Article: Financial distress in the wake of a pandemic

Employee Relations

Financial distress in the wake of a pandemic

Depending on the extent of financial distress, some companies are considering laying off some of their existing workforce. But the question remains, can financial distress be a ground for initiating layoffs in the wake of a pandemic?
Financial distress in the wake of a pandemic

As we look towards a gradual opening of the lockdown, it appears almost certain that the multi-week lockdown to slow the spread of COVID-19 has come at an economic cost. In the wake of such an economic crisis, a cost-cutting reflex is a natural response of  heads of businesses as they are required to make responsible decisions to keep their companies afloat. And as has been historically seen, whenever businesses face turbulent times, layoffs and salary reductions or a combination of both are recourses that employers and businesses seek to explore.

Most companies have had negligible revenues since the commencement of the lockdown and the companies expect that even after the lifting of the lockdown by the authorities, businesses will open only in a staggered manner. Further, companies are now facing different problems including the government restrictions due to which they can only operate with a limited capacity, supply chain issues, excess inventory, unavailability of labour due to health concerns or absence of public transport. Therefore, while industries are technically “operating”, the path towards becoming fully functional and operational seems to be a long and arduous one.

Depending on the extent of financial distress, some companies are considering laying off some of their existing workforce. But the question remains, can financial distress be a ground for initiating layoffs in the wake of a pandemic?

It is commonly believed that such situations would trigger a “no work - no pay” situation. However, judicial precedents on the principle clarify that the same would apply only where the employee is unwilling to work, and not where the employee is willing to work but the employer is unable to avail his services or provide him work.

Having  said that, the above-mentioned aspects are to be assessed in light of the extant lockdown in the country, against the backdrop of which specific government notifications have been issued by both the Central and state governments requiring commercial and industrial establishment not to deduct wages of employees despite the absence of employees from the workplace. It would, however, be interesting to note that the Central government, too, has taken a step back in enforcing this mandate. In its latest lockdown extension order dated 17 May 2020, the Central government has expressly provided that the order dated 29 March 2020 of the National Executive Committee (which directed such payment) shall cease to have effect from 18 May 2020. State governments may follow suit.

Until now the industry was grappling with different state notifications, but now starting this week the lockdown is being lifted gradually and some industries may have the capacity to function with limited workforce. Therefore, companies are now going out of the purview of these government orders and the companies and their employees would be subject to the terms of their employment contract / applicable labour laws such as the applicable Shops and Establishments Act, the Minimum Wages Act, 1948 and the applicable industrial standing orders and the Industrial Disputes Act, 1947 (ID Act). In such a circumstance, companies may take a decision as they would under normal circumstances in case of being faced with a financial crisis.

Situations like the one we are presently witnessing bring in the concept of ‘lay-off’ which, depending inter alia on the nature of the establishment (non-seasonal factory / mine / plantation employing a specified number of non-managerial employees or commercial establishment), would determine the rate of lay-off compensation payable and the process of lay-off depending upon the applicability of the provisions of the ID Act. For example, generally a manufacturing unit having more than 100 workmen may be required to pay its workmen layoff compensation at the rate of 50% of the total of the basic wages and dearness allowance for the layoff period, which may not exceed 45 days in a period of 12 months. However, prior to effectuating such ‘lay off’ provisions, an employer is required to examine the terms of the standing orders (if any) along with the terms of employment contract. While a statutory layoff may not be legally permissible on account of financial stringency, a layoff on account of a natural calamity is permitted. The present circumstance of the widespread COVID-19 outbreak, it may be argued, would fall under the ambit of “natural calamity or for any other connected reason” as stipulated under the ID Act. In this regard, reference may be made to an office memorandum issued by the Deputy Secretary to the Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division to the Secretaries of all Central Government Ministries/ Departments wherein it was inter alia clarified that the current situation due the widespread COVID-19 should be considered as a case of natural calamity. While the office memorandum may be indicative of the official thinking, however, ultimately what view the judiciary will take will depend on the facts and circumstances prevalent at the relevant time.

Any proposed action effectuated by the employer on account of financial distress should contemplate that an employer retrenches any workman for justifiable reasons, it should ensure that all statutory (retrenchment compensation) and contractual dues are paid to such workman to avoid any adverse litigation claim. Employers should err on the side of caution at this juncture and not resort to retrenchment to reduce fixed payroll cost, given that governments have been advising against termination of employment during such unprecedented times.

Having said the above, while cost cutting measures appear to be the need of the hour, governments and economic experts have urged companies to adopt a humane approach in rationalising their expenses before announcing across-the-board pay cuts or layoffs. Even though legally the option of layoffs and salary reductions may be available, challenges by labour unions and actions by labour authorities may ensue.


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Topics: Employee Relations, #GuestArticle, #COVID-19, #Layoffs

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