By S&S Co. Advocates & Solicitors · Published 24 September 2026 · Informational content, not legal advice — see our disclaimer
What Counts as 'Retrenchment'
Retrenchment means termination of a workman's service for reasons other than disciplinary punishment — typically because of surplus staff or broader business reasons. It does not cover voluntary resignation, retirement, or the non-renewal of a fixed-term contract on its natural expiry. Getting this classification right matters, since the compensation and notice obligations described below apply specifically to retrenchment and not to these other, distinct forms of separation.
The Notice and Compensation Requirements
A workman who has been in continuous service for not less than one year cannot be retrenched without being given one month's written notice, or wages in lieu of that notice; payment of retrenchment compensation equal to 15 days' average pay for every completed year of continuous service, or part thereof exceeding six months; and notice to the appropriate Government in the prescribed manner. These requirements, formerly found in Section 25F of the Industrial Disputes Act, 1947, are now to be read as the corresponding provision of the Industrial Relations Code, 2020, which came into force together with the other three Labour Codes on 21 November 2025.
The Higher Threshold for Prior Government Permission
For larger industrial establishments — those employing 300 or more workers, a threshold raised from the earlier 100-worker cap under the old law — prior permission of the appropriate Government is additionally required before retrenchment, layoff or closure, under the Code's special-provisions chapter. Employers at or near this threshold should confirm the exact current figure and check for any state-specific variation, since states have historically set differing thresholds by amendment.
Selection, Re-Employment and the Cost of Getting It Wrong
The general principle employers are expected to follow when selecting whom to retrench, absent a contrary agreement, is 'last come, first go' within the relevant category of workman — though this is a general expectation rather than an absolute rule that applies without exception in every circumstance. A retrenched workman also has a preference for re-employment if the employer proposes to take on workers again within a prescribed period.
Failing to follow the mandatory notice, compensation or government-permission requirements exposes the employer to a real risk of reinstatement and back-wages claims — this is not merely a procedural formality that can be corrected after the fact with a payment, since courts have shown a willingness to order reinstatement where the statutory process was not properly followed.
Frequently Asked Questions
What is retrenchment compensation and how is it calculated?
15 days' average pay for every completed year of continuous service (or part exceeding six months), payable together with one month's notice or wages in lieu, under the provision formerly known as Section 25F, now carried forward in the Industrial Relations Code, 2020.
Does retrenchment cover a fixed-term contract that simply ends?
No. Retrenchment is termination other than for disciplinary reasons, typically for surplus staff or business reasons — it does not cover voluntary resignation, retirement, or the natural, non-renewed expiry of a fixed-term contract.
When is prior government permission needed before retrenchment?
For industrial establishments employing 300 or more workers (raised from the earlier 100-worker threshold), prior permission of the appropriate Government is required before retrenchment, layoff or closure — subject to confirming the current figure and any state-specific variation.
What happens if an employer retrenches a worker without following the required process?
The employer risks a reinstatement and back-wages claim — courts have shown a willingness to order reinstatement where the mandatory notice, compensation or government-permission steps were not properly followed.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- Industrial Relations Code, 2020 (in force from 21 November 2025), carrying forward the former Section 25F, Industrial Disputes Act, 1947.