As the world continues to grapple with the aftermath of the pandemic, the global economy has been hit hard, with businesses across various sectors struggling to stay afloat. The recent conflict between Ukraine and Russia has only added to these challenges, causing an economic slowdown and increased job insecurity worldwide. This has impacted the Indian Labour market wherein companies have already started downsizing their workforce.
The IT and ITES sector in India have been significantly impacted, with many companies implementing cost-cutting measures that have resulted in massive employment cuts. In the past year, some of the largest IT companies, including Microsoft, Google, Twitter, and Amazon, have let go of thousands of their employees.
This article provides an overview of the legal considerations for employers while reducing their workforce in India.
Laws Regulating Reduction in Workforce
Termination of employment is governed under the Industrial Disputes Act in case of those employees falling under the category of a workman and in case of a Non-workman, the same is governed by their contract of employment (Appointment Letter).
Who is a Workman?
The term “workman” is defined under Section 2(s) of the Industrial Disputes Act, 1947 (“ID Act”) as “any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.”
The Honourable High Court of Karnataka in the case of Commissioner of Income-Tax and Another v. Texas Instruments India Pvt Ltd held that “a software engineer in a software industry is a workman within the meaning of Section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role.”
Who is a Non-workman?
Employees acting in a managerial, administrative, or supervisory capacity are considered as non-workmen. Employees who fall within the category of Non-workman are governed by the principles of contract in accordance with their contract of employment. They do not have any protection under any employment law, unlike those employees under the category of a workman.
Process of Reduction of Workforce
Retrenchment is one of the methods of reducing the workforce in an organization. While this can be an effective means for companies to restructure their operations, it also carries significant legal implications, particularly when it comes to the rights of the affected workman.
Section 2(oo) of the ID Act defines “retrenchment” as 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 voluntary Retirement, reaching the age of superannuation (if the contract of employment contains a stipulation in this regard), non-renewal of the contract of employment upon expiry, or continued ill health”.
Some of the conditions laid down before initiating the process of retrenchment are as follows:
- Prior Notice: The company must give a notice of at least one month to the employee 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.
- Payment of Compensation: The company must pay the workmen compensation which is equivalent to 15 days’ wages for every completed year of service or any part thereof in excess of six months, at the time of retrenchment.
- Informing the Authorities: The company must obtain prior permission from the appropriate Government and serve notice in the prescribed manner before proceeding with the retrenchment.
Apart from the above conditions, one of the essential principles of Retrenchment is “Last In, First Out” (LIFO), wherein, the last employee to be hired is the first to be let go when a company needs to reduce its workforce. This rule is applied to ensure that employees who have more seniority and experience with the company are not unfairly affected by retrenchment.
Further, in the event at a later stage, the company decides to hire a new employee for the position held by the retrenched employee, under such circumstances, the retrenched employee will have to be given preference over the other applicants.
Non-compliance with the retrenchment process will render the entire process of reduction in workforce as unlawful and illegal.
Reduction in workforce is never an easy exercise, but by prioritizing transparency, communication, and support, employers can ease the transition for affected employees. It’s important for the Employer to communicate with its employees about the reasons for the reduction in workforce in a more organised manner and not like in the manner where Mr. Vishal Garg, CEO of unicorn mortgage lender start-up Better.com, who bluntly informed his 900 employees that a large number of people will be fired in a cold, awkward one-way video announcement. It is important to keep in mind the mental health of the employees in concern. Employers can offer resources like career counselling and job search assistance to help the affected employees find new opportunities.
Alternatively, employers may avoid retrenchment by considering alternatives like layoffs and garden leaves. Further, employers can also ensure that the retrenched employees receive higher compensation over and above what the law stipulates. By implementing the above suggestions, employers can mitigate the after-effects of termination of employment due to redundancy on their employees on a more compassionate and humanitarian grounds.
-KG Devaiah, Advocate and Principal Associate
-Sourabha Venkatesh, Advocate
(2021) 321 CTR 34