Notice and compensation
For a worker with at least one year of continuous service, retrenchment requires one month's written notice stating the reasons, or wages for the notice period in lieu, and compensation of 15 days' average pay for every completed year of service. These are minimums, and a company policy or a settlement with the union can offer more. Earned wages are due within two working days of the worker leaving. Larger industrial establishments face further conditions, so read the retrenchment rules and your state rules before announcing anything.
Retrenchment vs layoff vs dismissal
Retrenchment ends employment permanently for business reasons, not because the worker did anything wrong. A lay-off, in the legal sense, is temporary: the worker stays on the rolls but is not given work because of a shortage of raw material, a power failure or a similar cause. Dismissal ends employment as a punishment for proven misconduct. In company announcements, 'layoffs' usually means what the law calls retrenchment, which is why HR letters should use the precise legal term.
Planning a retrenchment fairly
Start with the business case and the alternatives: a hiring freeze, redeployment, less overtime or a voluntary retirement scheme. Decide the selection criteria in advance and apply them consistently; seniority within a category is the traditional basis in Indian establishments. Work out each worker's compensation from their service record, check gratuity eligibility, and prepare letters, settlements and relieving documents before the announcement. Communicate in person, in the language workers understand, and offer references or placement help where possible.
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How is retrenchment compensation calculated?
Retrenchment compensation is 15 days' average pay for every completed year of continuous service, for a worker with at least one year of continuous service. Multiply 15 days by the number of completed years, then value those days at the worker's average pay. A worker with 10 completed years gets 150 days' average pay. This is in addition to one month's notice or wages in lieu.
Is retrenchment the same as layoff?
No. Retrenchment permanently ends employment for reasons other than punishment, such as surplus staff. A lay-off, in Indian labour law, is a temporary situation in which the employer cannot give work and the worker remains employed. In everyday business language, 'layoffs' often refers to job cuts, which legally are retrenchment, so HR letters should use the correct term.
Does a worker with less than one year of service get retrenchment compensation?
The notice and compensation rule applies to workers with at least one year of continuous service. A worker with less service is still owed earned wages within two working days of leaving, and any notice or pay in lieu stated in the appointment letter. Check the letter and your policy, and treat such workers fairly in selection and communication.