New Layoff Rules For Companies Under New Labour Codes: All You Need To Know

The Industrial Relations Code, 2020, as part of the new labour codes, has introduced an important change in India’s employment landscape: Factories, mines and plantations with up to 300 workers can now lay off or close units without seeking prior government approval. This is compared with the earlier threshold of 100 workers under the Industrial Disputes Act, 1947.

“The code establishes that the industrial establishment, employing 300 or more workers, shall require prior permission from the appropriate government, for lay-off, retrenchment, or closing down its industrial establishment. The threshold has been increased from 100 to 300, with flexibility for States to enhance this limit further,” according to an official statement.

Industries have

long said that the 100-worker limit was outdated and needed to be revised to promote the increase in the size of the companies. Raising the threshold is expected to reduce compliance burdens and give employers the confidence to expand operations.

For workers, the change raises concerns about job security. Without mandatory government approval, companies could initiate layoffs more easily. However, the code introduces certain safeguards. Workers affected by retrenchment are entitled to notice and compensation, and the law establishes a reskilling fund. Fixed-term workers are also brought under the protection framework for retrenchment compensation.

“The effect on the labour market is likely to differ across sectors. Large enterprises already employ far more than 300 workers and continue to operate under the approval requirement. Micro and very small firms employ fewer than 20 people and are outside this framework altogether. The most significant impact will be on mid-sized manufacturing units, which stand to benefit from newfound procedural ease,” according to a Delhi-based lawyer.

Under the codes, the concept of fixed-term employment (FTE) has been introduced, which allows engagement of workers through a direct written contract between the employer and the employee for a specified duration. Such workers are entitled to all benefits, including working hours, wages, allowances, and statutory benefits, on par with permanent employees.

The new codes also encourage more flexible hiring, especially in sectors with seasonal or project-based work, leading to greater overall employment opportunities.

“This provision is expected to reduce excessive contractualisation and offer cost efficiency to employers,” according to the official statement.

Amended Definition of ‘Strike’

To discourage flash strikes and to promote industrial harmony, the definition of strike has been amended. It includes “mass casual leave also within the ambit”, which comprises cases where casual leave has been taken by more than 50 per cent of the workers on a given day.

Lay-Off Vs Retrenchment Vs Closure

Under the Industrial Relations Code, 2020, ‘lay-off’ means the temporary inability of an employer to give employment to a worker whose name is on the muster rolls of the industrial establishment. It can happen due to reasons such as shortage of coal, power, or raw materials; accumulation of stocks; breakdown of machinery; natural calamity; or any other connected reason.

A worker who presents himself for work but is not given employment due to these reasons is said to be laid off.

Compensation rule: A laid-off worker must be paid 50% of basic wages + dearness allowance, unless the worker is a badli or casual worker.

Retrenchment

Under the Code, ‘retrenchment’ means the termination of service of a worker by the employer for any reason whatsoever, other than punishment through disciplinary action; voluntary retirement; retirement on reaching the age of superannuation; non-renewal or expiry of contract; termination due to continued ill-health; or termination due to closure of business.

In simple terms, any termination not fitting the exceptions listed above is legally treated as retrenchment.

Compensation rule: The worker must receive 15 days’ average pay for every completed year of service.

Closure

Closure means the permanent shutting down of a place of employment or part of it. This is not temporary. Once an employer decides to close an establishment (or a unit), it legally ends the relationship with the workers of that unit.

Notice rule: Employer must give 60 days’ prior notice to the appropriate government.

For factories, mines, and plantations that employ 300 or more workers, prior government approval is required.

Compensation rule: Workers affected by closure are entitled to the same compensation as in retrenchment: 15 days’ average pay for every completed year of service.