Initially, the Industrial Disputes Act of 1947 didn’t include the concept of retrenchment. Disputes related to retrenchment were addressed through principles of social justice and equity. This led to significant inconsistency in court and tribunal decisions, causing chaos in states like Bombay, particularly in industries such as cotton mills, where large-scale retrenchment was common and uncomplicated.
As the situation was getting worse, the central government realised the growing need for some imminent changes and therefore an ordinance was promulgated in 1953 to bring uniformity in the rules regarding the retrenchment of workers and their calculation of fair compensation. This ordinance was later replaced by the Industrial Disputes (Amendment) Act 1953. It was through this Act that a statutory definition of retrenchment was added to the Industrial Disputes Act.
In India, industries with more than a hundred employees are required to acquire government approval before imposing any redundancies or retrenchments, and employees are entitled to three months’ notice of any such action under Section 3(1) of the Industrial Disputes Act of 1947. This method protects employees who may be fired without cause or explanation by industry authorities or as a cost-cutting measure for companies. The goal of enacting such laws is to defend workers’ rights and improve the well-being of the labour force.
The Industrial Disputes Act of 1947 was amended in 1976 by adding Section 2(oo) to address the absence of provisions protecting employees from involuntary unemployment. Section 2(oo) of the Act defines the term ‘retrenchment’. It is the termination of service of a workman for reasons other than by way of punishment. A cursory reading of S. 2(oo) might lead one to believe that it covers any type of termination other than punishment, but this misconception was dispelled in Hari Prasad v AD Divalker (1957), which held that termination is retrenchment when it is of surplus labour in an ongoing industry that is not closed or transferred. Workmen may become surplus due to rationalisation, economics, or other industrial or commercial relationships.
There are certain exceptions which describe certain conditions which are not covered under the term ‘Retrenchment’.
- If the worker intentionally or wilfully resigns from the service of the employer, then such voluntary retirement will not be covered by the definition.
- If the employer or employee retires after attaining the age of superannuation such a provision must be mentioned in the employment contract between the employer and the employee.
- If the employee is restricted to work in the industry as a result of the employer’s failure to renew the contract of employment.
- Termination due to the employee’s continuing bad health is not covered under the concept of retrenchment. The ill-health of the employee would include his physical and mental health.
THE REASONS FOR RETRENCHMENT
The action for retrenchment taken by the employer may be for any reason as he thinks fit but should be just and legal. When a portion of the staff or labour force is discharged as a surplusage in a running or a continuing business, termination of which may be due to various possible reasons such as:
- If the company faces financial hardships or experiences any kind of loss in its income, the industry then considers limiting its respective employees by way of retrenchment.
- As businesses and industries grow, they may demand more realistic approaches to their operations. It is feasible that using such strategies will lead to structural or operational changes. If the industry becomes obsolete as a result of such advances, the retrenchment approach might be adopted following such recognition and examination of all relevant aspects.
- Industries are gradually implementing technological developments in their businesses. As a result, while such technological advancements may reduce the need for employees, workers may also be required to be able to properly comply with the new technology. As a result, if the deployed technologies render employee usage obsolete, the company or industry may be forced to retrench.
- If a specific industry’s machinery fails, the law of retrenchment may be used.
- Others as the employer may think fit.
PREREQUISITES OF A VALID RETRENCHMENT
Sections 25F and 25N both govern the principles relating to retrenchment. Section 25F applies to industrial establishments where more than 50 employees have been engaged on an average per working day in the preceding calendar year and is also applicable to seasonal industries. The following conditions have to be satisfied for a valid retrenchment u/s 25F:
- Workman should be given at least one month’s notice in writing indicating the reasons for retrenchment.
- The workmen should be paid compensation equivalent to 15 days average pay for every completed year of continuous service. This compensation can be recovered u/s 33C.
- A notice is served to the AG indicating the same. However, this does not protect the interest of the employees and is only intended to keep the government informed. Therefore, failure to serve a notice does not invalidate the retrenchment.
Section 25N applies to industrial establishments where more than 100 employees have been engaged on an average per working day in the preceding calendar year. This section insists on:
- The workmen should be given three months prior notice in writing indicating the reasons for retrenchment.
- An application has to be made to the AG seeking permission for the same. After considering the same, the AG may or may not grant the permission. If the government does not respond within sixty days from the application, the permission will be deemed to have been granted.
In Workmen of Meenakshi Mills v Meenakshi Mills (1992), the Court upheld the validity of Section 25N since it satisfies the reasonableness of the restrictions. The Court examined the object behind these restrictions. They were mainly implemented to review the reasons for retrenchment in advance and prevent unnecessary hardships for employees. This was done by safeguarding existing employment and also curbing the rise in unemployment.
These restrictions on the employers are intended to maintain a smooth and harmonious industrial atmosphere. It also attempts to give effect to the directive principles of the Constitution; therefore, it can be presumed to be a reasonable restriction in the public interest.
There is also a statutory obligation on the employer under Section 25H to provide retrenched employees with the opportunity to apply for re-employment. The workers must meet the following requirements:
- When a company retrenches, employees should be allowed to re-enter the workforce.
- The worker must be an Indian citizen.
- Any type of re-employment should be announced to the workers through a notice.
- Workers should be allowed to reapply for jobs in the same industry where they previously worked.
- Retrenched workers shall be given priority over other applicants for re-employment by the employer.
LOSS OF CONFIDENCE/ MISCONDUCT: AN ANALYSIS
The most important point is that the above rules do not apply if the worker is terminated due to misconduct or other legally defined circumstances. The Industrial Disputes Act of 1947 (‘ID Act’) exempts termination due to “misconduct” from the definition of “retrenchment.”
TESTS FOR ESTABLISHING ‘LOSS OF CONFIDENCE’
The Supreme Court of India in Kanhaiyalal Agrawal v. Factory Manager listed three conditions or ‘tests’ to be satisfied for concluding that the employer has validly ‘lost confidence’ in his worker in paragraph 12.
- Whether the worker holds a position of trust and confidence
- Whether the worker has abused their position of trust and committed an act that results in forfeiting their employment
- Whether it would be embarrassing and inconvenient to the employer or detrimental to the discipline or security of the establishment to continue the worker in service.
It is important to note that the fact of ‘loss of confidence’ cannot be established based on the subjective opinion of the management. The management must be able to prove objective facts that led to a definite inference of apprehension regarding the trustworthiness or reliability of the employee.
In Radhey Shyam Gupta v. U.P. State Agro Industries Corporation Ltd., the test of “motive” and “foundation” behind an order of termination was examined and it was stated thus, “In fact, the employer, by opting to pass a simple order of termination as permitted by the terms of appointment or as permitted by the rules conferring a benefit on the employee by passing a simple order of termination so that the employee would not suffer from any stigma which would attach to the rest of his career if a dismissal or other punitive order was passed.”
In the case of Chandu Lal v. Pan American World Airways, the court stated, “It is difficult to agree with the finding of the Labour Court that when service is terminated based on loss of confidence the order does not amount to one with stigma and does not warrant a proceeding contemplated by law preceding termination. Want of confidence in an employee does point out an adverse facet in his character as the true meaning of the allegation is that the employee has failed to behave up to the expected standard of conduct which has given rise to a situation involving loss of confidence. In any view of the matter, this amounts to a dereliction on the part of the workman and, therefore, the stand taken by the Management that termination for loss of confidence does not amount to a stigma has to be repelled.”
In the opinion, of the court it is not necessary to support the conclusion by reference to precedents or textual opinion as a common-sense assessment of the matter is sufficient to dispose of this aspect. “Retrenchment” has been defined in the Industrial Disputes Act under Section 2 (oo) and excludes termination of service by the employer as a punishment inflicted by way of disciplinary action. If the termination in the instant case is held to be grounded upon conduct attaching a stigma to the appellant, disciplinary proceedings were necessary as a condition precedent to the infliction of termination as a measure of punishment. Admittedly this has not been done. Therefore, the order of termination is vitiated in law and cannot be sustained.
THE NEED FOR DISCIPLINARY INQUIRY
An examination of various cases reveals that the institution of a disciplinary inquiry against the worker significantly helps employers in establishing their genuine belief before a court of law and in proving the charges of ‘loss of confidence’ made against the worker. However, there have been cases where no disciplinary investigation was conducted, but employers were allowed to present facts before a court of law to help them prove that their decision to terminate the employee for loss of confidence was just and necessary.
In the case of Air India Corporation, Bombay v. V.A. Rebellow (1981) 1 SCC 634, the employer terminated an employee on an immediate basis by paying him a salary instead of a notice. The reason given by the employer was that they had lost confidence in the employee due to a grave suspicion regarding his private conduct and behaviour with an air hostess employed by the employer. No disciplinary inquiry was conducted against the employee.
The Supreme Court stated that once the employer’s bona fide loss of confidence in the employee is affirmed, the termination order cannot be challenged. The employer’s opinion about the suitability of the employee for the job assigned to him, even if erroneous, is final and not subject to review by industrial adjudication. The employer’s opinion may lead to the termination of the employee’s services, but such termination cannot be considered misconduct and is therefore permissible and immune from challenge.
In the case of Kamal Kishore Lakshmanan v. Management of Pan American World Airways Inc., the Supreme Court of India held that termination based on the loss of confidence cannot necessarily be considered ‘stigmatic’. A stigmatic dismissal, on the other hand, implies that the employee is being accused of misconduct, and disciplinary proceedings are required to be carried out in such cases. The Supreme Court further ruled that if no disciplinary inquiry has been conducted, the employer may still present evidence to justify the order of dismissal during the process of adjudication. It is important to note that not all cases of ‘loss of confidence’ involve allegations of misconduct against an employee. Sometimes, ‘loss of confidence’ may occur simply because an employee fails to carry out their duties properly.
In the case of The Tata Oil Mills Co., Ltd. v. Workmen, it was held that an employee may be terminated due to sheer incompetence or failure to follow instructions given by their superiors. In cases of misconduct, a disciplinary inquiry is required. However, in cases that do not involve misconduct, a disciplinary inquiry may not be necessary. Nevertheless, the management may be required to present evidence to justify their loss of confidence in the employee.
In SBI v. R.B. Sharma, The Court observed that the purposes of departmental investigation and prosecution are two distinct and independent aspects. A criminal prosecution is initiated for an offence involving a breach of a duty by the offender to society or a breach of which the law requires the offender to make public satisfaction. Thus, crime is defined as an act of commission in violation of the law or omission of a public duty. The purpose of the departmental investigation is to maintain public service discipline and efficiency
HERE ARE SOME INSTANCES WHEN AN EMPLOYER MAY LOSE CONFIDENCE IN HIS WORKERS:
These situations could arise due to a variety of reasons such as poor performance, violation of company policies, breach of trust, unethical behaviour, or a lack of commitment to the job. When these situations occur, it can negatively impact the employee’s relationship with their employer and may even lead to termination of employment.
After going through these plethora of landmark case laws we shall further discuss various circumstances under which the employers can validly lose confidence in their workers and which could easily lead to their retrenchment. These may include:
- A worker can be retrenched if he is suspected of sexual harassment at the place of his work.
- If the employer is of the view that there is a breach of confidentiality by the worker. In this scenario, the employer should have relevant and accurate evidence supporting his cause.
- If the employer is of the view that the worker hasn’t shown any seriousness towards his work and has time and again given unsatisfactory work thus, showing a lot of incompetence.
- If the worker is accused of theft or misappropriation of a property. In State of A.P. v. K. Allabakash, while dismissing the appeal against acquittal by the High Court, observed: “that acquittal of the respondent shall not be construed as a clear exoneration of the respondent, for the allegations call for departmental proceedings, if not already initiated, against him.”
- If the employer is of the view that the worker has failed to discharge his duty properly as was held in the case of Francis Klein & Co. (P) Ltd. v. Their Workmen, AIR 1971 SC 2414, the court ruled that an employer has no obligation to reinstate an employee who has lost the employer’s trust, especially if the employee holds a position of trust and confidence. The court emphasized that when an employer loses confidence in an employee, it is not reasonable to direct their reinstatement.
- Misconduct, in general, refers to actions such as taking leave under false pretences or releasing mortgage documents without permission. In the case of Bharat Heavy Electricals Ltd. v. M. Chandrasekhar Reddy, such examples were cited. In U. P. State Road Transport Corporation vs. Mohan Lal Gupta and Ors. , the court held, that if an employee is found guilty of misappropriation, and the corporation loses its trust in the employee, it would not be fair for the court to substitute the employer’s finding and confidence with its own by allowing reinstatement. The gravity of the offence would render the misconduct proved, and in such a situation, the labour court cannot exercise its discretion and alter the punishment. When an employee is terminated from their job due to misconduct, it is crucial to determine whether the misconduct resulted in “loss of confidence”. This is important for the courts to consider if the employee is seeking reinstatement. Even if the employee is cleared of any wrongdoing, if the misconduct led to a loss of trust from their employer, it is unlikely that the court will order their reinstatement.
Does termination resulting from loss of confidence qualify as ‘retrenchment’?
The ID Act defines ‘retrenchment’ broadly to mean the termination of a worker’s service by the employer “for any reason whatsoever.” In Hariprasad Shivshankar Shukla v. A.D. Divikar , the Supreme Court ruled that the words ‘for any reason whatsoever’ cover only instances involving the discharge of surplus labour or staff by the employer. Termination of workers’ employment for any other reason (such as the closure of an enterprise) does not constitute ‘retrenchment,’ and thus the provisions of sections 25G (procedure for retrenchment) and 25H (re-employment of retrenched workmen) of the ID Act do not apply to such dismissals. Based on the Supreme Court’s decision in Hariprasad , several High Courts have ruled that terminating a worker due to a loss of confidence does not constitute ‘retrenchment’ (Kamlesh Kumar and Torrent Power Ltd).
As a result, a worker fired for lack of confidence would be unable to claim retrenchment compensation or the right to re-employment under the ID Act. It makes logical sense because if management decides to fire a worker due to a lack of confidence, it would be illogical to argue that such a person should have the right to re-employment with the same employer under section 25H of the ID Act.
 Kanhaiyalal Agrawal v. Factory Manager, (2001) 9 SCC 609
 Radhey Shyam Gupta v. U.P. State Agro Industries Corporation Ltd 1999 2 SCC 21
 Chandu Lal v. Pan American World Airways, (1985) 2 SCC 727 : 1985 SCC (L&S) 535 at page 7306
 Air India Corporation, Bombay v. V.A. Rebellow, AIR 1972 SC 1343
 Kamal Kishore Lakshmanan v. Management of Pan American World Airways Inc.,AIR 1987 SC 229
 The Tata Oil Mills Co., Ltd. v. Workmen, AIR 1966 SC 1672.
 SBI v. R.B. Sharma [(2004) 7 SCC 27 : 2004 SCC (L&S) 913 : AIR 2004 SC 4144]
 In State of A.P. v. K. Allabakash [(2000) 10 SCC 177 : 2000 SCC (L&S) 385]
 Francis Klein & Co. (P) Ltd. v. Their Workmen , AIR 1971 SC 2414
 Bharat Heavy Electricals Ltd. v. M. Chandrasekhar Reddy, (2005) 2 SCC 481
 U. P. State Road Transport Corporation vs. Mohan Lal Gupta and Ors. [(2000) 9 SCC 521 : 2001 SCC (L&S) 109]
 Hariprasad Shivshankar Shukla v. A.D. Divikar,  1 SCR 121]
 Hariprasad Shivshankar Shukla v. A.D. Divikar,  1 SCR 121]
This article is written and submitted by Righved Vashisht during his course of internship at B&B Associates LLP. Righved is a 4th year BA LLB (Hons.) student at RMLNLU, LUCKNOW.