INTRODUCTION

The term “lay-off” means a temporary suspension or permanent termination of employment

of an employee or a group of employees (collective layoff) for business reasons, such as
personnel management or downsizing an organization. The workers who have lost or left
their jobs, because their employer has closed or moved or because of an insufficiency of work
or because of an abolishment of their position or shift, are called laid off or displaced
workers1. On the other hand, downsizing a company means reducing the employees in a
workforce, a practice that gained popularity in the 1980s and early 1990s. Downsizing helped
reduce the costs of employers because of which it delivered better shareholder value. Recent
studies on the process of downsizing in the U.S, U.K and Japan indicate that downsizing aids
deteriorating organizations by cutting futile costs in order to improve their performance2.

In a nutshell, lay-off is a cost cutting measure that helps cope with the temporary inability of
an employer to offer employment to a workman so as to keep the establishment as going
concern. Although temporary in nature, it results in immediate unemployment. However, it
does not terminate the employer-employee relationship.

SCOPE AND NEED FOR THE LEGISLATION

India has over the years enacted and implemented a multitude of legislations, meaning to
protect the well-being of its labour force. As a consequence, there are laws that protect trade
union rights, laws that relinquish bonded labour and child labour from hazardous industries,
etc. We also have legislations that guarantee a minimum wage or prevent retrenchment, lay-
offs and dismissal of labour. Typically, the pivotal role in the labour market is played by the
government. As opposed to the West where facets of industrial relations are governed by
Collective bargaining, the same is determined in India by means of various legislations.

The Industrial Disputes Act enacted in the year 1947, aims to secure industrial peace and
harmony and “Maintenance of Peaceful work culture in the Industry in India”3. The scope of
this Act is to achieve harmony between employers and employees and promote economic and
social justice, thereby classifying the Act as a welfare legislation. It was also the first
legislation on exit, layoffs and closures. Initially, the Act did not prohibit employers from
laying off or retrenching workers or closing down unprofitable businesses, given they
1
https://www.bls.gov/cps/lfcharacteristics.htm#displaced
2
Mellahi, K. and Wilkinson, A. (2004) Downsizing and Innovation Output: A Review of Literature and Research
Propositions
3
Industrial Disputes Act, 1947

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informed the workers and the unions in advance. Hence, it was a practice but the provisions
with respect to payment of compensation for layoff and retrenchment was introduced in the
year 19534 with the promulgation of Industrial Disputes (Amendment) Ordinance which was
further repealed and replaced by Industrial Disputes (Amendment) Act, 1953. Chapter V-B,
introduced by the 1976 amendment, requires firms employing 300 or more workers to obtain
government permission for layoffs, retrenchments and closures. A further amendment in
1982, which took effect in 1984, expanded its ambit by reducing the threshold to 100
workers.

IMPORTANT PROVISIONS

STATUTORY DEFINITION

As explained earlier, Lay-off is a practice whereby the employer fails to give employment to
workmen owing to shortage of raw materials, coal or power, accumulation of stocks,
breakdown of machinery or for similar such reasons. Section 2(kkk) of the Act defines the
term Lay-off as “the failure, refusal or inability of an employer on account of shortage of
coal, power or raw materials or the accumulation of stocks or the breakdown of machinery
[ or natural calamity or for any other connected reason] to give employment to a workman
whose name is borne on the muster rolls of his industrial establishment and who has not been
retrenched.” It means that if a workman, whose name is on the muster rolls of the industrial
establishment presents himself for work and is not given employment within two hours of
presenting himself, he shall be deemed to have been laid-off for that day. However, as also
stated earlier, the labour-management relationship subsists even during lay-off.

PROCEDURE FOR LAY-OFF

Although the procedure for lay-off is not laid down in the Act, it is mandatory on the
management’s part to provide a notice of the period of lay-off within 7 days of beginning or
termination of such lay-off as per Rules 75-A of the Industrial Disputes (Central Rules),
1957. The employer must adhere to the following conditions before resorting to lay-off in the
industry:

 The employer is to follow the reasons laid down in Section 2(kkk) of Standing Orders
before refusal for employment of workmen.

4
Kaushik Basu, Gary S. Fields, and Shub Debgupta, Retrenchment, Labour Laws and Government Policy: An
Analysis with Special Reference to India.

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  The employer may declare lay-off only when the circumstances are beyond his
control.
 The lay-off should result in temporary non-employment of worker whose name is on
the muster rolls of the industrial unit.
 The workmen will be restored their rights within a reasonable period of time in case
of a lay-off.
 Lay-off can be declared only in case of a going concern. The practice loses all
relevance when the organization is closed permanently.
 Lay-off can’t be declared merely on the ground of an employer suffering financial
loss for reasons beyond his control. Such a lay-off is both unjustified and invalid and
the employees can claim full wages for the period of such a lay-off.

RIGHT OF MANAGEMENT TO LAY OFF

A. Standing Orders : Under the Industrial Employment (Standing Orders) Act, 1946,
the management is allowed to lay-off its employees in consonance with the relevant
provisions, adhering to the reasons mentioned therein.
B. The Industrial Disputes Act, 1947: Chapter V-A and V-B of the Act 5 lay down
reasons that the employer has to adhere to while declaring lay-off. If the terms and
conditions of the standing Orders do not cover the reasons for declaring the lay-off
then the conditions under the Act shall have to be met with.

PROHIBITION OF LAY-OFF

In 1970s, a number of cases of lay-off were reported leading to an overall denigrating

effect on the workers6. Although, the Act of 1947 did not curtail the right of management
to declare lay off, it had to be amended in the year 1976 so that the workers’ sufferings
could be eased and a high rate of industrial production be maintained. As a result,
Section 25M in Chapter V-B imposed certain restrictions on the management’s right to
lay-off. The apex Court had declared some of the provisions invalid and hence, the Act
had to be amended in the year 1984. Section 25M further laid down how prior approval
from the “appropriate government” is necessary to lay-off a workman when the industry
in question is neither seasonal nor does it function intermittently and has over 100

5
Industrial Disputes Act, 1947
6
https://shodhganga.inflibnet.ac.in/bitstream/10603/207150/1/10-chepter%206.pdf

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 employed workmen for the preceding 12 months. The appropriate government has the
final decisive say in determining whether an establishment is seasonal or not7.

PENALTY AND COMPENSATION FOR ILLEGAL LAY-OFF

A. Penalty
If an employer has declared lay-off in his industrial unit, contravening the provisions
of Section 25M of the Act, he will be penalized under Section 25Q with
imprisonment up to a period of 1 month or with a fine of Rs 1000 or both.
Industrial establishments all across the world maintain muster rolls which record the
attendance of the employed workers. Muster rolls are also important because workers
whose names are not present therein, can’t be laid off under the Act. Section 25D
obligates the employer to maintain muster-rolls of workmen; failure to do so attracts
penalty under Section 31(2) of the Act.
B. Compensation
Section 25C of the Act lays down provisions ensuring right of workmen laid-off to a
compensation.
Any workman
a) whose name is borne on the muster-rolls of an industrial establishment and,
b) who has completed at least one year of continuous service under the
employer, shall be paid compensation for the period during which he was
laid-off, which shall be equal to fifty percent of the total of the basic wages
and dearness allowance that should be payable to him had such workman not
been so laid-off.

If during the period of one year of continuous service, the workman is laid-off for
more than 45 days, no further compensation will be paid if there is an agreement
in that respect between the workman and the employer. Upon the expiry of this
period, the employer can retrench the workman and the compensation then paid
would exclude the amount already paid during the 45 day period of layoff.

Further, if the workman is a “badli” workman or a casual workman, he would fall

outside the ambit of Section 25C. However, if a “badli” workman has completed
1 year of continuous service in the industrial establishment, he will be treated as a
permanent workman for all purposes8.
7
Section 25K(2), Chapter VB, Industrial Disputes Act, 1947
8
English Electric Co. of India Ltd v. Industrial Tribunal Madras (1987) 1 LLJ 141, 153 (Mad) (DB)

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WORKMEN NOT ENTITLED TO COMPENSATION

Section 25E of the Act is an exception to Section 25C, highlighting situations wherein a
workman is not entitled to compensation even when subject to a lay-off. An employee is not
entitled to compensation if:

a) he does not accept any alternate employment offered by the employer in the same
establishment or in any other establishment under the same employer, provided such
establishment is within 5 miles radius from the previous establishment. Further, such
alternate employment should not require any special skill or experience and the
employer must be paid wages similar to what he was being paid previously.
b) he is not present to work at the establishment at the appointed time during normal
working hours at least once a day;
c) such lay-off is a result of a strike or slow production by workmen in another part of
the establishment.

It is on the employer to show that the workman is prohibited from claiming compensation
because his case is being hit by Section 25E9.

JUDICIAL INTERPRETATION OF THE RELEVANT PROVISIONS

AND DEVELOPMENT OF LABOUR JURISPRUDENCE

9
RS Rekchand Mohota Spg and Wvg Mills Pvt Ltd v. Labour Court 1968 Lab IC 480, 484 (DB)

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