What are the rights of ‘downsized employees’?

What is downsizing?

It is a permanent reduction of a company’s labor force through the elimination of unproductive workers or divisions. It is usually undertaken in times of economic downturns and failing businesses to cut down on costs. Downsizing an entire store, branch or division also frees assets for sale during corporate re-organizations. It targets inefficient employees or departments to create leaner and more efficient businesses. Also, with the advancement in the field of artificial intelligence and robotics has threatened the blue-collar and white-collar jobs. In a labor abundant country like India the result could be drastic and hence we are observing new forms of employment types coming up- freelancers, gig workers, independent contractors, etc.

Recently, Microsoft laid off under 1000 employees across several divisions in October 2022 to sustain during a global economic slowdown and hence employees from all sectors, belonging to all sizes of companies are at risk of losing their jobs and therefore must be aware of their rights.

Blue collar jobs refer to manual labor-based jobs, e.g., mechanics, power plant operator, electricians, etc.

White collar jobs refer to jobs in office settings in clerical, administrative and management roles.

What are the laws governing downsizing in India?

In India, employment termination provisions are covered in the Industrial Disputes Act, 1947, Model Standing Orders of the Industrial Employment (Standing Orders) Act, 1946 and state specific statutes applicable to shops and commercial establishments, in addition to the employment contract. The India law doesn’t recognize ‘at will employment’, i.e. Hire and fire as per the whims and fancy of the employer. Instead, the employer may termination employment only on reasonable grounds or for misconduct. The Labor laws have been subsumed under Industrial Relations Code, 2020, it has been passed by both the houses of the Parliament and has received Presidential assent, but its enforcement date is yet to be announced.

Courts have upheld termination of job on grounds of redundancy. Although there is no specific statutory definition for ‘redundancy’, India courts have interpreted that in case employee’s role becomes redundant for reasons such as cessation of a particular type of business or introduction of a new technology. Further, redundancy on account of mechanization, job elimination pursuant to outsourcing, organisation restructuring, and other business and trade related reasons have also been held to be valid grounds for termination of employment. Nonetheless, the courts tend to adopt a conservative and pro-employee approach in dealing with reductions in workforce.

Who are ‘workmen’?

In Indian employment law, the most litigated aspect is whether the individual is a workman or not. A ‘workman’ is accorded higher protection under the law. A workman is any person employed in an industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. Further as per Section 2(s) of Industrial Disputes Act, employees acting is managerial, administrative or supervisory capacity are not considered as workmen. Such employees are protected under state-specific statutes applicable in case of shops and commercial establishments and/or employment contract.  

What is the legal procedure for downsizing in case of more than 100 workmen?

1. Legal requirements in case of more than 100 employees are stringent as when factories with a minimum of 100 workmen want to retrench/downsize they need to obtain prior permission of the labor authorities.
2. Such an application should provide the reasons behind the decision of the factory to terminate employment.
3. It is the discretion of the labor authorities to grant or refuse permission for termination based on consideration of relevant facts, after hearing both the parties.
4. Further, law states that is the appropriate government or specified authority fails to grant or refuse to grant permission to the employer within a period of 60 days from the date on which such application is made, the permission applied shall be deemed to have been granted after expiry of 60 days.
5. Further, the law also requires an employer to serve three months’ notice to the workman which includes the reason for termination. Such a termination can be enforced only after the expiry of the notice period or if the workman has been paid wages in lieu of such notice period.
6. In case, permission is granted then the workman must be paid at the time of termination, compensation should be equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of 6 months.
7. Any retrenchment in contravention of this order will be deemed to be illegal and inoperative in law wherein the employer can be held liable Industrial Disputes Act and other penal consequences.

What is the legal procedure for downsizing in case of less than 100 workmen?

1. In case a factory has less than 100 workmen then also the employer has to notify the labor authorities of the employment termination.
2. The employer is required to give a 1 month notice period to employee mentioning the reason for termination and pay severance (retrenchment compensation) equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months.
3. In case the terms of the contract between the parties are more beneficial to the employees than the statutory provisions than the contract provisions apply.

What are different types of retrenchment methods?

1. In the absence of any alternative agreement between the employer and workman, the employer must follow the last in, first out (LIFO).
2. In case the employer is terminating employees on one hand and deciding to make new offers on the other then such offers should be provided to the retrenched employees for re-employment. However, court has noted that such preference shall not overlook the interest of the business. So, the employer may breach the LIFO process to keep a talented staff but such reasons should be recorded.
3. The court has noted that the company is free to decide on its strength of its labour force and the number of workers that it requires to carry on its business. Further, Madras High Court[1] has observed that the management does not need to wait till business is suffering loss before retrenching its employees. Further, company can downsize to maximize profits even if the company is not making any losses.[2]
4. Sometimes the employer gives an option to the employee to resign willingly as termination is stigmatic. However, it deprives the employee of his right to claim back wages and even reinstatement in some cases of forceful resignation by approaching the Court.
5. Employer and Employee can undertake a Mutual Separation Agreement (MSA) wherein the parties can negotiate and reach favorable terms of mutually agreed severance package/ex gratia amount to the employees along with other statutory and contractual dues.
6. An employer can also propose a voluntary retirement scheme (VRS) by way of which the employees can retire before their retirement age. Under this option the employee is offered an ex-gratia sum in addition to statutory and contractual dues.

What are the consequences of not following legal procedure for downsizing?

If the employer fails to comply with the above-mentioned legal procedure, then the termination will be held invalid and illegal. The court may direct the employer to reinstate the employees with continuity and payment of back wages. The amount of back wages to be paid depends on the period of service rendered by the employees and nature of employment.[3]

What are the rights of the employee wrongfully terminated?

1. Once the Industrial Relations Code, 2020 (IRC) becomes effective, then any termination other than for disciplinary action will be treated as retrenchment which requires a month’s written notice period and must contain the reason for retrenchment. The compensation should be equal to 15 days of average pay for every completed year of continuous service. Further, in case more than 300 workers have been in continuous service for one year then employer needs to take prior permission of appropriate government. IRC bars jurisdiction of civil court[4] and it also abolishes labor court. Instead, it establishes Industrial Tribunal and National Industrial Tribunal as per Section 44 and 46 of IRC. so, in case the tribunal finds that the employer has wrongfully terminated the employee then employer will be penalised. The dispute has to be raised by the retrench employee within a period of 2 years.[5]
2. The employee has a right to receive a notice of termination of employment. As per the prevailing state law in Delhi, The Delhi Shops and Establishment Act, 1954 as per which the employer can terminate an employee by giving them at least 30 days of notice or a salary in lieu of such notice. However, it requires that the employee has been with the organisation for more than 3 months. Further, the employer is not required to give notice if the employee is removed on account of misconduct. However, the employee has an opportunity to explain himself reasonably. In a similar fashion as per Maharashtra State law the employer has to give a 30-day prior notice for termination if the employee has worked with the company for more than a year. And in case the employee has worked for more than three months but less than a year then at least 14 days prior notice should be served by the employer.
3. Employee must be given just and reasonable cause for termination. He has a right to sue by reason of illegal or unlawful termination.
4. The employment contract terms can be invoked by the employee.
5. Employee has a right to receive a severance pay. This right is available to blue collar job. Such a pay includes salary in lieu of notice, unpaid salary for days worked ; encashment of unused paid leave; payment of gratuity to an employee who is employed for more than five years as provided for in the Gratuity Act, 1972; payment of 50% of the employee’s wages for up to 45 days where an employee employed for more than 1 year is laid off; compensation will be paid that will amount to 15 days average pay for every year of continuous service; payment of bonus for those employees who worked for at least 30 days in a financial year and earned upto Rs. 10,000 under the Payment of Bonus Act of 1965.
6. The Employee has the right to conduct an inquiry in case of improper and unjust termination.
7. White collar employees can initiate a civil suit for breach of employment contract.
8. The employee can ask the employer to settle the dispute via arbitration.[6]
9. Prabhudayal Birari v. MP Rajya Nagrik Aapruti Nigam, the Appellant was not give one month’s notice nor one month’s salary so he demanded reinstatement of service instead of payment of back wages. To this the opposite party submitted that the Appellant was a temporary employee and  could be given one month’s salary in lieu of one month’s notice. The trial courts order that the termination of services was one passed without complying with condition precedent and hence was void. This was reversed by the High Court however before the Supreme Court the order of the trial court was restored.
10. In the case of Sumal Das v. State of Tripura, the Gauhati High Court was to consider the decision of Single Judge in appeal which had set aside the order of discharge from service and that the appellant shall be entitled to one month’s salary in lieu of one month notice in view of the facts and circumstances. The High Court also quashed the order of discharge from service and directed his reinstatement.
11. In the case of Nagar Parishad Atri Thr. v. Dalveer Singh Yadav, the Madhya Pradesh High Court had to deal with a case wherein a pump operator was dismissed from his job by way of an oral order, he challenged the same. The Court directed that in lieu of reinstatement compensation should be awarded to him.

Conclusion:

The protection of blue collared employees is based on statutory laws of center and state as labor is a concurrent subject. Whereas the white collared employees are left to fend for themselves by enforcing the rights mentioned in the employment contract entered into between the parties. So, a company can downsize its employees, but it has to ensure that employees receive a notice period or payment in lieu of it.

[1] Film Distributors Employees Association v. Metro Goldwyn May er India, AIR 1962 Mad 226.

[2] India tyre and rubber co. v. their workmen AIR 1958 Mad 205.

[3] Bhuvnesh Kumar Dwivedi v. Hindalco Industries Ltd. AIR 2014 SC 2258.

[4] Section 16 of the Industrial Relations Code, 2020.

[5] Section 4 of the Industrial Relations Code, 2020.

[6] Section 42 of the Industrial Relations Code, 2020.