Employee Termination

Employers often speak of termination as a single act. Legally it is several, and the applicable obligations follow from which one is genuinely occurring.

The bottom row deserves attention because it is where employers create problems. A resignation obtained under pressure is capable of being characterised as a termination by the employer, and the fact that a letter was signed does not by itself settle it.

Similarly, describing a redundancy as a performance dismissal to avoid the retrenchment procedure does not remove the procedure. It adds a factual dispute about the real reason to whatever else is in issue.

Retrenchment is the route with the most specific statutory content, and there are two layers of it. Getting the wrong one is the most common error here, because the widely-quoted three month notice applies to a minority of establishments.

The general rule is section 70 of the Industrial Relations Code, 2020, and it applies to a worker in any industry who has been in continuous service for not less than one year. Such a worker may not be retrenched until three things have happened. One month's notice in writing indicating the reasons has been given and has expired, or wages for the notice period have been paid in lieu. Compensation equivalent to fifteen days' average pay, or average pay of such days as the appropriate Government notifies, has been paid at the time of retrenchment for every completed year of continuous service or any part of a year in excess of six months. And notice in the prescribed manner has been served on the appropriate Government or the authority it specifies.

The third of those is the one employers most often miss, because the first two are visible to the worker and the third is not.

The second layer is Chapter X, and its reach is narrower than the headline figure suggests. Section 77(1) applies the Chapter to an industrial establishment, not being seasonal or intermittent, in which not less than three hundred workers were employed on an average per working day in the preceding twelve months, or such higher number as may be notified. Section 77(3) then defines industrial establishment for that Chapter as a factory, a mine or a plantation. An office, a shop or a service business is outside Chapter X however many people it employs, so the three hundred figure is not a headcount test on its own.

Where the Chapter does apply, section 79(1) sets two conditions precedent for a worker in continuous service of not less than one year. The notice requirement is three months in writing indicating the reasons rather than one. And, more consequentially, the prior permission of the appropriate Government must have been obtained on an application made in the prescribed manner, a copy of which is served on the workers concerned at the same time. Under section 79(4), if the Government does not communicate an order within sixty days of the application, permission is deemed granted.

The permission requirement is the part that changes how these exits are planned, because it puts a decision outside the employer's control on the critical path. An employer that budgets for three months' notice and overlooks the application has not simply mistimed the exit; it has no lawful retrenchment at all.

So the three month figure belongs to large factories, mines and plantations. Everywhere else the obligation is section 70: one month plus the compensation and the notice to the appropriate Government. In neither case does a contractual notice period substitute for a statutory condition precedent.

Two further provisions shape a retrenchment beyond the notice.

Section 71 governs the order of selection. Where a worker who is a citizen of India belonging to a particular category is to be retrenched, in the absence of an agreement the employer shall ordinarily retrench the worker who came last into that category. That is a last in, first out rule expressed as the ordinary position rather than an absolute one, so departure from it is possible, and the section requires the reasons to be recorded.

Section 72 gives retrenched workers a re-employment opportunity. Where the employer proposes to employ any person within one year of the retrenchment, retrenched workers who are citizens of India must be given an opportunity to offer themselves, and those who do so have preference over other persons.

The second of these has a practical consequence organisations frequently overlook. A retrenchment followed within months by recruitment into a similar role invites the obvious question, and the answer needs to be better than that the requirement re-emerged unexpectedly.

Where a genuine restructuring produces new roles that differ from the ones removed, documenting how they differ at the time is considerably easier than reconstructing the distinction a year later.

Two adjacent provisions are worth knowing because they catch employers who are not thinking about retrenchment at all. Section 73 provides that on a transfer of ownership or management, a worker with not less than one year of continuous service is entitled to notice and compensation under section 70 as if retrenched, unless the transfer leaves service uninterrupted, terms no less favourable, and the new employer legally liable for continuous service. And section 74(1) requires sixty days notice of an intention to close down an undertaking.

Across all the routes, a small number of process points determine whether an exit is defensible.

• Establish the real reason first, and choose the route that matches it, rather than choosing a route and fitting the reason to it.
• Where conduct or performance is the reason, follow the applicable procedure fully, including the opportunity to respond. Standing orders, where they apply, may prescribe it.
• Record contemporaneously. A decision documented at the time is evidence; a file assembled after a dispute begins is much weaker.
• Check whether the establishment is one Chapter X reaches at all, which means a factory, mine or plantation averaging three hundred workers or more, and not merely any employer of that size.
• Settle the financial position accurately, since an otherwise sound exit undermined by an underpayment becomes a dispute about the underpayment.

The first point carries most of the weight. Nearly every difficult termination this glossary's readers will encounter involves an employer that decided on the outcome and then selected a justification, and the mismatch between the two is what the process eventually exposes.

Whatever the route, the employer's payment obligations crystallise quickly.

Under section 17(2) of the Code on Wages, 2019, where an employee is removed, dismissed, retrenched, resigns or becomes unemployed due to closure, the wages payable must be paid within two working days.

Most organisations do not run settlement on that timetable. Clearance processes, asset recovery, notice-period reconciliation and monthly payroll cycles routinely push final payment well beyond it, and the gap is a widespread and largely unrecognised exposure.

It is also entirely a process problem. The amounts are known or knowable, and the delay comes from sequencing rather than from cost. Organisations that separate the wages component from the items genuinely requiring reconciliation can meet the deadline for the former while resolving the latter.

Accrued entitlements survive the manner of exit. Treating a dismissal for misconduct as extinguishing amounts already earned is a common and expensive assumption, and disqualification provisions where they exist are specific and limited rather than general.

Recording the exit reason accurately matters beyond the individual case, because the pattern of reasons across an organisation is what any later review will read.