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Compensation to be paid when company is winding up operations

what is retrenchment compensation

Pls read the rules:

Under sec. 25F of the IDA, an employer proposing to retrench workers, who have been continuously employed for more than one year, must give one month’s notice or pay in lieu of such notice to the worker, and must also notify the relevant governmental authority, giving the reasons for the proposed retrenchment.

Special provisions under the IDA are applicable in relation to industrial establishments employing 100 workers or more. In this case, workers may not be retrenched unless three months’ written notice, stating reasons for the retrenchment, or pay in lieu of notice, is given to the worker. In addition, the employer must seek prior authorization from the relevant governmental authority before the retrenchment can be carried out (sec. 25N, IDA).

The concept of “prior authorization” in this context perhaps needs some elaboration here. The Supreme Court of India has recognized the right of management to run its own business as it pleases without any interference by the courts. The decision to retrench is thus left solely up to the discretion of management. The court will inquire only into the closure to verify that it is bona fide and for economic reasons and will not question the motive behind it. The concept of a bona fide redundancy does not, for example, include a situation where retrenchment is carried out in accordance with unfair labour practices or to victimize workers. Consequently, the proper governmental authority is required to examine the reasons given in the notice for the proposed retrenchment to ascertain whether they are in accordance with good labour practice and are for bona fide reasons of redundancy. If this is not found to be so, the governmental authority may refuse permission for the retrenchment, giving its reasons in


In the absence of any agreement between the employer and the workers retrenched as regards the procedure for retrenchment, the employer retrenches the worker who was the last person to be employed in the category, unless for reasons to be recorded the employer retrenches any other worker (sec. 25G, IDA).

Severance pay

In case of retrenchments, employees with more than one year’s service, and other than temporary or casual employees, are entitled to compensation equivalent to 15 days’ pay for each completed year of service (sec. 25F(b), IDA).

However, a distinction is made for cessation of business for reasons beyond the control of the employer. This might include force majeure, frustration of contract, etc. but does not include financial difficulties or loss of stock. In such circumstances, the employee is still entitled to a redundancy payment, but the amount is less than that given for termination of employment due to other reasons, being a sum equivalent to no more than the average of three months’ pay (sec. 25FFF, IDA).

Under the Payment of Gratuity Act, 1972, a worker continuously employed for five years or more is entitled to a gratuity payment upon termination of service, except where such termination has been as a result of his or her wilful omission or negligence resulting in damage or loss of the employer’s property, in which case the gratuity is forfeited to the extent of the damage caused. Where the employee has been dismissed on account of his or her riotous, violent or disorderly conduct or for an offence involving moral turpitude committed in the course of employment, the gratuity shall be wholly or partly forfeited. The sum is calculated at 15 days’ average pay for every completed year of service.

Category: Bank

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