Lay-off, Retrenchment and Closure: An Overview

By | June 1, 2020
Lay-off, Retrenchment and Closure

Lay-off, Retrenchment and Closure | Overview


Lay-Off, Retrenchment and Closure are three case scenarios contemplated in the Industrial Disputes Act, 1947, which essentially results in employees losing their jobs. Chapter V-B was added in the Industrial Disputes Act, 1947 through amendment under Article 32 of the Constitution. This article deals with the special provisions relating to lay-off, retrenchment and closure in certain establishments. Chapter V-B includes Section 25-K to Section 25-S of the Industrial Disputes Act, 1947.

I. Lay-off

Definition and Explanation:

Lay-off” means the failure, refusal or inability of an employer[1]

  1. on account of the shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery [or natural calamity or for any other connected reason]
  2. to give employment to a workman whose name is borne on the muster rolls of his industrial establishment
  3. and who has not been retrenched.

Lay-off is a measure to cope with the temporary inability of an employer to offer employment to a workman to keep the establishment, as going. It results in immediate unemployment, though temporary in nature. It does not put an end to the employer-employee relationship, nor does it involve any alteration in the conditions of service.

Further, lay-off occurs only in continuing business. When the industrial establishment is closed permanently or its lock-out is declared by the employer, the question of lay-off has no relevance. Lay-off is justified only when it is in conformity with the definition given under Section 2 (kkk) of the Industrial Disputes Act.

Essential Conditions

Essential conditions for lay-off are as follows[2]:

  1. The number of workmen employed in an industrial establishment should not be less than 50 on an average per working day in the preceding calendar month.,
  2. The industrial establishment should not be of season character,
  3. The unemployment should be due to the failure, refusal or inability of an employer on account of reasons beyond his control (there should not be mala fide on the part of the employer).
  4. The name of the workmen should be borne on the muster roll of the industrial establishment.
  5. The workmen should have presented himself for work on the establishment at the time appointed for the purpose during normal working hours.
  6. The workmen should not have been given employment within two hours of his so presenting himself.

Conditions to be fulfilled by the laid-off workman for claiming a compensation

Before a workman may claim lay-off compensation, he must fulfil some conditions like[3]:

  1. His name must be borne on the muster roll and he should not have been retrenched.
  2. He must have completed not less than one year of continuous service (as defined in Section 25B)
  3. The workman must not be a badli (a workman employed in the place of another workman) or a casual worker.

If these requirements are fulfilled, a workman shall be paid compensation for all days during which he is laid off, except for such weekly holidays. The amount of compensation payable to such workman shall be half of the total of basic wages and dearness allowance.

When the workman is not entitled to compensation

Section 25E of the Industrial Disputes Act explains situations where the workman will not be entitled to compensation. These can be broadly understood as the following:

  1. Refusal to accept alternate employment in the same establishment or any other establishment owned belonging to the same employer, provided similar wages are offered to the workman in the alternate employment as well.
  2. Where the workman does not come to work during normal working hours at least once a day
  3. Where the lay-off is because of a strike or slowing-down of production due to workmen in another part of the establishment.

In K.T. Rolling Mills v. M.R. Meher[4] it was held that provisions for payment of lay-off compensation does not mean that the employer can pay compensation and declare lay-off. Further, compensation cannot be awarded in advance of actual lay-off and on grounds of social justice.

It is also necessary that the alternate employment is something which can be done by the workman. This means that not only should the workman have the physical capability to do the alternate work but it should be acceptable to the workman.

Therefore, in Industrial Employees’ Union, Kanpur v. J.K. Cotton Spinning and Weaving Mills Company[5] it was held that offering the job of a coolie to a skilled workman cannot amount to the offer of an alternative job.

II. Retrenchment

Definition and Explanation

The ordinary meaning of Retrenchment is that business itself is continuing though a portion of staff or labour force is discharged as surplusage. In the Industrial Disputes Act, 1947, Section 2(oo) defines retrenchment. The essential points that can be gathered from the definition in the statute are as follows:

  1. Retrenchment is the termination of a workman for any reason whatsoever, otherwise than as a form of punishment, given as a means of disciplinary action.
  2. Retrenchment does not include the following:
    1. Voluntary retirement of the workman
    2. Retirement of the workman on reaching an age of superannuation as stipulated in the contract of employment
    3. termination of service due to non-renewal of the contract of employment on the contract’s expiry, or the contract being terminated.[6]
    4. Termination of the service of a workman on the ground of continued ill-health.

Essential conditions to be fulfilled prior to retrenchment

Section 25F of the Industrial Disputes Act talks about essential conditions precedent to retrenchment. These conditions can be summarised and understood as follows:

  1. The workman has to be given one month written notice, which includes the reasons for retrenchment, or the workman has been paid in lieu of such notice, wages for the period of the notice
  2. The workman has to be paid, at the time of retrenchment, compensation equal to the average pay of fifteen days [for every completed year of continuous service]
  3. The notice is also to be served on the appropriate Government.

Procedure of Retrenchment

Section 25G of the Industrial Disputes Act lays down the procedure of retrenchment. It provides that if any worker is to be retrenched, and that workman belongs to a particular category of workmen in that establishment, then generally, that workman will be retrenched by the employer who was the last person to be employed in that category.

The exceptions to this rule of the procedure are if there is a contract between the employer and the workmen which is to the contrary, or the employer records his reasons to retrench any other workman. The employer can also retain an employee possessing special qualifications whose services are necessary in the interests of business in a bona fide manner.

This rule shows that the system of Last in, First out is to be followed in retrenching. From this rule, it also follows that it is required from the employer that they maintain a seniority list of the workmen. The general principle of retrenchment is that the retrenchment should start with the latest, newest worker, and progressively go up to employees higher up in the seniority list.

Important Judgments

The Supreme Court in Byram Pestonji Gariwala v. Union Bank of India and Others[7] had restricted the definition of ‘retrenchment’ under Section 2(oo)(bb) and held that retrenchment can be said to occur only when there is a ‘discharge of excess labour’ by the employer.

Later, the Supreme Court in State Bank of India v. N. Sundara Money[8], Punjab Land Development and Reclamation Corporation Ltd., Chandigarh v. Presiding Officer, Labour Court, Chandigarh[9] and subsequent decisions rejected the narrow interpretation adopted by the Court in the earlier decision and held that any retrenchment, as defined in Section 2(oo), means 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 and those expressly excluded by clauses (a), (b) and (c) of the definition.

In the State Bank of India v. Sundara Money judgement, the Supreme Court adopted the literal meaning of retrenchment, which is very exhaustive and comprehensive and held that the expression “for any reason whatsoever” was very wide and admitted almost no exceptions.

Hence, retrenchment means termination of a worker’s services for any reason whatsoever, other than those specified in Section 2(oo), and in view of these subsequent decisions, it cannot be said that retrenchment means termination by the employer of the service of a workman as surplus labour.

The Supreme Court excluded closure from the scope of retrenchment in Hariprasad Shivshankar Shukla v. A.D. Divelkar[10].

The Madras High Court, in State Bank of India v. Sundaramony[11] held that wherein the court held that an analysis of the definition reveals four essential ingredients, namely:

  • There must be a termination of the service of a workman.
  • The termination must be by the employer,
  • For any reason whatsoever, and
  • Otherwise than as by way of punishment inflicted by way of disciplinary action.

III. Closure[12]

There was no provision of closure in The Industrial Disputes Act 1947. The law of closure was inserted in 1957 in the view of Supreme Court judgement in case of Hariprasad Shiv Shankar Shukla v. A.D. Diwelker[13]. Subsequently, over the number of years, this law has undergone a series of amendments from time to time and then finally consolidated in its final form in 1982.

The Act defines “closure” as the permanent closing down of a place of employment or part thereof. Here, the employer is constrained to close the establishment permanently. Nonetheless, the due procedure has to be complied with when it comes to rolling out a plan of closure. These procedures do not apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.

If the employer is intending to do a closure of his establishment, he has to necessarily apply at least ninety days in advance to the appropriate government. A copy of the said application has to be given to the representatives of the workmen as well.

The said application will be considered and a reasonable opportunity to be heard shall be given to the employer as well as the workmen. After considering the same, the appropriate government may or may not grant the employer to close down. Even here, if the government does not respond within sixty days from application, the permission will be deemed to have been granted. A similar provision for review of the decision exists even here.


Lay-off is temporary and in lay-off, the employer is compelled to refuse employment under certain circumstances like shortage of raw material, power, finance et cetera, which arise temporarily in the industry. The laid-off employees are paid laid off compensation and they should be taken to their usual posts as soon as lay off lifted out.

Retrenchment is permanent. In retrenchment, the employer lessens the number of employees under circumstances like government policies and reduction in the number of departments. During this process, the industry does not stop functioning. In retrenchment, the last come workman is retrenched first. Re-employment of retrenched workmen also takes place in some cases but it is not necessary that all retrenched workers should be re-employed (Section 25H).

Closure means the permanent closing down of a place of employment. A closure is not a weapon in the hands of the employer. In a closure, both employer and employee are equally affected. A bona fide closure signifies the final and irrevocable termination of the business itself. In the closure, the relationship between them comes to an end. The causes of the closure are permanent or lasting and cannot be cured. Generally, the cause of closure is economical, poor maintenance and management.

[1] Section 2(kkk), Industrial Disputes Act 1947.

[2] Sections 2(kkk), Section 25A and Section 25C, Industrial Disputes Act 1947.

[3] Refer to footnotes 1 and 2.

[4] (1962) 2 LLJ 667 (BOM).

[5] (1956) 1 LLJ 325.

[6] Section 2(oo)(bb), Industrial Disputes Act, inserted by the 1982 amendment and brought into effect in 1984.

[7] AIR 1991 SC 2234.

[8] AIR 1976 SC 1111.

[9] 1990 SCR (3) 111.

[10] AIR 1957 SC 121.

[11] (1975) ILLJ 453 Mad.

[12] See Sections 2(cc), 25FFA, 25FFF, 25O and 25P of Industrial Disputes Act 1947.

[13] AIR 1957 SC 121.

  1. Labour Law; Notes, Cases & Study Material
  2. Strikes And Lockouts: Concept, Explanation and Case Laws
Author: Nitya Bansal

She is a B.A.LLB (H) student at National Law University Delhi. She enjoys legal research and drafting, and is currently associated with the Centre for Communication Governance as a Research Assistant.

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