Downsizing

Downsizing describes an intention: fewer people, lower cost, or a smaller footprint. Indian law does not regulate the intention. It regulates how the employment actually ends.

For workers within the industrial relations definition, that mechanism is retrenchment, and the Industrial Relations Code, 2020, in force since 21 November 2025, sets out what it requires. The requirements are procedural and substantive together, and failing the procedure can invalidate the termination regardless of how sound the commercial case was.

Two threshold questions decide which rules apply.

• Is the person a worker within the Code's definition? Those employed in a managerial or administrative capacity, and supervisory employees above a prescribed wage, are generally outside it, and their exit is governed by their contract instead.
• How large is the establishment? Above a prescribed size, retrenchment requires prior permission from the appropriate government rather than merely notice to it.

Getting the first question wrong is the more common error, because organisations assume seniority means managerial, and the test is the nature of the duties rather than the title.

The order of selection is the requirement most often overlooked. Selecting for retrenchment on performance rather than on seniority is possible, but it requires the departure from last in, first out to be for reasons recorded in writing at the time. Deciding afterwards that the people let go were the weakest performers is not the same thing.

Verify the notice period, the compensation rate, the continuous service qualification, the permission threshold and the re-employment provisions against the Code before acting.

Employers reach for alternatives to retrenchment because the process is demanding. Some are legitimate and some are the same thing wearing a disguise.

• Voluntary separation. Genuine where the terms are open, the choice is real and nobody is told what will happen if they decline. It becomes retrenchment in substance the moment refusal carries a consequence.
• Performance management. Legitimate where the process is real and predates the cost decision. Where a performance process starts the week the headcount target is set, its purpose is evident.
• Not replacing leavers. The cleanest route, and the slowest, which is why it is rarely sufficient on its own.
• Redeployment. Genuinely reduces the number affected and is the option most often skipped because it takes longer.
• Hiring freeze and contractor reduction. Usually the first steps, and often not counted as downsizing at all even though the contract workers affected are people.

The recurring failure is a voluntary scheme that is not voluntary. If employees who decline are subsequently retrenched anyway, the earlier exits look like retrenchments conducted without the process, and the fact that people signed does not resolve it.

• Decide the selection criteria before looking at names, and record them.
• Settle everything on time. Dues on termination have their own statutory deadline, and an organisation that has just made people redundant is the last one that should be late paying them.
• Give the relieving letter and references promptly. It costs nothing and it is the thing that most affects what the person does next.
• Tell the people staying what happened and why. The survivors' response determines whether the organisation recovers, and silence is filled with worse assumptions than the truth.
• Keep the re-employment obligation live. If you hire for the same work within the relevant period, the preference applies, and organisations forget this within months.
• Expect the productivity dip. Work does not disappear with the headcount, and the people left carry it.