under the Industrial Disputes Act, 1947 (“ID Act”) being exhaustive, has led to certain categories of employees in new age industries who are not otherwise “blue collared” employees becoming subject to this legislation, purely on account of their role not being managerial or supervisory in nature. This has meant that a number of new age businesses have been required to comply with the ID Act, although historically this legislation was meant to protect the rights of traditional “blue collared” workmen.

  3. Constant interface by local authorities: Under the ID Act, where the number of workmen is less than 100, the process for retrenchment involves notification to the appropriate government but extends to approval requirements where the number of workmen is more than 100. While certain states such as Bihar, Orissa, Gujarat, Madhya Pradesh, Karnataka and Punjab, have amended Section 25K of the ID Act, to increase the threshold from 100 to 300, giving a better buffer to employers, this is insufficient given most businesses in the current age tend to be present in multiple jurisdictions, within the country and the globe. The approval mechanism for effecting mass retrenchment is often not implemented in strict adherence to the ID Act, as a result of significant and pervasive red-tapism and bureaucracy at the local level which leads to delays and additional costs for employers.

Once implemented, the IR Code shall subsume the ID Act; the Industrial Employment (Standing Orders) Act, 1946; and the Trade Unions Act, 1926. Accordingly, the IR Code inter alia contains provisions related to retrenchment which are similar to those under the ID Act. Retrenchment under the IR Code is defined as:

“termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include-

  1. voluntary retirement of the worker; or

  2. retirement of the worker on reaching the age of superannuation; or

  3. termination of the service of the worker as a result of the non-renewal of the contract of employment between the employer and the worker concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or

  4. termination of service of the worker as a result of completion of tenure of fixed-term employment; or

  5. termination of the service of a worker on the ground of continued ill health”.

It is important to note that there are not too many significant changes in the scope and applicability of the retrenchment framework in the IR Code when compared to Chapter V-B of the ID Act. The only change being the threshold for seeking approval for mass retrenchment being raised to 300 instead of 100 under the ID Act. Theoretically, both the ID Act and the IR Code provide for a detailed time-bound approval process for effecting mass retrenchment. However, from a practical standpoint, several employers have in the past faced stiff resistance from the local state governments while applying for such approval. Such resistance has been on account of various socio-economic and political issues, including demands made by trade unions or other political factors to not allow such retrenchment. As a result, several employers (especially in labour intensive sectors such as manufacturing and construction), have been unable to successfully effect mass retrenchment, leading to significant losses, prolonged protests and deadlocks with trade unions. This aspect has not been addressed under the IR Code, which fails to make significant improvements in the extant procedure for effecting mass retrenchment.

While India Inc. heaves a sigh of relief at this small but significant change in the threshold for mass retrenchment, trade unions across the country view it as a step towards degeneration of labour rights and as a prologue to the ‘hire and fire regime’ in India. Workers feel that mass retrenchment without any governmental/ regulatory oversight could result in a situation of termination of employment at will. Their concerns are especially relevant in the COVID-19 era where mass retrenchments across labour intensive sectors have become common. The steady rise of automation and deployment of artificial intelligence in traditionally labour intensive sectors has further increased anxiety for workers. While ‘employment at will’ or ‘hire and fire’ arrangements continue to be unrecognized under the existing law and the IR Code, it is equally true that enforcement of labour laws and strict compliance in India especially in rural setups and small and medium size enterprises have historically remained weak, often leading to illegal retrenchments and violation of statutory rights of “blue collared” workers for whose benefit Indian labour laws were originally put in place, as opposed to skilled non-managerial / non-administrative employees of large corporations.

The IR Code however fails in reaching that middle ground between the conflicting needs and concerns of labour and capital. The IR Code does not address issues such as providing for a fair and transparent approval process for effecting mass retrenchment that have been core to the effective functioning of retrenchment. While the objective of the labour codes was to rationalize, consolidate and simplify labour laws in India, it appears that rationalization has not been given adequate priority.

Contributed by Samvad Partners

The above article has been authored by Ms Ashwini Vittalachar(Partner) and Mr Srinivas Raman(Associate).

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