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Apple Inc. laid off Steve Jobs in 1985.

In 1997, Apple laid off one third of it’s workforce, to stay afloat!

Company A, has to lay off a bunch of employees, less ordinary than Steve Jobs.

This is a COVID commissioned decision- to stay afloat.

In the following pages we will take you through the cross roads of Labour Laws India is at and navigate the regulatory retrenchment environment for Company A.

Company A’s, assessment checklist –

  1. Classification of the employees into “workmen” and “non-workmen”;
  2. Review of employment contracts for terms of termination;
  3. Review of state enactments and ordinances governing retrenchment;
  4. identified financial exposure under PF, Gratuity and other statutory benefits.

RETRENCMENT LAWS IN INDIA

End of an era of labour laws, retrenchment under these laws. in India.Here, retrenchment or terminations are governed by State enactments and some central legislations which direct these legislations. The lay-offs Company A undertakes will be under the new labour laws.

Indian labour laws have hinged on “Workmen” and “Non-Workmen” categories.

Thus,

EMPLOYMENT CATEGORYLEGISLATIONS
WorkmenIndustrial Disputes Act,1947 (“IDA”) replaced with  Industrial Relations Code, 2020[2] (IRC), Payment of Gratuity Act,1972, Payment of Bonus Act of 1965, Maternity Benefit (Amendment) Act, 2017, State specific ordinances;Shops and Establishment Act (Statewise);Any Company Policies and Code of Conduct guidelines.
Non-WorkmenState Specific legislations including Shops and Establishment Act (Statewise);Employment contract;Company Policies around separation compensation;State specific ordinances (if any modifications are made to the Industrial Disputes Act);Maternity Benefit Act, 2017. Replaced with and consolidated with Social Security Code, 2020. All benefits of the Maternity Benefit Act are now under SSC.

RETRENCHMENT OR LAY OFF-without cause

1. Workman

1.1 Section 25G of the IDA contains the procedure of retrenchment of workman. It states that in the absence of any agreement between the employer and the workman, the employer shall ordinarily retrench the workman, first who was the last person to be employed in that category. Last in First Out rule to be followed.

1.2 Conditions to be fulfilled by an employer before retrenching an employee employed for a period of continuous period of not less than one year under the IDA[3], require-

i.    one months’ notice in writing indicating the reasons for retrenchment or payment in lieu of such notice;

ii.   including wages for the period of notice;

iii.   3 months’ notice in writing stating the reasons for retrenchment or payment made in lieu of such notice[4]

iv.  Compensation, equivalent to fifteen (15) days average pay (Basic Salary + DA) for every completed year of continuous service or anything more than six months;

v.   the unpaid salary for days worked;

vi.  Encashment of unused paid leave;

vii.  Gratuity, if employed for more than five years as provided for in the Gratuity Act, 1972;

viii. Bonus for those employees who worked for at least 30 days in a financial year and earned up to Rs.10,000 under the Payment of Bonus Act of 1965;

ix. Other payments agreed to be paid upon termination under company policy including insurance money payable to the employee for security.

The payment of average pay to workman depends on the type of employment he is involved.

x. Notice has to be served to the appropriate Government prior to retrenchment. As per the IDA establishments with more than 100 workers needed the prior permission of the government for retrenchment.

Such permission is not necessary if the lay-off is due to shortage of power, natural calamity  and in the case of a mine, such lay-off is due to fire, flood, excess of inflammable gas.

The central government had declared COVID-19 as a ‘national disaster’ and announced ex-gratia relief of Rs 4 lakhs to the families affected by it but the government still has not declared COVID-19 as ‘natural calamity’.

2. Non-Workman

2.1 Non-workers can be terminated without mentioning the cause except in few states,  where the reasons for termination have to be provided or grounds have to be disclosed.

Eg., A “reasonable cause” has to be mentioned for the termination of non-workers (Tamil Nadu Shops and Establishment Act, 1947[7]), (Karnataka Shops and Commercial Establishment Act, 1961[8]); (Madhya Pradesh Shops and Establishment Act, 1958[9]); (Kerala Shops and Establishment Act, 1960[10]).

2.2 The following have to be paid upon termination for grounds other than “misconduct”:

i. Notice, or pay instead of notice have to be given according to the Employment Contract;
ii. Gratuity as applicable,
iii. PF as accumulated;
iv. Bonus or incentive as committed in writing;
v. Payments as per Company Policy, leave encashment or any other benefits.

For non-workmen the Employment Contract, typically govern the severance compensation, incentive and bonus. Enactments remain applicable to the statutory payouts.

2.3  For Contract/casual worker:

i. Section 25F[11]of the IDA does not require compliance before retrenching a casual or contractual worker. The casual workers employed in different establishments under a single employer can be retrenched without giving a notice even if he or she has completed 240 days of service.

In general a contract/casual employee has the same legal relationship with the employer just like any other permanent employees. Difference being, the contractor appointed for a fixed term is not required to be served any notice of termination at expiry of the period of contract. It is therefore, indicative that a notice has to be served only when the contract worker is being terminated before the actual cessation of employment.

NEW LABOUR LAWS

2020, is the year, when the Industrial Relations Code, 2020[12](“IRC”) and Social Security Code, 2020[13] (“SSC”) replace a bunch of existing labour laws. This alters labour laws governing-

  1. provident fund,
  2. gratuity,
  3. employee state insurance,
  4. Maternity etc.
  5. Trade unions
  6. Industrial employment and disputes
  7. Cine workers welfare
  8. Employees compensation
  9. Unorganized workers social security

The SSC will not include gig workers, platform workers and contractual workers working in an establishment. See section on contract workers below, under (x).

What does the SSC repeal?

New LawRepealed
Social Security Code, 2020 (SSC)The Employee’s Compensation Act, 1923;The Employees’ State Insurance Act, 1948; The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959; The Maternity Benefit Act, 1961; The Payment of Gratuity Act, 1972; The Cine-Workers Welfare Fund Act, 1981; The Building and Other Construction Workers’ Welfare Cess Act, 1996; The Unorganised Workers Social Security Act, 2008.  

What is the impact?

i. EPF Contribution: Employee Provident Fund (EPF) contribution reduced to 10% from the existing 12% of the wages.[14]EPF scheme applicable to all establishments having 20 or more employees. Employee can make a higher contribution, but employer is under no obligation to match that.

Earlierunder the EPF Act, only those establishments listed under the schedule having 20 or more employees were brought under the EPF scheme. The Central Board of Trustees of Employees Provident Fund Organisation in its recommendation has changed the annual rate of interest to be credited for EPF subscribers to 8.5%.

The calculation of employees contribution towards EPF-

Basic Salary+Dearness Allowance

                10%

Calculation of employers contribution towards EPS-

Basic Salary+Dearness Allowance

                8.33%

The summation of EPS AND EPF contribution will be the total EPF contribution per month upon which the interest rate of 8.50% shall be levied

ii. Social Security:“Social security” means the measures of protection afforded to employees, unorganised workers, gig workers and platform workers to ensure access to health care and to provide income security, particularly in cases of old age, unemployment, sickness, invalidity, work injury, maternity or loss of a breadwinner by means of rights conferred on them and schemes under the SSC.

iii. Maternity benefits:Maternity benefits include creche facility, maternity benefit claims, prohibition from work during certain periods, provision of nursing breaks etc.

iv. Forfeiture of Maternity benefit if woman working elsewhere: SSC forfeits maternity benefit who works for remuneration during the period she has been permitted by an employer to absent herself for availing the maternity benefit.

Under Section 5(1) of Maternity Benefit Act,1961 the employer is liable to pay maternity benefit at the rate of average daily wage for the period of absence which is immediately preceding and on the day of her delivery. The maternity benefit has to be paid for the next six weeks from her date of delivery. So according to SSC,2020 in between this availed period of absence if the women works in an establishment for remuneration, her maternity benefit shall be forfeited.

v. Aadhaar based requirements: An employee or unorganised worker for: (a) registration as member or beneficiary; (b) seeking benefit whether in kind, cash or medical sickness benefit or pension, gratuity or maternity benefit or any other benefit or for withdrawal of fund; or (c) availing services of career centre; or (d) receiving any payment or medical attendance as Insured Person himself or for his dependants will have to establish their identity through Aadhaar.

vi. Work Hours:  The provisions related to working hours as in Factories Act, 1948 are in force and therefore no modifications to it. Provisions related working hours under the Codes will get implemented after the relevant provisions or rules made there under have come under force.  

vii. Gig workers: “Gig Worker” means a person who performs work or participates in a work arrangement and earns from such activities outside of traditional employer-employee relationship.

viii. SSC makes Gig workers, eligible for welfare measures.

It mandates the Central Government to frame a scheme for the welfare of these classes of employees for- Life and disability; Health and maternity benefits; old age protection; Education; ESI[15], gratuity on prorated basis for fixed term employees, any other benefits as may be determined by the Central Government.
Role of aggregators has been defined under Schedule 7 of which nine categories have been formed including ride-sharing services, food and grocery delivery services and media services and e-marketplaces. Any contributions from such an aggregator may be at a rate notified by the government falling between 1-2% of the annual turnover of the aggregators capped @5% of the amount paid by an aggregator to gig worker.

ix. Contract workers:The SSC applies toestablishments or contractors employing 50 or more workers.

What does the IRC repeal?

New LawRepealed
Industrial Relations Code, 2020 (IRC)Trade Unions Act, 1926;Industrial Employment (Standing Orders) Act, 1946;Industrial Disputes Act, 1947.  

What is the impact?

i. Closure, lay-off and retrenchment: Prior permission of the government before closure, lay-off or retrenchment will be required for establishment with at least 300 workers. This threshold can be revised only by the central government through a notification.

ii. Disputes relating to termination of Individual worker: Dispute in relation to discharge, dismissal, retrenchment or otherwise termination of the services of an individual worker will be an industrial dispute with recourse to Industrial Tribunal.

‘Worker’ defined:
The definition of worker includes working journalists from Working Journalists and other Newspaper Employees and Miscellaneous Provisions Act, 1955 and Sales Promotion Employees from Sales Promotion Employees Act, 1976
AND it includes-
Person employed in supervisiory drawing less than Rs 18,000 per month.*

* This change has altered a paradigm- person employed in an industrial establishment and in a supervisory position with wages less tha1600/- per month would be a worker under the IDA. Now, with the IRC a person employed in a supervisory position in an industrial establishment with wages less than 18,000/- would be considered a worker.

iii. Protection for fixed term employment: Fixed term workers are eligible for all statutory benefits same as offered permanent worker based on period of service rendered by him even if his period of employment does not extend to the required 1 year period for receiving the statutory benefits.Fixed term employees will be eligible for gratuity on a pro rata basis as per section 53 of the SSC.

Employer includes contractor, legal representative of deceased employer etc.

iv.  Notice period for strike and lockouts: Strikes require a 14 daysprior notice to the employer. Validity of strike notice is increased to 60 days from existing 6 weeks. Under the IDA the notice requirement was 6 weeks to a strike, which has been reduced to 60 days under the IRC. Notice period for lock-out is applicable to all establishments.

*Under the ID Act, the requirement of prior notice of strike and lockout was applicable only to public utlity services such as railways, transporatiion, posts/telegraph/telecommunication, and other notified services.

FAQS

1. Can I Terminate Employees?

Yes, you may terminate employees from your establishment keeping in mind the provisions stated under the Industrial Disputes Act,1947 in case they are “workmen”. For non-workmen, the terms and conditions of the employment contract and State Specific Legislations (Shops and Establishment Act) of the respective State will be applicable. Certain Governmental notifications and circulations also needs to be followed especially when you are terminating employees during COVID-19.

2. What laws govern termination?

Ans:  Central and State laws will govern the termination for workmen and to the extent applicable even to the non-workmen.

For example:

3. Do I have to pay anything to them other than Salary?

Ans: Yes, the employee is entitled to wages which shall be inclusive of basic wages+ plus dearness allowances at the time of termination. Further retrenchment compensation has to be provided to the employee under the head of Severance pay, which is inclusive of bonus, leave encashment, insurance, gratuity, compensation.

4. What amount am I liable to pay under the law?

Ans: You are liable to pay the amounts under the following categories:

  1. Payment of Salary in lieu of notice.
  2. unpaid salary for days worked.
  3. Encashment of unused paid leave
  4. Payment of gratuity to an employee who is employed for more than five years as provided for in the Gratuity Act, 1972
  5. Payment of 50% of the employee’s wages for up to 45 days where an employee employed for more than 1 year is laid off
  6. Compensation will be paid that will amount to 15 days average pay for every year of continuous service
  7. Payment of bonus for those employees who worked for at least 30 days in a financial year and earned up to Rs.10,000 under the Payment of Bonus Act of 1965
  8. Any other payment agreed to be paid on termination by the employer under the company policy

5. What is the Calculation for Gratuity? When does my liability under Gratuity Act begin?

Ans: i.  Gratuity has to be paid to an employee for every completed year of service or part thereof in excess of six months.

       ii.   It is calculated @ fifteen (15) days wages based on the rate of wages (basic + DA) last drawn by the employee.

       iii. For a monthly rated employee is that the fifteen days wages shall be calculated by  

            Dividing the monthly rate of wages last drawn by him by twenty-six (26) and     

            Multiplying by fifteen (15).

Formula: [Monthly rate of wage] x 15

                        26

The liability to pay gratuity under the Gratuity Act starts on the termination of employment of the employee only after he has rendered continuous service for not less than five years. However, the eligibility for Gratuity is applicable upon completion of 6 months.

6. What about bonus and incentives?

Ans: At the time of termination certain statutory bonus and incentives has to be paid to the employee by the employer.

For Employees governed by an Employment Contract, the commitments in the Contract will have to be paid and any Company Policies that bind the Company.

7. How is severance pay/retrenchment compensation determined?

Ans: Typically, based on the date of appointment and upon completion of 240 days of employment, entitlement is of 15 days retrenchment compensation + one month’s notice or salary in place of notice to be calculated as the employee has worked for one year.

Formula: [Last drawn monthly salary] x 15

                            25

8. Can I give more than what is prescribed under law? What do I have to keep in mind for giving more than what is prescribed under law?

Ans: Yes, you could. As ex-gratis act of solidarity, you are free to give anything you chose over and above what is required under law. Ex-gratia can be paid along with annual bonus since the Payment of Bonus Act puts a cap on 20% bonus to employees. So if you are willing to pay higher than 20% of bonus to the employees you can make ex-gratia payment along with the bonus payable. There is no ceiling to Ex-Gratia payment and the percentage also varies from year to year purely at the discretion of the employer. Ex-gratia is generally paid out of the revenues of the firm in case the profits generated after completion of a successful deal/order.

9. What are my risks for not complying with the law?

Ans:  An attempt to not pay Gratuity[19] knowingly or unknowingly, makes it a criminal offence punishable with imprisonment for a term which may extend to six months, or with fine which may extend to INR 10,000/- or with both.

Repeat contraventions of the Payment of Gratuity Act,1972, then punishable with imprisonment for a term which shall not be less than three (3) months extendable to one (1) year, or with fine which shall not be less than INR 10,000/- extendable to INR 20,000/-, or with both.

10. How can I reduce my risk and mitigate exposure at termination?

Ans: Comply with the law, terms of the employment contract and Company Policies will reduce your risk exposure, significantly.

It will make it almost negligible if simple Resignation Letters are obtained from the employees.

While remaining empathetic towards the employees situation can go a long way and reduce the risk to Nil.

There are also certain reasons which can be listed at the time of termination:

  1. Lack of projects and work available to the employer himself.
  2. No access to financial supports due to lack of work and lack of investors
  3. Work from home or remote work is not possible
  4. Employee not agreeing to work on alternative arrangements provided by the company
  5. Consistency of work has been lowered
  6. Inefficiency
  7. Violation of confidential provisions
  8. Breach of employment contract.

10 PRACTICAL HACKS FOR COMPANY A

  1. Try to retain a fair and balanced approach in structuring retrenchment plans;
  2. Prepare detailed plans with reasons for a drastic step like retrenchment;
  3. Make monetary leeways where possible. Eg., excuse loan repayments if possible, write off reimbursements, round off to the next nearest figure;
  4. Have clear communications around the paln to retrench;
  5. Keep senior management involved in all communications;
  6. Retain transparency and provide opportunity to people to approach with clarifications or desire to speak;
  7. Work out post termination support as feasible;
  8. Provide options around financial aids;
  9. Try to reduce rumoured discussions by involving clear communication from amangers;
  10. Follow the provisions of Governmental notifications: Considering COVID19 there are high chances that governmental regulations with regard to termination of employees will be issued time and time again. It is very necessary to follow the provisions of these Governmental Notifications and keep the management updated.

Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author.
Readers are encouraged not to rely solely on these contents before making any decision.

ANNEXURE-A

STATE SPECIFIC LEGISLATIONSPROVISIONS
Karnataka Shops and Establishment Act,1961Reasonable cause to be given, for service of not less than six months. One month Notice or payment in lieu;Payment of Gratuity;300 or more workmen require Government permission and comply with certain conditions in cases of closure, retrenchment or lay-off.
Kerala Shops and Establishment Act,1960Reasonable cause, for service not less than six months. One month Notice or payment in lieu;Payment of Gratuity;
Madhya Pradesh Shops and Establishment Act,1958A reasonable cause for service not less than three months. Notice or payment in lieu;Payment of Gratuity.
Maharashtra Shops and Establishment Act,1948Thirty days (30) of notice in writing for employee engaged for a year by the employer.(Sec 66)more than three months but less than a year, at least 14 days of notice;Payment of Gratuity.
Punjab Shops and Establishment Act,1958 (Applicable for both Punjab and Haryana)One months notice or payment in lieu of such notice;Payment of Gratuity;Three months notice mandatory (an option of paying three months wages in alternative has been removed) for the retrenchment payout, an extra amount  equivalent to 3 months avg pay has to be paid in addition of 15 day avg pay of every year of continued service according to the Industrial Disputes (Punjab Amendment) Ordinance, 2020(Sec 25N(1)(a) (Applicable only for Punjab)
Tamil Nadu Shops and Establishment Act,1972reasonable cause, for service not less than six months. One month Notice or payment in lieu;Payment of Gratuity.
Uttar Pradesh DookanaurVanijya Adhisthan,1962one month’s previous notice or pay in lieu;Notice can be shorter if wage is paid for the number of days short;Payment of Gratuity.
West Bengal Shops and Establishment Act, 1963one month’s previous notice or pay in lieu;Payment of Gratuity.
Bihar Shops and Establishment Act,1963One month’s previous notice or pay in lieu;Payment of Gratuity.
Andhra Pradesh Shops and Establishment Act, 1988one month’s previous notice or pay in lieu;Payment of Gratuity.
Delhi Shops and Establishment Act,1954thirty days notice if he has been with the corporation for more than three months;Payment of Gratuity.

Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author.
Readers are encouraged not to rely solely on these contents before making any decision.


[1] Section 2(s) of Industrial Disputes Act 1947

[2] currently subjected to Presidential assent but will come into force in December 2020 according to the ministry of Labour and Employment

[3]https://labour.gov.in/sites/default/files/THEINDUSTRIALDISPUTES_ACT1947_0.pdf

[4]Section 25 N

[5] http://egazette.nic.in/WriteReadData/2019/210356.pdf

[6] http://egazette.nic.in/WriteReadData/2019/210356.pdf

[7] Section 41

[8] Section 39

[9] Section 58

[10] Section 18

[11] Sec25F (a) of IDA,1947- The workman has to be given one months’s notice in writing indicating the reason for retrenchment or has to paid in lieu of such notice.

[12]https://www.livelaw.in/pdf_upload/pdf_upload-382034.pdf

[13]https://www.livelaw.in/pdf_upload/pdf_upload-382050.pdf

[14] Under Section 2 (88) of Social Security Code,2020 wages is defined as all remunerations in monetary terms whether by salaries, allowances or otherwise would form part of wages and also includes basic pay, dearness allowance and retaining allowance.

[15] 10 or more employees

[16] Section 8

[17] Section 10

[18] Section 2(13)

[19]https://clc.gov.in/clc/sites/default/files/PaymentofGratuityAct.pdf

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