Can an employer implement a reduction in force because of the business impact of COVID-19? If yes, what is the process?

As stated above, the Central Government has issued a circular stating that if the place of employment is made non-operational due to COVID-19, the employees of such unit will be deemed to be on duty[9]. Similar circulars advising employers to not reduce or stop salary payments or to terminate employment have been issued by State Governments including Karnataka, Haryana, Maharashtra, and Telangana. These are, however, mostly in the nature of advisories or appeals on a humanitarian basis.

Having said the above, to carry out large scale terminations of employment (i.e., reductions in force or lay-offs as per common parlance) an employer would need to adhere to the specific requirements in relation to termination of employment under the ID Act; state specific legislations applicable to commercial establishments (S&E Acts); and the terms of employment contained in the employment documentation and company policies. We have elaborated on the specific requirements in this regard below:

a. Requirements under ID Act - The ID Act is only applicable to employees categorised as ‘workmen’, i.e., a person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. This definition excludes persons employed mainly in a managerial or administrative capacity and those persons who are employed in a supervisory capacity drawing monthly wages in excess of INR 10,000. The ID Act treats termination of workmen for reasons other than misconduct, voluntary retirement, superannuation, ill-health, and expiry of contract as ‘retrenchment’. In case of retrenchment, every ‘workman’ who has been in continuous service for at least one year (i.e., 240 days) is entitled to:

(I) one month’s notice in writing (indicating the reasons for retrenchment) or wages in lieu of the notice; and

(II) retrenchment compensation at the rate of 15 days average pay for every completed year of continuous service or any part thereof in excess of 6 months.

The ID Act also requires the employer to:

(I) notify the local labour department in the manner prescribed under the statute as a condition subsequent to retrenchment;

(II) follow the “last in first out” rule or record reasons for deviating from this rule (for this purpose the employer is required to put up a seniority list of workmen at least 7 days prior to the retrenchment/ termination); and

(III) give an opportunity to the retrenched workman, in the manner prescribed under the statute, to offer himself for re-employment.

Additionally, if the establishment is a factory in which not less than 100 workmen (300 in some states) were employed on average per working day in the preceding 12 months, the employer would need to make an application to the relevant authority seeking permission to retrench workmen and the workmen who are so retrenched would have to be provided with 3 months’ notice or pay in lieu thereof.

With respect to employees who are not ‘workmen’, termination of their employment will need to be as per the S&E Act (if applicable) and contractual terms of employment.

b. Requirements under S&E Acts - S&E Acts, subject to the state in which the establishment is located, apply to both managerial and sub-managerial employees. Typically, S&E Acts entitle employees to at least one months’ notice or pay in lieu thereof prior to termination of employment. This may not be applicable to manufacturing establishments.

c. Requirements per the terms of employment - The employer would also be required to adhere to the terms of employment as contained in employment contracts and the organisation’s policies. In the event that the terms of employment are more beneficial to employees (such as a longer notice periods, higher severance, etc.) than those offered under statute, the more beneficial terms would need to be provided.

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