Retrenchment
Also called: Retrenchment compensation, Last come first go
Termination by the employer of a worker's service for any reason other than disciplinary punishment, excluding retirement, non renewal or end of contract, end of fixed term and ill health. Section 2(zh) of the IR Code, 2020.
Explained
Section 2(zh) of the Industrial Relations Code, 2020 defines retrenchment as the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. It excludes five cases: voluntary retirement; retirement on reaching the age of superannuation; termination on non renewal of the contract of employment on its expiry or under a stipulation in it; termination on completion of the tenure of fixed term employment; and termination on the ground of continued ill health. The definition replaced Section 2(oo) of the Industrial Disputes Act, 1947, adding the express exclusion for fixed term employment.
The words for any reason whatsoever are read widely. In Punjab Land Development and Reclamation Corporation v. Presiding Officer, Labour Court (1990) a Constitution Bench held that retrenchment is not confined to the discharge of surplus labour and covers every termination by the employer not falling within the exclusions. Dismissal for misconduct after disciplinary action is not retrenchment, and neither is closure, which is dealt with separately.
Section 70 lays down conditions precedent for retrenching a worker with at least one year of continuous service: one month's written notice with reasons or wages in lieu; compensation equal to fifteen days' average pay, or such days as the appropriate Government notifies, for every completed year of service or part exceeding six months; and notice to the appropriate Government. Section 71 adopts the last come first go rule within a category, unless reasons are recorded, and Section 72 gives retrenched workers a preference in re-employment. Under Section 83 the employer must also contribute fifteen days' wages per retrenched worker to the worker re-skilling fund.
Chapter X applies stricter rules to industrial establishments employing at least three hundred workers. Under Section 79 such a worker can be retrenched only after three months' notice and with the prior permission of the appropriate Government. Examiners test the exclusions, the compensation arithmetic, and the three hundred worker threshold.
What the law says
Section 2, Industrial Relations Code
(zh) “retrenchment” means the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include—
(i) voluntary retirement of the worker; or
(ii) retirement of the worker on reaching the age of superannuation; or
(iii) termination of the service of the worker as a result of the non-renewal of the contract of employment between the employer and the worker concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
(iv) termination of service of the worker as a result of completion of tenure of fixed term employment; or
(v) termination of the service of a worker on the ground of continued ill-health;
Section 2(zh) defines retrenchment and its exclusions
Section 70, Industrial Relations Code
(a) the worker has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice;
(b) the worker has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay, or average pay of such days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months; and
(c) notice in such manner as may be prescribed is served on the appropriate Government or such authority as may be specified by the appropriate Government by notification.
Conditions precedent to retrenchment: notice and compensation
Section 71, Industrial Relations Code
Where any worker in an industrial establishment who is a citizen of India, is to be retrenched and he belongs to a particular category of workers in that establishment, then, in the absence of any agreement between the employer and the worker in this behalf, the employer shall ordinarily retrench the worker who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other worker.
Last come first go rule
Section 72, Industrial Relations Code
Where any worker is retrenched and the employer proposes to take into his employment any person within one year of such retrenchment, he shall, in such manner as may be prescribed, give an opportunity to the retrenched workers who are citizens of India to offer themselves for re-employment and such retrenched workers who offer themselves for re-employment shall have preference over other persons.
Preference to retrenched workers in re-employment
Section 79, Industrial Relations Code
(a) the worker has been given three month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the worker has been paid in lieu of such notice, wages for the period of the notice; and
(b) the prior permission of the appropriate Government has been obtained on an application made in this behalf.
(2) An application for permission under sub-section (1) shall be made by the employer electronically or otherwise in the prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such application shall also be served simultaneously on the workers concerned in such manner as may be prescribed.
Prior permission for retrenchment in Chapter X establishments
Section 83, Industrial Relations Code
(a) the contribution of the employer of an industrial establishment an amount equal to fifteen days wages last drawn by the worker immediately before the retrenchment, or such other number of days as may be notified by the Central Government, for every retrenched worker in case of retrenchment only;
(b) the contribution from such other sources as may be prescribed by the appropriate Government.
(3) The fund shall be utilised by crediting fifteen days wages last drawn by the worker to his account who is retrenched, within forty-five days of such retrenchment, in such manner as may be prescribed.
Employer contribution to the worker re-skilling fund
Example
For example, W has four years and seven months of continuous service and is retrenched as surplus. The part year exceeds six months, so he gets compensation of 15 days' average pay for five years, that is 75 days' average pay, unless a different number of days is notified.
For the exam
- Defined in Section 2(zh) IR Code; earlier Section 2(oo) Industrial Disputes Act, 1947.
- Excludes VRS, superannuation, contract expiry, end of fixed term and continued ill health.
- Section 70: one month's notice and 15 days' average pay per completed year or part over six months.
- Chapter X (300 or more workers): three months' notice and prior Government permission (Section 79).
- Employer also pays 15 days' wages per retrenched worker into the re-skilling fund (Section 83).
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Related terms
- WorkmanA person employed to do manual, skilled, technical, operational, clerical or supervisory work for hire or reward. The Industrial Relations Code, 2020 now uses the term worker in Section 2(zr).
- Industrial disputeA dispute between employers, employers and workers, or workers, connected with employment, non-employment, terms of employment or conditions of labour, including an individual termination dispute (Section 2(q) IRC).
- Lock-outThe temporary closing of a place of employment, suspension of work, or an employer's refusal to continue to employ any number of persons employed by him (Section 2(u), Industrial Relations Code, 2020).
- StrikeCessation of work by persons employed in an industry acting in combination, or a concerted refusal to work, including concerted casual leave by 50% or more workers on a day. Section 2(zk), IR Code.
- WagesUnder Section 2(y) of the Code on Wages, 2019, all remuneration in money or money's worth payable for employment, including basic pay, dearness allowance and retaining allowance, but excluding listed items.
- Trade unionUnder Section 2(zl) of the Industrial Relations Code, 2020, any combination formed primarily to regulate relations between workers and employers, workers and workers, or employers and employers.
Further reading
Checked 6 November 2026. Statutory text is quoted from the Bare Acts library, taken from India Code. See the full glossary.