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Retrenchment Compensation: All You Need To Know

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Retrenchment Compensation: Turning Change into Opportunity

A sudden separation from your employment may knock you hard before you’re ready. It may rob you of all your confidence, morale, and financial stability. Nothing can be more relatable than the global recession between 2007 and 2009. Retrenchment compensation was the most popular buzzword in those days.

Retrenchment Compensation – Do You Need It?

The past few months have seen large-scale layoffs. The tech and financial sector was the hardest hit, with many bankers and others in the financial industry fearing they would be the next to get the pink slip. But, instead, with speculations of another major recession on the horizon, retrenchment compensation is making the rounds and is quickly becoming the hottest topic discussed during a tea break.

So, if you’re among those worried that the pink slip will be yours next, relax because we’ve got the best answers to your retrenchment compensation issues. So, let’s get started.

What is the Industrial Disputes Act (ID Act) 1947

Before the Industrial Disputes Act of 1947, employers had more bargaining power over employment terms and benefits. Employees may be fired without adequate justification and without retrenchment compensation for job loss.

The ID Act 1947 gave employers and employees a structured framework to resolve disputes and restore industrial peace and harmony. But, it is noteworthy that this Act applies only to employees satisfying the criteria of “Workman”.

 Let us understand in simple terms that to qualify as a “Workman” u/s 2(s) of the Industrial Dispute Act, 1947, you must fulfil these conditions-

  • Must be working in the industry.
  • Must be employed for the following jobs
    – Manual, skilled, or unskilled
    – Technical work
    – Operational work
    – Clerical work
    – Supervisory work
  • If the employee works in a supervisory role, the salary must not exceed Rs. 10,000/-.
  • You must not be excluded as defined below-
    – Person covered by the Air Force Act of 1950, the Army Act of 1950, or the Navy Act of 1957.
    – Person working in the police force; officer or another prison employee
    – A person who is primarily employed in a managerial or administrative capacity.
    – Person hired as a supervisor and earning more than Rs. 10,000 per month (either by nature of duty or powers vested, does mainly work of managerial nature)

What is Retrenchment Compensation?

Retrenchment Compensation is defined in section 2(oo) of the ID Act as a monetary relief paid by an employer for terminating a worker’s services for any reason other than punishment imposed by disciplinary action.

Exclusions to Retrenchment Compensation include-

  • worker’s voluntary retirement, or
  • retirement of the worker upon reaching the age of superannuation
  • Termination of the contract and suspension due to non-renewal
  • Termination of the contract and suspension due to continued illness

Who can receive Retrenchment Compensation?

There are two conditions for retrenchment compensation-

  • You must be covered under the definition of “Workman”.
  • You must have offered continuous service for 240 days in the previous 12 months, counted as one year of regular service. Sickness, officially sanctioned leaves, lock up of industries, work halts, etc., are not considered an interruption of service.

How to Calculate Retrenchment Compensation?

Retrenchment compensation is an average pay of 15 days per year of interruption-free service or any part of that for half a year. Consider the following example to gain a better understanding:

Say an employee X working in ABC for the last 4 years and earning a monthly in-hand salary of Rs. 50,000/-, is being laid off under company cost-cutting measures due to the recession. Then, the 15 days’ average X pay will be Rs. 25,000/- Now, the retrenchment compensation will be calculated as-

15 days’ average pay x No. of years of continued service i.e. Rs. 25,000/- X 4 = Rs. 1,00,000

Retrenchment should be put into force only when the employee is served a notice intimating the termination process at least 30 days before the action, failing which the company has to pay a retrenchment compensation. Further, the employer has to pay the employee his wages for the notice period.

Retrenchment compensation  can be reimbursed in one of three ways:

  •  Under a month-by-month ground scheme based on three months
  • An employee is paid every week for four weeks.
  •  Under a week-based scheme on the last 12 working days.

Is Retrenchment Compensation Taxable?

Retrenchment compensation will incur tax relief under the following conditions-

  • The amount of average pay paid to the employee is upto Rs. 5,00,000/-
  • If the total amount received by the employee exceeds Rs. 5,00,000/-, then the surplus amount will be treated as profit instead of salary while computing income tax.
  • Net compensation received is the lowest of the three amounts.

However, if the retrenchment compensation is paid under a government-sponsored scheme, the total amount, with no upper limit, is exempt from income tax provisions.


The law governing retrenchment compensation for laid-off employees is based on citizens’ constitutional rights to economic justice. A significant anomaly in the termination created the need for a transparent and systematic framework. Employers used retrenchment policies to reduce labor costs even before the implementation of the ID Act in 1947. However, the methods used were biased and favored employers striking any compensation for sudden interruptions in regular income.


Can an employer rehire an employee who has received retrenchment pay?

Employers usually include a clause in their retrenchment letters stating that the company may consider rehiring the employee within six months if he or she remains retrenched until then and there is a suitable slot in the company.

Will an employee be paid retrenchment compensation if not covered under the ID Act 1947?

Where an employee does not meet the “Workman” definition, the terms and conditions of the employment contract signed at the time of hire will govern your claim for retrenchment compensation. When an employee is fired, the payments are made by the contract terms.

If an employee believes that appropriate retrenchment compensation clauses are missing from his contract, he or she may bring the matter up with the employer to incorporate appropriate changes.

Can an employer fire an employee right before retirement?

Yes, an employer can fire an employee at any time before retirement if the employer intends not to prevent the employee from receiving full superannuation benefits. In such cases, proving intent may be difficult, so keep all records and documents detailing the events of your retirement in a safe place.

If your termination was caused by age discrimination, you can sue your employer for wrongful termination.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

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