CHAPTER 1: RETRENCHMENT UNDER INDUSTRIAL DISPUTES ACT, 1947

It is common for corporates to carry out termination of employees who do not meet their
performance requirements, or are found wanting in their conduct or are incapable of working in
teams. HR units often act in a rush thinking all they have to do is to invoke the terms of the
employment contract regarding termination. Not surprisingly, terminations are carried out with
little or no idea of the requirements of the governing legislations in India. This is even more typical
in the case of subsidiaries of foreign companies who often overlook that employment laws in India
are based on legislations which override contractual terms of employment.

Retrenchment, as commonly understood is termination of an employee on the grounds of surplus

labor or incapacity of employees due to some economic grounds. However, the Industrial Dispute
Act, 1947 is the governing legislation for “retrenchment”, which takes the wider view of
termination of employee as against the ordinary meaning of the term retrenchment.

Section 2(oo) of the Act states that

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

(a) voluntary retirement of the workman or

(b) retirement of the workmen on reaching the age of superannuation if the contract of
employment between the employer and the workman concerned contains a stipulation in
that behalf; or

(bb) 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;

(c) termination of the service of a workman on the ground of continued ill-health.”

The definition of retrenchment was not included in the Industrial Disputes Act, 1947 in its original
form. It was inserted by Amendment to the Act in 1953. Thus, the Industrial Disputes A ct, 1947
provides for certain conditions in which the termination of employment would not be considered
as retrenchment. The provision (bb) to Section 2(oo) was inserted later through the Amendment

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Act 49 of 1984. Section 2(oo)(bb) provides that termination of employment on non - renewal of
employment agreement upon its expiry shalll not be considered as ‘retrenchment’. Before this
provision was added to the Act, the Courts were of the opinion that non - renewal of such contracts
of employment would constitute retrenchment for the purpose of this Act. This opinion was
expressed by the Supreme Court in Hindustan Aluminum Corporation v. State of Orissa1. It
was later realized that the judgment was a bad judgment and the provision (bb) was subsequently
added to the section.

In the State Bank of India vs. Sundara Money2, the Supreme Court adopted the literal meaning
of retrenchment, which is exhaustive and comprehensive and held that the expression "for any
reason whatsoever" was very wide and admitted almost no exceptions. So, retrenchment means
termination of a worker's services for any reason whatsoever, other than those specified in Section
2(oo).

The Bombay High Court, in State Bank of India v. Sundaramony held that wherein the court
held that an analysis of the definition reveals four essential ingredients, namely

1) There must be a termination of the service of a workman.

2) The termination must be by the employer,

3) For any reason whatsoever, and

4) Otherwise than as by way of punishment inflicted by way of disciplinary action.

CHAPTER 2: CONDITIONS PRECEDENT TO RETRENCHMENT

An employer must carry out retrenchment (other than dismissal on grounds of misconduct), as per
the requirements of section 25F of the Industrial Disputes Act. This provision provides for the
employer to fulfill certain conditions before retrenching any employee.

It states that “no workman employed in any industry who has been in continuous service for
not less than one year under an employer shall be retrenched by that employer until-

1
1970 AIR 253
2
(1975) ILLJ 453 MAD

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(a) the workman has been given one month’ s notice in writing 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:

(b) the workman has been paid, at the time of retrenchment, compensation which shall be
equivalent to fifteen days’ average pay for every completed year of continuous service or any
part thereof in excess of six months; and

(c) notice in the prescribed manner is served on the appropriate Government or such
authority as may be specified by the appropriate Government by notification in the Official
Gazette.”

The condition given under section 25F(c) states requires the employer to give notice to appropriate
government in addition to the other two conditions. The notice must state the reason for
retrenchment of the employee and the notice must be issued as is prescribed in the rules framed
under the Act.

Further, in the case of the employers of industrial units, who have employed one hundred workmen
or more on an average per working day for the preceding twelve months are required to comply
with certain different conditions.

Section 25N also lays down the conditions precedent to retrenchment

1) No workman employed in any industrial establishment to which this Chapter applies, who has
been in continuous service for not less than one year under an employer shall be retrenched by that
employer until,-

(a) the workman has been given three months notice in writing 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; and

(b) the prior permission of the appropriate Government or such authority as may be specified by
that Government by notification in the Official Gazette (hereafter in this section referred to as the
specified authority) has been obtained on an application made in this behalf.

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(2) An application for permission under sub-section (1) shall be made by the employer in the
prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such
application shall also be served simultaneously on the workmen concerned in the prescribed
manner.

(3) Where an application for permission under sub-section (1) has been made, the appropriate
Government or the specified authority, after making such inquiry as it thinks fit and after giving a
reasonable opportunity of being heard to the employer, the workmen concerned and the persons
interested in such retrenchment, may, having regard to the genuineness and adequacy of the
reasons stated by the employer, the interests of the workmen and all other relevant factors, by order
and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of
such order shall be communicated to the employer and the workmen.

(4) Where an application for permission has been made under sub-section (1) and the appropriate
Government or the specified authority does not communicate the order granting or refusing to
grant permission to the employer within a period of sixty days from the date on which such
application is made, the permission applied for shall be deemed to have been granted on the
expiration of the said period of sixty days.

Unlike notice requirements of section 25F, the employer is required under section 25N to make
application along with the reasons of intended retrenchment to the State Government for seeking
its prior permission to retrench the employee. The State Government has the discretion to grant or
withhold such permission after making enquiries. Hence, a simple termination as per the contract
of employment can prove disastrous in the event the termination is challenged.

CHAPTER 3: PROCEDURE OF RETRENCHMENT AND CALCULATION OF

COMPENSATION

Procedure of retrenchment

Section 25G of the Industrial Disputes Act,1947 lays down the procedure of retrenchment. Where
any workman in an industrial establishment, who is a citizen of India, is to be retrenched and he
belongs to a particular category of workmen in that establishment, in the absence of any agreement
between the employer and the workman in this behalf, the employer shall ordinarily retrench the

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workman who was the last person to be employed in that category, unless for reasons to be
recorded the employer retrenches any other workman. The employer is also required to maintain
a seniority list of the workmen. The system of last in first out is to be followed in retrenching
workmen.

Procedure for calculation of retrenchment compensation

There are provisions under Chapters V-A and V-B of Industrial Disputes Act relating to
retrenchment under certain situations. Section 25F provides for conditions precedent to
retrenchment of workers, Section 25F(b) provides for payment for retrenchment compensation
which shall be equivalent to 15 day’s average pay for every completed year of continuous service
or any part thereof in excess of 6 months.

As per employment law in India, the payment of retrenchment compensation is condition

precedent and failure to pay will vitiate the retrenchment. Therefore, calculation of retrenchment
compensation is very important. While calculating retrenchment compensation unlike Gratuity
component of wages includes Basic, Dearness Allowance and all allowances. Since, payment of
retrenchment compensation is a condition precedent; one will have to consider definition of Wages
as provided in Section 2(rr) in Industrial Disputes Act. –

while calculating retrenchment compensation, Basic Wages, Dearness Allowance, all allowances
for attendance, House Rent, Conveyance etc. shall have to be considered. The value of housing
provided as well as value of amenities provided along with housing also will have to be considered.

t is obligatory on the part of the employer to pay retrenchment compensation at the rate of 15 days
wages (for every completed year) to be calculated at the last drawn salary of an employee. The
calculation of compensation is to be based from the date of appointment and in case an employee
has completed 240 days, he will be entitled to 15 days retrenchment compensation besides one
month’s notice or salary in lieu thereof as if he has worked for one year. 240 days includes Sundays
or off days as well as festival or national holidays.

In case an employee has worked for more than one year, the procedure is that in case the subsequent
period of one year is less than six months then it will be counted as one year for calculation of
compensation. While making calculations the period of notice is also to be taken into
consideration.

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 CHAPTER 4: INTRODUCTION AND LEGAL BACKGROUND OF CASE

Retrenchment connotes in its ordinary acceptation that the business itself is being continued, but
that a portion of the staff of labour force is discharge as surplusage. It is defined in Section 2 (oo)
of the Act as follows:

1. Retrenchment means the termination by the employer of the service of a workman;

2. The termination may be for any reason whatsoever;

3. But termination should not be as a measure of punishment by way of disciplinary action.

However, the following are not retrenchment:

• Voluntary retirement of a workman, or

• Retirement of a workman on reaching the age of superannuation if the contract of

employment between the employer and the workman concerned contains a stipulation in
that behalf; or

• 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 of such
contract being terminated under a stipulation in that behalf contained therein, or

• Termination of the services of a workman on the ground of continued ill-health.

Section 25-F lays down certain condition’s precedent to retrenchment of workmen as discussed
above in chapter 2.

The requirement of paying compensation is a mandatory pre-condition for retrenchment of a

workman, therefore, its non-compliance will render a retrenchment of a workman, therefore, its
non-compliance will render a retrenchment invalid and would attract the penalty under Section
31(2) of the Act. If retrenchment is proved unlawful, the workmean has a right to reinstatement
with continuity of service and right to wages for such period. Termination of service of a workman
for any other reason other than those excepted in Section 2(oo) amounts to retrenchment. If pre-
requisites for a valid retrenchment have not been complied with, the termination of service would
be void ab initio. Therefore, the workman would be entitled to a declaration that the workman

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continued to be in service with all consequential benefits and if he was not paid all the benefits
including salary, he shall be entitled to recover the same arrears.

CHAPTER 5: FACTS OF THE CASE

The relevant facts of the case District Development Officer v. Satish Kantilal Amrelia3 are as
follows:

1. The appellant is the Panchayat Department of State of Gujarat having its office at
Bhavnagar. The respondent, Satish Kantilal Amrelia worked in the appellant’s office as a
Peon-cum-Driver on ‘daily wages’.

2. The respondent’s working tenure as a daily wager at appellant’s office :

• 18.12.1989 to 31.05.1990 (5 months 15 days) in Revenue department at Bhavnagar.

• 01.06.1990 to 12.02.1993 (1 year 9 months) in Small Savings branch.

3. The respondent was terminated from his service 12.02.1992 vide termination order
(herein referred as T.O.) dated 23.03.1992 by the appellant.

4. On feeling aggrieved the respondent simultaneously initiated two actions against the T.O.
issued by the appellant and the following were the outcomes:

• Filed a Civil Suit (No.141 of 1992) in the Civil Court at Bhavnagar.

• The 2nd Joint Civil Judge (SD), Bhavnagar, (vide judgment dated
03.05.1994) set aside the termination order and directed the appellant (State) to
reinstate the respondent back in service with all consequential benefits.

• Against this the appellant filed Civil Appeal (No.45/1994), wherein the Appellate
Court on 30.09.2003 passed an order upholding the termination order of the
appellant.

3
Civil Appeal Nos. 19857-19858 OF 2017 (Arising out of SLP © Nos.11956-11957 of 2015)

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• Prayed for making Industrial Reference to the concerned Labour Court under Section 10
of the Industrial Disputes Act,1947 (hereinafter referred as the Act).

• The State Labour Commissioner made an Industrial Reference (No.166 of 1992)

for deciding the legality and correctness of the termination order and for
regularization of the respondent’s services. The Labour Court passed an Award in
respondent’s favour on 01.02.2006 stating that:

▪ The respondent is entitled to get the protection under the Act as he was
able to prove that he has worked for 240 days continuously in one
previous calendar year.

▪ Since the respondent was not paid any prior retrenchment compensation
before the termination of his service, this amounts to ‘illegal
retrenchment’.

▪ Section 25-G of the Act has been violated in passing the T.O.

▪ Direction to reinstate the respondent in service along with payment of

40% back wages.

• The appellant (State) on feeling aggrieved by the Award of the Labour Court:

▪ Filed a writ petition (Special Civil Application No.8390/2006) before the

High Court of Gujarat which was dismissed.

▪ Filed a Letters Patent Appeal before the Division Bench of the High Court
which was dismissed in default.

▪ Filed for restoration of the Letters Patent Appeal which again was
dismissed.

▪ Thus, the appellant filed for a Special Leave Petition {CIVIL APPEAL
Nos. 19857-19858 OF 2017 (ARISING OUT OF SLP © Nos.11956-
11957 of 2015)} before the Supreme Court, which was granted in the
present case.

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 CHAPTER 6: ISSUES RAISED BEFORE COURT

Following are the various issues that were raised before the court

1. Whether the T.O. passed by the appellant (State) is valid?

2. Whether the Award passed by the Labour Court is valid ?

3. Whether an order of reinstatement automatically follow in a case where the engagement

of a daily wage worker has been brought to an end in violation of S.25-F of the Industrial
Disputes Act, 1947?

CHAPTER 7: JUDGEMENT AND RATIONALE ADOPTED BY COURT

JUDGEMENT :
The court by taking recourse to powers under Section 11-A and the rationale laid down in Bharat
Sanchar Nigam Limited v. Bhurumal4 awards a lump sum compensation of Rs.2,50,000/- to be
paid by the respondent (State) to the appellant within 3 months from the date of receipt of this
judgement failing which the amount will carry interest at the rate of 9% per annum. In view of
foregoing discussion, the appeals succeed and are allowed in part. The impugned order of the
Division Bench and that of the Single Judge are set aside. The Award of the Labour Court dated
01.02.2006 is accordingly modified to the extent indicated above.

RATIONALE ADOPTED BY THE COURT:

In Employers, Management of Centra P & D Inst. Ltd v. Union of India and Another5, it was held
by the Supreme Court that reinstatement was not always obligatory in cases of violation of Section
25-F of the Industrial Disputes Act, 1947. For good reasons it can be substituted with
compensation. However, the Court has clearly demarcated the circumstances where the terminated
worker should not be denied ‘reinstatement’ unless there are some other weighty reasons for
adopting the course of grant of compensation. For instance, if the termination was found illegal on
grounds of ‘unfair labour practices’ or in violation of the principle of ‘last come, first go’ or by

4
(2014) 7 SCC 177
5
(2005) I LLJ 552 (SC)

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adopting some policy the other daily wage workers were regularised except the workman
concerned, in such cases reinstatement should be the rule and compensation should be awarded in
exceptional cases.
It is trite law that when the termination is found to be illegal because of non-payment of
retrenchment compensation and notice pay as mandatorily required under Section 25-F, even if
the workman is reinstated, it is always open for the employer to terminate the services once again
by paying retrenchment compensation. Owing to the fact that in the present case the respondent
was a daily wager he has no right to seek regularization6. Thus, no useful purpose could be served
in reinstating such a workman that too after a very long gap of 25 years. Thus, the Court has
adequately justified its judgement with apt logical reasoning.

CHAPTER 8: CASE COMMENT

Legal position of the daily wagers right to regularise their work

It is settled law laid down in State of Karnataka v. Umadevi7 that there is no fundamental right in
those who have been employed on daily wages or temporarily or on a contractual basis, to claim
that they have a right to be absorbed in service or regularisation of their work. As has been held
by this Court, they cannot be said to be holders of a post, since, a regular appointment could be
made only by making appointments consistent with the requirements of Articles 14 and 16 of the
Constitution. The right to be treated equally with the other employees employed on daily wages
cannot be extended to a claim for equal treatment with those who were regularly employed. That
would be treating unequals as equals. It cannot also be relied on to claim a right to be absorbed in
service even though they have never been selected in terms of the relevant recruitment rules. The
arguments based on Articles 14 and 16 of the Constitution are therefore overruled. Thus, in the
present case even if the employee was reinstated, he has no right to regularise his employment,
therefore, as assessed by the Court he is vulnerable to be retrenched once again on paying
statutorily required compensation, making the entire effort to reinstatement unfruitful.

6
State of Karnataka v. Umadevi Civil Appeal No. 1968 of 2006 arising out of SLP(C)9103-9105 of 2001
7
Civil Appeal No. 1968 of 2006 arising out of SLP(C)9103-9105 of 2001

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Violation of Section 25-F : Reinstatement not automatic

The Supreme Court in a catena of decisions starting from Jagbir Singh v. Haryana State
Agriculture Mktg. Board,8 U.P.State Brassware Corpn. Ltd v. Uday Narain Pandey9, Uttaranchal
Forest Development Corps. v. M.C. Joshi10 has clearly laid down that although an order of
retrenchment passed in violation of Section 25-F of the Industrial Disputes Act may be set aside
but an award of reinstatement should not be passed. Relief by way of reinstatement with back
wages is not automatic and may be wholly inappropriate in a given fact situation even though the
termination of an employee is in contravention of the prescribed procedure. ‘Compensation’
instead of reinstatement has been held to meet the ends of justice.

Distinguishing Daily wager and permanent employee:

In Jagbir Singh case the Court has stated, “The award of reinstatement with full back wages in a
case where a workman has completed 240 days of work in a year preceding the date of
termination, particularly, daily wagers has not been found proper by this Court and instead
compensation has been awarded. This Court has distinguished between a daily wager who does
not hold a post and a permanent employee.” A similar distinction has been made in Bharat Sanchar
Nigam Ltd. Vs. Man Singh.11 In Telegraph Dept. v. Santosh Kumar Sea12l the Court reiterated that,
“Workmen engaged as daily wagers about 25 years back and they have worked hardly 2 or 3 years,
relief of reinstatement cannot be justified, instead monetary compensation would subserve the ends
of justice.”

8
2009 15 SCC 327
9
2006 1 SCC 479
10
2007 9 SCC 353
11
CIVIL APPEAL NO. 8747 OF 2011 (Arising out of SLP(C) No.7935/2007)
12
2010 6 SCC 773

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