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Compliance With Labour & Retrenchment Laws in India – Hire & Fire Policy of the Indian IT Industry

One of the most critical need of the burgeoning Indian software industry and other outsourcing service providers is to have the flexibility and the independence to hire the most worthy of the manpower and fire the unproductive employees. There is also a growing need to draw a fine balance between the hire and fire policy of the employer and the rights of the workmen. This article proposes to discuss the Indian retrenchment laws, right of compensation of employees and applicability of these laws to Indian Information Technology (the “IT”) industry.

Termination of employment needs to be in accordance with the Shops and Establishments Act as applicable to the jurisdiction where the IT company is situated and the Industrial Disputes Act, 1947 (hereinafter the “ID Act”). The Shops and Establishment Act usually enables the employer to discharge his employee, other than an employee engaged for a specified period or in a leave vacancy, from the service by providing the employee a thirty (30) days notice in advance or such longer period as may be required under the terms of employment or salary in lieu thereof.

The Shops and Establishments Act is not usually applicable to employees occupying positions of confidential, managerial or supervisory nature, i.e. all non-workmen can be terminated at will in terms of the contract of employment entered into with the respective employee.

The ID Act which is applicable to all industrial and commercial establishments defines employee/workmen and both skilled or unskilled persons may be considered as ‘workmen’. However, a person employed mainly in a managerial or administrative capacity or if the nature of services rendered by an employee is supervisory in nature, the employee may not be considered as workman. In view thereof, the Head, Project Managers, Manager (business development) of the project teams at an IT or outsourcing company may not be termed as ‘workmen’ subject to actual assessment of their roles and responsibilities. However, it is likely that the other team members, associates, trainees, etc., employed by an IT company may be considered ‘workmen’ subject to assessment of their specific job profiles, roles and responsibilities.

Termination of service of a workman (other than for specified reasons as discussed below) is referred to as ‘retrenchment’. In terms of section 2(oo) of the ID Act, retrenchment “means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include –

(a) voluntary retirement of the workman; or

(b) retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman contains a stipulation in that behalf; or

(bb) termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein;

(c) termination of the service of a workman on the ground of continued ill-health.”

In view of the aforesaid definition, it is clear that employees who have been employed for a specified training period may be asked to leave at the conclusion of that period without providing them an offer of employment by the IT company. If the company needs to extend their training period, it may extend the specified period and reserve its right to offer employment at the conclusion of the extended training period failing which the training period of each of these employees would be deemed to have been concluded.

The legal requirements with respect to termination of services are more onerous once a company employs more than 100 workmen. In terms of ID Act, if an industrial establishment employs more than 100 workmen, a company may not retrench, that is, terminate the services of any workman who has been in continuous service for not less than one year unless the (i) workman has been given three (3) months notice in writing indicating the reason for retrenchment and the period of notice, and (ii) the prior permission of the concerned state government has been obtained for the retrenchment (section 25N of the ID Act).

If the permission is not obtained, the retrenchment will be deemed to be illegal from the date on which the notice was given and the workman will be entitled to all the benefits under law as if no notice had been given to him. From a practical standpoint, obtaining state government’s approval for retrenchment is considered nearly impossible due to the implications of the resulting unemployment. Therefore, companies rarely apply to the state government for permission for retrenchment. Penalty for contravening the aforesaid provisions on retrenchment is imprisonment up to one month or fine which may extend to Rs. 1000, or with both. Assuming that the state government approval is obtained, the services of the workmen can be terminated upon provision of three months’ prior notice and payment of 15 days average pay for each completed year of service in excess of six months.

The term ‘workmen’ within the meaning of ID Act has not been interpreted by the courts with specific reference to data processors or software workers. However, the courts have addressed the question whether a company engaged in the development of computer software is an ‘industrial establishment’ within the meaning of the ID Act. In the matter of Cholamandalam Software Ltd. v/s. Additional Labour Court Madras [(1995) (S) LLJ 78 Mad], the Hon’ble Single Judge of the Madras High Court examined the question whether Cholamandalam Software, a company rendering computer services relating to the collection and maintenance of information and developed computer software applications for the requirements of its customers, was an ‘industrial establishment’ within the meaning of section 25L of the of the ID Act. For the purpose of solving this question the Hon’ble Judge addressed the question whether the company was a ‘factory’ and engaged in any ‘manufacturing process’. The Hon’ble Judge stated that Explanation II to section 2(m) of the Factories Act is clearly intended to exclude the premises on which electronic data processing or computer units are installed and wherein no other manufacturing process is being carried on from the scope of the definition of ‘factory’.

The Hon’ble Judge, thus, essentially took the view that electronic data processing units had been specifically excluded from the definition of ‘factory’ in Explanation II. Therefore, Cholamandalam Software could not be considered a factory under section 2(m) of the Factories Act and in turn, could not be considered an ‘industrial establishment’ within the meaning of section 25L of the ID Act. This judgment was later upheld by the Division Bench of the Madras High Court, after which the workmen of the company filed an appeal in the Supreme Court. The Supreme Court while distancing itself from the interpretation provided by the Madras High Court recognized that the key question is whether the activity of data processing and preparation of software would constitute a ‘manufacturing process’ and further referred the matter to a larger bench of the Supreme Court for consideration, the decision of which is still awaited.

In view of the pending Supreme Court’s consideration, the question as to whether the software companies or other outsourcing service providers would constitute an ‘industrial establishment’ under the ID Act remains unanswered as of date and there is no clarity as to whether a software company can dismiss its employees without compliance with the ID Act if it has more than 100 employees.

From a practical standpoint, the IT industry does not consider itself an ‘industrial establishment’ within the meaning of section 25L of the of the ID Act and follows the ‘hire and fire’ policy without compliance with the ID Act of seeking prior state government approval, taking support from the Division Bench judgment of the Madras High Court which has held that the software companies are not an ‘industrial establishment’ and hence are not covered under the stringent provisions of retrenchment mentioned under Chapter VB of the ID Act.

Notwithstanding the above flexibility, the software companies will need to comply with the retrenchment related provisions of section 25F of the ID Act which applies to all industries (and not only industrial establishment) and requires that “no workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until –

(a) the workman has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice;

(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months; and

(c) notice in the prescribed manner is served on the appropriate Government or such authority as may be specified by the appropriate Government by notification in the Official Gazette.

In view of the foregoing, an IT Company may terminate the services of those employees who have not completed one year of employment in terms of their respective contract of employment, i.e., by providing a minimum notice of one month without compliance with the aforesaid retrenchment provisions.

As regards the employees who qualify as ‘workmen’ and have competed continuous service of one year, in cases other than misconduct, the IT company may terminate their services by providing minimum one month’s notice (or such agreed notice) in writing indicating the reasons of termination together with retrenchment compensation equivalent to 15 days average pay for every completed year of continuous service in excess of six months and necessary intimation is provided to the appropriate labour authority.

My next article will deal with situations where the termination of services is necessitated due to misconduct of employee and the procedural compliances required under Indian labour laws.

Seema Jhingan

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