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Labor and employment law challenges in business transformations

India

Workforce restructuring

The key practical issues in workforce restructuring include:

  • Legal justification
  • Works council and employee representatives’ process
  • Labor administration process
  • Costs and timing
  • Litigation risk

Applicable legislation

In India, employees are broadly classified into two groups:

  • Blue-collar employees (also referred to as workmen)
  • White-collar employees

The distinction is based on, inter alia, the kind of work performed by the employees and their remuneration.

Workforce restructuring triggered by the termination of the services of workmen is governed by the Industrial Disputes Act, 1947 (ID Act). Redundancy of workmen, known as retrenchment under the ID Act, involves the compliance with certain procedural requirements as set out in the ID Act. The procedures required to be followed in case of redundancy of workmen will vary on the basis of various factors including the nature of the organization and the number of workmen employed in the organization.

The termination of the services of the white-collar employees is dealt with in accordance with their respective employment contracts and the local shops and establishment laws, to the extent applicable. Each state in India has a separate shops and establishment law. These laws have broad applicability and cover, inter alia, any premises where any profession, business or trade or any activity that is incidental or ancillary to any profession, trade or business is carried out and any premises where goods are sold or services are made available to customers.

Required legal justification

No specific justification is required to be given under law, and redundancy can be for any reason. However, the notice required to be given to the workmen whose services are being made redundant must set out the justification for such redundancy. This notice is mandatorily required to be given in all cases of termination except:

  • Voluntary retirement
  • Retirement upon reaching the age of superannuation or pursuant to a contract
  • Termination as a result of non-employment
  • Termination on the ground of continued ill health

Works council/unions or other employee consultation requirements

Consultation requirements with works council/unions

There are no statutory prescribed consultation requirements in case of termination of services of workmen. However, there may be certain notification and consultation requirements with trade unions — the requirements in this regard vary from case to case. For example, if there are any collective bargaining agreements, the procedure for termination of workmen set out therein needs to be followed.

There are no statutorily prescribed consultation requirements in case of termination of services of white-collar employees.

Consultation requirements with other employee representatives

There is no specific consultation requirement with other employee representatives.

Consultation requirements with employees

There are no statutory prescribed consultation requirements with employees/workmen in case of termination of their services. The employer is only required to give notice to the employees/workmen being made redundant.

Approval/notification of the labor authorities or other government authorities

There are no statutory prescribed information or notification requirements in case of termination of service of white-collar employees.

The Industrial Disputes Act, 1947, requires the employer to notify the Central Government, labor commissioners and employment exchange when any workman is being retrenched.

Generally, approval of any labor or government authorities is not required for employees whose services are being made redundant except in case of factories, mines and plantations where more than 100 workmen were employed at any time during 12 months preceding the retrenchment.

Employee selection criteria

Unless otherwise agreed with the workman, the termination of services of workmen is governed by the last in, first out principle, which is that the last person employed in a particular “category” shall be the first to be made redundant. This principle is not required to be followed for white-collar employees, for whom there are no specific rules.

Certain employees are afforded special protection, including under the following circumstances:

  • A female employee who is on maternity leave cannot be dismissed during, or because of, her maternity leave.
  • Workmen who are office bearers of a trade union cannot be dismissed from service without prior permission of labor authorities.
  • Employees who are receiving sickness benefits under the Employee State Insurance Act, 1948, cannot be dismissed during the time in which they are entitled to such benefit.

Actions required to limit the negative impact and social plan

Internal alternative employment/redeployment
There are no prescribed obligations in this regard.

Other measures
There are no prescribed obligations in this regard.

Estimated timeline

There is no timeline prescribed under the Industrial Dispute Act within which the redundancy procedure is to be completed. It depends on the number of workers/employees whose services are being made redundant, the compliances required to be made under applicable laws and the nature of the establishment in which such workers are employed.

Depending on the number of employees and other specifics of the process, it usually takes up to a month to prepare for the redundancy process.

Estimated costs

Mandatory costs

The key components of mandatory HR legal costs are as follows:

  • Every workman who has been in employment for a minimum period of 1 year (effectively 240 days in the preceding year) shall be entitled to a compensation (i.e., an emolument for the services rendered). The compensation has to be equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of 6 months pursuant to the Industrial Dispute Act.
  • In addition, every employee who has completed 5 years of continuous service is entitled to payment of gratuity at the rate of 15 days’ salary or wages for every completed year of service pursuant to the Payment of Gratuity Act, 1972. Gratuity is a form of retirement benefit, pursuant to which a lump sum is paid to employees at the time of their retirement.
  • Every employee shall be entitled to receive the amount set aside in his or her favor and for his or her benefit in a provident fund pursuant to Provident Fund Act, 1952.
  • Every employee is entitled to leave encashment for leaves accrued but not availed.
  • Employees will receive other benefits and entitlements as may accrue pursuant to their employment contracts or other agreements.

Customary additional costs

There are no fixed additional costs with respect to redundancy of workmen and white-collar employees. The incurrence of any such costs will largely depend on the terms on which the redundancy is carried out. It shall also depend on local and/or market practice.

Hiring restrictions post-redundancy

If the employer proposes to employ any person post-redundancy, the employer must give preference to the workman who was made redundant (if appropriately qualified) if he or she is willing to be reemployed. There is no specific prescribed time period on the duration of the right of preference.

There is no such requirement in case of white-collar employees.

Litigation risk

Interested parties

The following interested parties can bring lawsuits related to the dismissal process:

  • The impacted workmen: either individually or through a union may resort to litigation in case the procedural requirements set out in the Industrial Disputes Act, 1947, are not complied with. A workman can raise an industrial dispute claiming reinstatement and back wages against wrongful termination. The dispute should be raised within three years from the date of termination of employment; however, this period is often extended in practice.
  • The impacted white-collar employees: may resort to litigation if there is a contravention of the terms of their respective employment contracts. A white-collar employee can file a suit for damages against wrongful termination. The period of limitation for such a suit is three years; however, this period is often extended in practice. Remedies include reinstatement and damages.

Litigation may adversely affect the redundancy process as the courts in India tend to be very labor-friendly and have wide ranging powers.

Damages and other remedies

Challenges could lead to two types of civil remedies.

Damages for unfair dismissal
The workmen and/or white-collar employees can file a suit for damages against wrongful termination. The period of limitation for such a suit is three years, however in practice this period is often extended.

Reinstatement
The workmen and/or white-collar employees may claim reinstatement and back wages against wrongful termination. The dispute should be raised within three years from the date of termination of employment, however in practice this period is often extended.

Criminal sanctions
Criminal sanctions are not imposed unless actual wrongdoings of a penal nature (such as fraud or harassment) are proved against the employer.

Country-specific issues

There are no other issues specific to India.

Contact

Primary Contact for India Labor and Employment Law

Probal Bhaduri
PDS Legal, Advocates & Solicitors
+91 11 4363 3120

Global Labor and Employment Law Guide
Workforce restructuring
2016-07-01
India
IN

Contacts