Article: The dreaded pink slip: Minimizing legal risk while downsizing

Employee Relations

The dreaded pink slip: Minimizing legal risk while downsizing

Indian employers too, like their overseas counterparts, are taking hard decisions of issuing the much-dreaded pink-slip. Learn more on how to minimize any legal impact during this process

It can hardly be denied that more flexible and realistic labour laws can certainly push the Indian economy forward


Faced as we are with its rude reality, the issue of lay-offs needs to be addressed in a legally tenable manner to obviate hassles post facto


In the news virtually every day, the ‘Pink-slip’ has become ubiquitous like the proverbial mushroom! At one level it becomes a metaphor of protest and on the other, the shattering of dreams!

Yes, we are concerned with the pink-slips which are issued due to the downward slide of economies the world over. Indian employers too, like their overseas counterparts are taking hard decisions of issuing the much-dreaded pink-slip.

Faced as we are with its rude reality, the issue of lay-offs needs to be addressed in a legally tenable manner to obviate hassles post facto. There are currently around 154 labour law enactments/case-law, to ensure welfare of workers, a majority of which were enacted during the Nehruvian era of controlled economy. Many among these affect only the workers in the organized sector, who constitute around 30 million workers out of the total workforce of about 400 million. There is no gainsaying the fact that if India is to remain competitive and continue on its growth trajectory, there is an imperative need to revisit and revamp labour laws and policies.

A broad overview of employment protection scenario in the country is primarily based upon the distinction between two categories of employees’ viz. (i) Workman and (ii) Non-workman.

Workmen and non-workmen

Keeping in view the definition of “workman” contained in the Industrial Disputes Act Section 2(s), it can be said that all employees who are employed to do any manual, unskilled, skilled, technical, operational, clerical or supervisory (supervisory personnel drawing less than Rs. 1600 per month) work for hire or reward, whether the terms of employment be expressed or implied, are workmen.

The question whether an employee is a workman or not has to be decided having regard to the nature of the main work assigned to such employee. Occasional entrustment of supervisory, managerial or administrative work, will not take a person, mainly discharging manual, unskilled, skilled, technical, operational, clerical or supervisory duties, out of the purview of the definition of workman.


Non-workmen consist of managerial or administrative and supervisory personnel drawing more than Rs. 1600 per month.
The termination of non-workmen is guided by the terms of their engagement which are mainly the appointment letter and any rules made by the management, forming part of the service conditions. They may be entitled to notice with compensation, if any, stipulated in the contract of employment. They may also be entitled to certain statutory terminal benefits like Gratuity. Certainly, if the service of a non-workman is terminated illegally in violation of terms of his employment he has right to claim compensation but a non-workmen cannot claim right of reinstatement.


The termination of employment of a workman has to be in accordance with the Industrial Disputes Act 1947 (“IDA”) failing which the employer may face industrial disputes and other consequences.
Under IDA, definition of "industry" is very wide and encompasses any business, trade, undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen.

The main objects of the IDA, in this matter, are:

  • To secure industrial peace leading to enhanced productivity
  • To ensure fair terms to workmen;
  • To eliminate or resolve industrial disputes.

Termination of the service of a workman is highly sensitive and has to be done mainly in the circumstances justifying termination i.e. proven misconduct of a serious nature. Since punishment cannot be in excess of the offence, commensuration between proven misconduct and punishment is vital.

Retrenchment of Workman

According to IDA, retrenchment refers to the discharge of surplus labour by the employer and does not include termination by way of punishment inflicted as a consequence of disciplinary action/voluntary retirement/ superannuation etc.

Under section 25-FF in Chapter VA, the employer has to comply with three conditions precedent before retrenching a workmanwho has been in continuous service for not less than one year.

  • Giving one month's notice in writing indicating the reasons for retrenchment and the notice period has expired or the workman has been paid wages in lieu of such period of notice.
  • Workman has been paid at the time of retrenchment, compensation which shall be equivalent to 15 days average pay for every completed year of continuous service or any part thereof in excess of six months and
  • Notice is served on the appropriate Government or such other authority as may be notified by the appropriate Government in the official gazette.

If retrenchment is made otherwise, the concerned labour court may order reinstatement with back wages or award suitable compensation in lieu of reinstatement. It should be borne in mind that there would be some State level amendments/legislations or sector wise legislations that may be relevant to an industry in a particular location/sector.

Last come first go rule

Departure from this self-explanatory rule is permissible only if it is on valid and justifiable grounds, to be proved by the management. The Supreme Court has held in Swadesamitran Limited (AIR 1960 SC 762), subsequently reiterated in other cases, that:

“It may be conceded that if a case for retrenchment is made out it would normally be for the employer to decide which of the employees should be retrenched; but there can be no doubt that the ordinary industrial rule of retrenchment is 'last come first go', and where other things are equal this rule has to be followed by the employer in effecting retrenchment."

Clarifying the position further the apex court in Om Oil and Oil Seeds exchange, inter alia observed that “The rule of ‘first come, last go’ is intended to secure an equitable treatment to the employees when, having regard to the exigencies of the business, it is necessary to retrench some employees. But in the application of the rule the interests of the business cannot be overlooked. The rule has to be applied where other things are equal. The management of the business must act fairly to the employees; where, however, the management bona fide retains staff possessing special aptitude in the interests of the business, it cannot be assumed to have acted unfairly merely because the rule ‘first come, last go’ is not observed.”

It is also relevant to point-out that the rule of ‘first come last go’ is applicable only in the context of a workmen who are citizens of India.

Right of Re-Employment

If the employer proposes to take into his employment any persons, a retrenched workman gets preference over others, where he is an Indian citizen.

Payment of gratuity & other terminal benefits

Under Payment of Gratuity Act, gratuity is payable to all employees who have completed five years of continuous service. The Payment of Gratuity has to be made upon retrenchment/ termination of service after an employee has rendered continuous service for not less than 5 years. Other benefits like leave encashment etc are also payable.

Grievance Redressal

The dismissal or retrenchment of an individual is deemed to be an industrial dispute. The Labour Court, Industrial Tribunal and National Tribunal have wide discretion to review disputes relating to termination of employment, including the examination of evidence, in awarding relief as they deem fit including compensation in the form of damages and reinstatement (sec. 11A, IDA).


The pretty strict retrenchment laws and the fairly conservative interpretation of them by the Courts in the country (based on the left-leaning welfare state model of our ‘mixed’ economy in post-independence era) resulted in increasing the organisational costs in adjusting its workforce.

By and large employers in India, have devised mechanisms to address the issue e.g greater use of contract, temporary and/or casual labour; increase in capital intensity and labour-saving technologies; setting up of production in States where labour is not organized and even the euphemistic ‘short-cuts’ to avoid the legal consequences of retrenchment.

It can hardly be denied that more flexible and realistic labour laws can certainly push the Indian economy forward. However concurrent care needs to be taken and constructive mechanisms devised to ensure that that does not happen at the cost of overall welfare of the working class. That clearly is both the challenge and the solution!

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Topics: Employee Relations, Strategic HR

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