Many countries have legislation which make it costly for firms to dismiss or retrench
workers. In the case of India, the Industrial Disputes Act, 1947, requires firms that employ 50
or more workers to pay a compensation to any worker who is to be retrenched. This paper
builds a theoretical model to analyze the effects of such anti-retrenchment laws. Our model
reveals that an anti-retrenchment law can cause wages and employment to rise or fall,
depending on the parametric conditions prevailing in the market. We then use this simple
model to isolate conditions under which an anti-retrenchment law raises wages and
employment. In a subsequent section we assume that the law specifies exogenously the
amount of compensation, s, a firm has to pay each worker who is being dismissed. It is then
shown that as s rises, starting from zero, equilibrium wages fall. However beyond a certain
point, further rises in s cause wages to rise. In other words, the relation between the
exogenously specified cost to the firm of dismissing a worker and the equilibrium wage is V-

The freedom of contract theory, emerged out of the laissez-faire principle, authorised the
employer to discharge his workmen due to breakdown of machinery or such other reasons
beyond the control of the employer. This invariably exposed the workmen to frequent risk of
involuntary unemployment. This absolute power of the employer to discharge his workmen
gradually began to disappear with the erosion of the laissez-faire philosophy and the
introduction of more State interventions in industrial relations. Consequently, the employer
lost his privilege to sever the contract of service and that he can utmost only lay-off
temporarily the workers on the occurrence of such eventualities. This means that there will be
only a suspension of employer-employee relationship and does not involve any complete
severance of such relationship.

A layoff describes the act of an employer suspending or terminating a worker, either temporarily or permanently, for reasons other than an employee’s actual performance. A layoff may happen to a displaced worker whose job has been eliminated because an employer has shuttered its operation or relocated.

The ordinary meaning of Retrenchment is that business itself is continuing though a portion
of staff or labour force is discharged as surplusage. In the Industrial Disputes Act, 1947,
Section 2(oo) defines retrenchment. Theessential points that can be gathered from the
definition in the statute are as follows:
1. Retrenchment is the termination of a workman for any reason whatsoever, otherwise
than as a form of punishment, given as a means of disciplinary action.
2. Retrenchment does not include the following:
a) Voluntary retirement of the workman
b) Retirement of the workman on reaching an age of superannuation as stipulated in the
contract of employment
c) Termination of service due to non-renewal of the contract of employment on the
contract’s expiry, or the contract being terminated.
d) Termination of the service of a workman on the ground of continued ill-health.

Lay-off and Retrenchment in India:
Originally the Industrial Dispute Act did not provide for lay-off and retrenchment. The explosive situations due to enormous accumulation of stocks, particularly in the textile mills, with the consequence of probable closure, large scale lay-off and retrenchment in many mills provoked to introduce some effective measures to prevent large scale industrial unrest in the country. The ordinance promulgated for this purpose in 1953 was replaced by the Industrial Disputes (Amendment) Act, 1953 which commenced retrospectively from 24th October, 1953. Thus, Chapter VA was introduced into the Act to regulate lay-off, retrenchment, transfer and closure of undertakings. The provisions under this Chapter have much impact on some of the rights and privileges of the employers who are subjected to certain new liabilities and restrictions in the event of lay-off, retrenchment, transfer or closure of undertakings. In 1976, a new Chapter VB, was added to the Industrial Disputes Act incorporating more stringent conditions against lay-off, retrenchment and closure of certain establishments.

Distinction between Lay-off and Retrenchment:
➢ In case of lay-off there is failure, refusal or inability of the employer to give
employment to a workmen for a temporary period while in retrenchment the workman
is deprived of his employment permanently.
➢ Lay-off is on account of one or more reasons mentioned in Section2 (kkk) while in
retrenchment the termination is on the ground of service of labour.
➢ The reasons of lay-off are entirely different as compared to reasons of retrenchment.
In lay-off the labour force is not surplus but in retrenchment it is surplus which has to
be retrenched.
➢ In lay-off the relationship of employment is not terminated while in retrenchment it is
➢ In lay-off relationship of employment is only suspended while in retrenchment it is
➢ Consequences for both are different to each others and are governed by different
norms. Lay-off is for trade reason beyond the control of the employer i.e. it is not
intentional act while retrenchment is permanent with the intention to dispense with
surplus labour.
➢ In lay-off there is no severance of relationship of employer and employee while in
retrenchment, the relationship of employer and employee is severed at the instance of
the employer.
➢ The right to receive lay-off compensation is subject to certain more stringent
restrictions while the right to receive compensation is absolute in retrenchment.
➢ The right to receive lay-off compensation is subject to certain more stringent
restrictions while the right to receive retrenchment compensation is subject to less
stringent restrictions.

With the view various socially beneficial legislations like the Industrial Disputes Act,
Workmen’s Compensation Act, Payment of Wages Act, etc have been enacted from time to
time along with the amendments which would suit with the day to day changing trend. As a
consequence, the common law right 29 of an employer to discharge and dismiss an employee,
popularly known as the right to ‘hire and fire’ has been subject to various statutory
limitations and conditions.

The Industrial Disputes Act, 1947 and the timely amendments in the Act, especially the provisions relating to the retrenchment, lay-off compensation has proved to be of great advantage to the workmen, in a country like India, wherein the bulk population is constituted of the labour class. These workmen are solely dependent upon their wages for their livelihood. So taking into consideration the essence of wage earnings to the workmen for their livelihood, the legislature has amended the principal Act and inserted provisions relating to retrenchment, lay-off compensation, definition, procedure to be followed in such cases,conditions precedent for retrenchment, lay-off, right of workmen to claim compensation, exceptions to compensation, reinstatement of a retrenched workman, relief in unjustified circumstances. The insertion of chapter V-B in the year 1976 by an amendment, special provisions relating to lay-off, retrenchment has been incorporated.


Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

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