Is Severance Pay Mandatory During Layoffs? What The Law Says

Microsoft, TCS, Oracle, and many other IT organisations are cutting jobs at different levels. The main reason is the development in the artificial intelligence (AI) domain, which is stealing their work. However, the effect of AI is not limited to IT companies; it is impacting industries across workplaces. In such an environment, layoffs are becoming increasingly common. But, for workers who have been associated with an organisation for a long time, say more than a decade, at times even two, facing a layoff could be a traumatic experience.

Recently, a Reddit user (supereen_nj), aged 56, described his experience, saying, “Last month, July 22 to be exact, I am told I am being laid off, not because of anything I did, but because the company has decided to eliminate my position and use freelance workers instead (I am a creative worker). Was not expecting this in the least. Given 20 weeks severance and a kick in the aas, “see ya!” I am 56 years old and this is NOT where I expected to be.” A layoff after so many years’ association with a company is hard to accept, as the user shared, “So, it’s a month later and I am still so angry and in shock and I am really trying to move on but it’s so hard.” However, as he said, “Severance helps” holds value in such situations.

What Is Severance Pay, And Is It Always Payable During Layoffs?

Ankita Ray, Partner, Cyril Amarchand Mangaldas, explains, “The Industrial Disputes Act, 1947 (ID Act), which is the primary legislation regulating employment matters, categorises employees into workmen and non-workmen and regulates payments to be made in cases of retrenchment and layoff in respect of the workmen category of employees. For non-workmen employees in commercial establishments, the relevant State’s shops and commercial establishment legislation and the contract of employment would regulate payments to be made in cases of retrenchment or layoff.”

While a layoff is commonly used when a company asks its employees to leave for reasons such as downsizing, restructuring, or so on, the law distinguishes among various situations that bring employment to an end.

Ankit Rajgarhia, Designate Partner, Bahuguna Law Associates, says, “Severance pay is applicable when there is a layoff, retrenchment, or close up, but not when there is voluntary exit or misconduct.”

While voluntary exit, termination due to misconduct, and the company’s closure are easy to understand, layoff and retrenchment are often used interchangeably.

Padmanabhan Ananth, Partner, Counselence, clarifies it, saying, “Layoff under the ID Act is a temporary industrial situation where workers remain employed on the rolls but are not actually given work due to factors not attributable to them. Whereas, ‘Retrenchment’ means termination for all other reasons except misconduct, superannuation/retirement, end of fixed-term employment, continued ill-health, and voluntary retirement/resignation.”

Takeaway

Under the ID Act, a “layoff” is a temporary suspension of employment, and it does not mean termination of employment. If an employer terminates employees’ services for no fault of theirs but for the employee’s own reasons, it is termed “retrenchment”.

Who Is Eligible For Severance Pay Under The ID Act?

Ray says, “The ID Act or the local shops and establishments legislation will be applicable to all private sector employees. However, note that while the former is not applicable to managerial or certain supervisory employees, the latter in many States excludes top management employees.”

“Generally, the ID Act applies to all establishments that employ more than 50 employees. However, certain states have increased the threshold for applicability”, highlights Ananth.

In short, there is no difference in severance pay based on the job location or the industry one works in, but the designation of the person, whether the role is that of a workman or a manager.

Takeaways

• ID Act: covers workmen

• State’s shops and establishment legislation: covers administration, managerial, and supervisory roles (does not include top management employees)

However, every category of employees, irrespective of their roles, is entitled to the benefits mentioned in their employment contract.

How Severance Pay Is Calculated In India As Per The Law?

The law defines the rules to calculate the payment in case of layoff, retrenchment, and closure. According to experts, the law provides:

Layoff Compensation

• For Workmen: 50 per cent of basic wages plus dearness allowance for the layoff period, if they have completed at least one year of continuous service

• For Non-Workmen: any payments per their employment contract

Retrenchment Compensation

• For Workmen: one-month notice (or wages in lieu of the notice), and equivalent to 15 days’ average pay for every completed year of service or any part thereof in excess of 6 months. According to Ray, the law entitles the workmen to the statutory and contractual dues, in addition to the severance pay

• For Non-Workmen: Payment as per provisions under the local shops and commercial establishment legislations, statutory payments, and contractual payments

Statutory payments include accrued salary, gratuity, leave encashment, etc.

In case of the closure of a company, the job-cut is treated the same as retrenchment because there is no fault of the employees, and it is not a discretionary payment but a statutory right which cannot be waived in the contract, says Rajgarhia. 

What Are Employees’ Rights Regarding Severance Pay?

Ananth says, “Non-compliance with the pre-conditions for retrenchment could result in employees challenging the termination as ‘wrongful’. This could result in the labour court directing reinstatement and back wages or payment of compensation to the employee.”

Rajgarhia states, “The statutory right of employees who qualify as workmen in the definition of that term in the Industrial Disputes Act to receive severance pay in the event of a layoff or retrenchment is clear. This right is actionable against labour authorities, and failure to pay an employee can result in formal proceedings and binding orders against the employer.”

Ray emphasises, “All employees are entitled to notice (or pay in lieu thereof) and are required to be paid all statutory and contractual dues owed to them on termination of employment. Notice/payment in lieu is also extended to that category of employees who are not covered under either the IDA or the local shops and commercial establishment legislations.”

Considering the layoffs news in the IT circle, Rajgarhia says that ID Act provisions apply to the workmen, and thus, the IT workforce remains outside the scope. He adds, “Most businesses in the IT and service industries offer severance on a voluntary basis, both as a way of goodwill and as a way of avoiding the risk of reputation challenges”, and adds, “The courts have highlighted that retrenchment compensation is not a generosity issue but a statutory requirement. However, when a large segment of skilled workers is left outside this safety net, this presents a serious loophole in the legislation. There must be a visionary approach that recognises the right of the employer to restructure, and yet a certain degree of assurance that all employees have.”

While the job market remains uncertain and large companies like TCS and Microsoft are handing out pink slips to their employees, it is important to know your employment entitlements and plan your finances accordingly to stay afloat, no matter what happens.