Newsletter Oct - Dec 2025

Layoffs vs Retrenchment: Legal Distinctions, Judicial Interpretations, and Protection of Workers’ Rights

The growing trend of dismissing employees under the term “lay-off” has obscured the legal distinction between temporary unemployment and permanent termination of employment. Employers often cite economic restructuring and operational efficiency as reasons for significant workforce reductions, while neglecting their legal responsibilities related to retrenchment. This article explores how such misclassification undermines labor protections outlined in the Industrial Disputes Act of 1947. It critically examines whether these corporate practices qualify as legitimate layoffs or are merely disguised retrenchments aimed at avoiding legal repercussions.

Definitions

As per Section 2(kkk) of the Industrial Dispute act 1947, Lay-off refers to a temporary situation where an employer is unable to provide work to an employee who is still on the company’s rolls and has not been terminated. It occurs due to practical difficulties faced by the organisation such as shortage of power or raw materials, excess stock, breakdown of machines, or natural events. The worker is not at fault, and the employment relationship continues even though work is not given for that period.

As per Section 2(oo) of the Industrial Dispute act 1947 Retrenchment means the employer ending the service of a worker for reasons other than disciplinary punishment. It does not include cases where the employee leaves on their own, retires after reaching the agreed retirement age, or where a fixed-term contract naturally comes to an end as per its terms. It also excludes termination due to the worker’s long-term illness.

Layoff vs Retrenchment: Distinctions & Compensation

The primary distinction between layoffs and retrenchments is the duration of the employee’s absence from work. Layoff is when an organisation experiences operational issues such as material shortages, technical malfunctions, or unavoidable external occurrences, the employer does not provide work for a brief period of time. The worker is still regarded as an employee of the company and could be summoned back if things get better. Retrenchment, on the other hand, is a final separation from service that is typically carried out when an organisation reduces the number of employees for commercial purposes even though its operations continue.

The nature of separation determines the difference in compensation between layoffs and retrenchments. In a layoff, the employer is only obligated to pay half of the regular wages plus a dearness allowance because the work stoppage is only temporary. Retrenchment, on the other hand, results in the employee’s permanent loss of employment; as a result, the employer is required to pay a larger compensation, which is equal to fifteen days’ average wages for each year of service. This glaring disparity in pay demonstrates that retrenchment costs the company far more than layoffs.

Judicial Insights on Lay-off and Retrenchment

The judiciary has repeatedly affirmed that the content of an employer’s actions takes precedence over their form. Even when employers refer to workforce reductions as “voluntary separations” or “lay-offs,” courts look at the actual nature, purpose, and effects on workers. The landmark rulings listed below demonstrate how Indian courts uphold statutory rights and forbid covert layoffs.

Ranbir Singh v. Executive Engineer, PWD (2021) 14 SCC 815

The Supreme Court ruled in this historic decision that the actual nature of termination must be determined from the factual matrix rather than the employer’s nomenclature. Although the employer argued that the workers’ disengagement was only temporary, the Court determined that the termination was meant to be final and irreversible. Regardless of the language in the contract, it was decided that any permanent severance of service qualifies as retrenchment under Section 2(oo). The termination was void from the start because Section 25-F was not followed. The abuse of layoffs to avoid statutory retrenchment obligations is exposed by this ruling, which is crucial.

Workmen of Firestone Tyre and Rubber Co., Ltd v. Management 1976 AIR 1775, was decided by the Supreme Court.

According to management, an employer does not automatically have the right to announce layoffs. Such authority must be specifically granted by certified Standing Orders or the service contract. The employer is required to pay full wages during the layoff period in the absence of such authority. The Court reiterated that managers cannot simply decide to suspend employees from their jobs. Prior authorization from the relevant government is required for layoffs or retrenchments in establishments covered by Chapter V-B. The workers must receive copies of the application. Permission must be requested within thirty days in the event of a fire, flood, or explosion. Approval is considered to have been given if the government does not reply within sixty days.

Alok Kumar v. Oriental Bank of Commerce (2008 111 FLR 928)

The Delhi High Court investigated a case in which the bank asserted that the worker had left the company voluntarily as part of a voluntary retirement plan. The Court did not, however, accept this explanation without question. After closely examining the surrounding circumstances, it concluded that the employer’s pressure and coercion caused the employee to quit. The Court ruled that an employee’s resignation or decision to retire under duress, fear, or coercion cannot be regarded as voluntary. Legally speaking, it turns into a retrenchment, and the employer must abide by the Industrial Disputes Act’s statutory requirements. The ruling makes it abundantly evident that courts will always consider the true motivation behind the action and that employers cannot avoid legal liability by simply labeling termination differently.

Analysis

Layoffs are defined by the Industrial Disputes Act as a temporary suspension of employment due to events outside the employer’s control. However, judicial scrutiny reveals that layoffs lose their statutory protection and take on the characteristics of retrenchment when they are prolonged, economically motivated, or strategically implemented to permanently reduce workforce. The Supreme Court categorically ruled in Ranbir Singh that permanent severance of service, regardless of the term lay-off constitutes retrenchment. In a similar vein, Tatanagar Foundry establishes that layoffs cannot be justified by employer-engineered crises. In the Alok Kumar case, the Delhi High Court exposed the abuse of voluntary retirement plans to conceal forced terminations, reaffirming that the law prioritizes substance over form, the employer’s intention and the outcome of their actions are crucial, not the nomenclature used.

Where layoffs are indefinite, accompanied by fresh hiring, or driven primarily by cost-cutting, they amount to disguised retrenchment. In such scenarios, the safeguards under Section 25-F of the ID Act are not optional but mandatory. Non-compliance renders the termination unlawful, highlighting the judiciary’s firm stance against procedural subversion and the protection of workers’ statutory rights.

Lay-off & Retrenchment Changes under Industrial Relation Code 2020

With effect from November 21, 2025, the Industrial Disputes Act of 1947 has been repealed and combined into the Industrial Relations Code of 2020. The definition of retrenchment under Section 2(zh) essentially stays the same, covering termination of an employee’s employment by the employer for any reason other than disciplinary punishment. However, it now expressly excludes termination of fixed-term employment, voluntary retirement, superannuation, and contract non-renewal. Layoffs are still defined and understood in the same way. In order to support skill development and job transition, the Code also establishes the Worker Re-Skilling Fund under Chapter XI, Section 83. Employers contribute fifteen days’ worth of wages for each retrenched worker, which is credited to the worker within 45 days. The contribution amount will be used for his skill development, job searching etc.  All things considered, the Code preserves current safeguards while offering more assistance to retrenched employees.

Conclusion

To conclude, the courts have made it clear that employers cannot evade statutory protections by mislabelling terminations. Lay-offs must remain temporary and genuine, while any action that permanently removes workers without following legal safeguards is treated as retrenchment. The real test is the intent and effect of the employer’s action, ensuring that labour rights are protected against disguised or indirect terminations.

Recent Amendments & Notifications

Implementation of ESIC Registration Under the Social Security Code, 2020 – November 2025

The Social Security Code, 2020 came into nationwide effect from 21 November 2025, consolidating multiple social security laws. All educational institutions, government, aided, unaided, private schools, colleges, and affiliated learning establishments, that meet eligibility criteria must register with ESIC. Institutions are required to enroll all eligible employees and ensure timely contribution remittance, enabling workers to fully access ESIC medical and financial benefits.

Streamlining Employee Registration on the ESIC Employer Portal

ESIC has updated the employee registration process on the employer portal to simplify onboarding. The revised process reduces manual intervention, improves data validation, and enables faster employee registration. These enhancements aim to ensure better compliance, minimize errors, and provide a more user-friendly experience for employers.

Compliance with ESIC Notification on Hospital Tie-ups under ESIC Pensioners Medical Scheme

As per the ESIC notification dated 16 December 2025, Regional Offices must ensure mandatory tie-ups with eligible Government and private hospitals under the ESIC Pensioners Medical Scheme, 2006. Priority shall be given to CGHS/CSMA/State Government–approved hospitals for providing comprehensive and tertiary medical care to pensioners. Additional hospitals may be empanelled wherever required, following CGHS-like terms and conditions. Nodal Officers shall submit compliance reports and regularly update the empanelled hospital list on the official website for beneficiary awareness.

ESIC SPREE Awareness Drive – Code on Social Security, 2020

The Employees’ State Insurance Corporation (ESIC) has initiated an awareness drive for employers under SPREE to promote understanding of compliance requirements. ESIC has clarified that formal compliance checks and enforcement actions will begin only after the Central Rules under the Code on Social Security, 2020 are formally notified. Until then, the initiative focuses on awareness, facilitation, and preparedness rather than penal action.

Commencement of the Occupational Safety, Health and Working Conditions Code, 2020 – Notification dated 21 Nov 2025

The Central Government, through S.O. 5321(E), has notified 21 November 2025 as the commencement date for the provisions of the Occupational Safety, Health and Working Conditions Code, 2020, in exercise of powers under section 1(2) of the Code.”

Commencement of Specified Provisions of the Code on Wages, 2019 – 21st November 2025

The Ministry of Labour and Employment has notified 21st November 2025 as the commencement date for key provisions of the Code on Wages, 2019. Sections 1 to 41, parts of sections 42, 43 to 66, 67, 68, and 69 (with certain exceptions) will come into force. This notification activates major provisions related to wage regulation, minimum wages, and compliance requirements across applicable establishments in India.

Commencement of Specified Provisions of the Code on Social Security, 2020 – 21st November 2025

The Ministry of Labour and Employment has notified 21st November 2025 as the commencement date for key provisions of the Code on Social Security, 2020. Sections 1 to 14, parts of sections 15, 16, 17 to 141, 143 (with certain exceptions), 144 to 163, and selected clauses of section 164 will come into force. This notification operationalizes major provisions related to social security, welfare, and compliance requirements for applicable establishments in India. It is highlighted that PF Act has not been repealed and the provisions relating to PF have not been given effect to.

Karnataka Menstrual Leave Policy 2025:

The Government of Karnataka has introduced the Menstrual Leave Policy 2025, allowing women employees aged 18 to 52 to take up to 12 days of paid leave per year, at a rate of one day per month. This policy applies to women working in government departments, IT companies, multinational corporations, private industries, factories, and Shops & Establishments, including both permanent and contractual staff. It is designed to support women’s health and well-being at the workplace.

Tamil Nadu Shops & Establishments – Annual Combined Return (Form ZC) Amendment

The Government of Tamil Nadu has amended the Shops & Establishments Rules, 1948, by introducing Rule 16-D, which mandates all employers to submit a combined annual return under Section 47-A. This return must be filed through the designated Labour Department web portal using the newly added Form ZC, on or before 31st January each year. Form ZC is inserted after Form ZB, standardizing the format for annual returns.

Employees’ Pension (Amendment) Scheme, 2025 – Paragraph 43C

The Employees’ Pension (Amendment) Scheme, 2025 (G.S.R. 791(E)), issued under Section 6A read with Section 7(1) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, inserts Paragraph 43C into the Employees’ Pension Scheme, 1995. This provision, effective from 1st November 2025 to 30th April 2026, allows employers to regularize unreported employees under the Employees’ Enrolment Campaign, 2025 by paying a ₹100 lump sum for defaults between 1st July 2017 and 31st October 2025, which will be treated as full compliance under the Scheme.  

Case Analysis

Case Name: K. Umadevi v. Government of Tamil Nadu & Ors.
Year: 2025
Citation: 2025 INSC 781; Civil Appeal No. 2526 of 2025

Judgment Date: May 23, 2025

Facts of the Case

The appellant, K. Umadevi, joined Tamil Nadu government service as an English Teacher in December 2012. She had two children from her first marriage, whose custody was with her former husband. In September 2018, she remarried and subsequently conceived a child from her second marriage. She applied for maternity leave from 17.08.2021 to 13.05.2022, covering pre-natal and post-natal periods. The request was rejected by the authorities under FR 101(a), which limits maternity leave to women with fewer than two surviving children.

The appellant challenged this decision before the High Court. A Single Judge allowed her petition, emphasizing that since she did not have custody of her first two children, her entitlement to maternity leave for her first child from the second marriage should not be denied. The Division Bench reversed this decision, holding that the State’s policy restricting maternity leave to two children applied irrespective of custody, and emphasized administrative and fiscal considerations.

Sections/Rules Involved
  • Tamil Nadu Fundamental Rules, 101(a) – Maternity Leave for women government employees.
  • Maternity Benefit Act, 1961 – Section 5 (for interpretative guidance).
  • Constitution of India:
    • Article 21 – Protection of life and personal liberty
    • Article 42 – Directive principle on maternity relief
    • Article 51(c) – Respect for international law and treaty obligations
Issues
  1. Whether a woman government employee, who has children from a previous marriage but does not have their custody, is entitled to maternity leave for a child born from a subsequent marriage under FR 101(a)?
  2. Whether State policy restricting maternity leave to women with fewer than two surviving children can override the fundamental and reproductive rights of the employee?
Rule and Reasoning

The Supreme Court held that maternity leave is part of a woman’s fundamental rights under Article 21, which includes her health, dignity, and reproductive choices. Since the appellant’s first two children were not in her custody, she is entitled to maternity leave for her first child from her second marriage. The State’s policy limiting benefits to two children cannot override these rights. The Court relied on the Maternity Benefit Act, international conventions, and previous judgments like Deepika Singh v. PGIMER to interpret the rules in a way that protects maternal and child welfare.

Decision

The Supreme Court allowed the appeal and set aside the Division Bench judgment of the Madras High Court dated 14.09.2022. The Court held that the appellant was entitled to maternity leave under FR 101(a) and directed the State to release the admissible maternity benefits within two months from the date of judgment. No costs were imposed.

Case Name: Dr. Sohail Malik v. Union of India & Anr.

Year: 2025

Citation: 2025 INSC 1284; Civil Appeal No. 404 of 2024

Judgment Date: 10 December 2025

Facts of the Case

The appellant, an officer of the Indian Revenue Service posted as OSD and Investigation Officer, and the aggrieved woman, a 2004 batch Indian Administrative Service officer then serving as Joint Secretary in the Department of Food and Public Distribution, were both working at Krishi Bhawan, New Delhi. The aggrieved woman alleged that the appellant had sexually harassed her at the workplace. An FIR was registered on 16.05.2023 under the relevant provisions of the IPC and a charge-sheet has since been filed. Thereafter, on 24.05.2023, the aggrieved woman filed a complaint under Section 9 of the POSH Act before the Internal Complaints Committee constituted in her department, namely the Department of Food and Public Distribution. The ICC issued notice on 13.06.2023 asking the appellant to appear for hearing on 22.06.2023. The appellant challenged the notice before Central Administrative Tribunal (CAT) saying the ICC had no jurisdiction.

Sections & Rules Involved

(The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013)

  • Section 2(o)(v) – Definition of Workplace – includes any place visited by the employee during the course of employment
  • Section 9 – Complaint of sexual harassment
  • Section 11 – Inquiry into complaint
  • Section 13 – Inquiry report and action to be taken by employer
  • Section 18 – Appeal against ICC recommendations
  • Section 19(f) – Duty of employer to assist ICC and provide required information.

(Central Civil Services (Conduct) Rules, 1964)

  • Rule 3C – Prohibition of sexual harassment of working women

(Central Civil Services (Classification, Control and Appeal) Rules, 1965)

  • Rule 14(2) – Proviso – ICC / Complaints Committee deemed as Inquiring Authority
  • Rule 14(3) – Issue of charge sheet by Disciplinary Authority
  • Rule 14(5) – Consideration of reply of charged officer and decision to conduct inquiry
  • Rule 15 – Action on inquiry report and imposition of penalty
Issues
  1. Whether the Internal Complaints Committee (ICC) constituted at the workplace of the aggrieved woman has jurisdiction to inquire into a complaint when the respondent is employed in a different department.
  2. Whether Section 11 of the POSH Act restricts the filing and inquiry of complaints only before the ICC of the respondent’s workplace.
Rule & Reasoning

As a social welfare law, the POSH Act needs to be interpreted purposefully. Even if the respondent works in a different department, the ICC established at the aggrieved woman’s place of employment has the authority to investigate a complaint under Section 11 read with Section 2(o)(v). The purpose of the Act would be defeated, the victim would face psychological and procedural obstacles, and her basic rights to equality, dignity, and a safe workplace would be compromised if jurisdiction were limited to the ICC of the respondent’s place of employment. As a result, the ICC at the aggrieved woman’s place of employment has the authority to carry out the fact-finding investigation and send the results to the respondent’s employer, who is legally required by Section 13 to act upon the report and start disciplinary action in compliance with service rules.

Decision

The Hon’ble Supreme Court dismissed the appeal and affirmed that, the Internal Complaints Committee (ICC) established at the aggrieved woman’s place of employment is fully qualified to carry out the preliminary/fact-finding investigation, even if the respondent works in a different department, in accordance with Sections 11, 13, and the expanded definition of “workplace” under Section 2(o)(v) of the POSH Act. The Court further ordered that the ICC’s inquiry report and recommendations be sent to the respondent’s employer, who is legally required by Section 13(3) read with Section 19(f) to take appropriate action and start disciplinary actions in line with the relevant service rules.

Judgement Snippets
  • Disbursement of PF dues from trust is mandatory once the external auditor has given his findings. – 2025 LLR 1288 Madras High Court
  • Recovery under the EPF Act can be made from the money received by the employer from any source. – 2025 LLR 1288 Madras High Court
  • Limitation Act cannot be applied to appeals under the Payment of Wages Act. – 2025 LLR 1267 Madras High Court
  • Stay order passed cannot be a bar for EPF Authority to make a fresh demand. – 2025 LLR 1252 Madras High Court
  • Actual proof of financial difficulties will have to be produced for reduction of damages. – 2025 LLR 1348 Madras High Court
  • Non-payment of the employer’s contribution to EPFO before due date is a continuing offence. – 2025 LLR 1354 Madras High Court
  • Establishment’s defence of not having old record is valid when belated challenge was initiated by EPFO. – 2025 LLR 1361 Madras High Court
  • Widowed sister is not a dependent and cannot seek any accident compensation. – 2025 LLR 1299 Supreme Court of India
  • Only an establishment actually employing building workers is covered under the BOCW Cess Act. – 2025 LLR 1313 Supreme Court of India
Questionnaire

1. Under the Code on Wages, 2019, wages shall be paid to employees:
A. On or before the 5th day of the succeeding month
B. On or before the 7th day of the succeeding month
C. On or before the 10th day of the succeeding month
D. As per internal company policy

 

2. Under the Code on Wages, 2019, if excluded allowances exceed 50% of total remuneration, then:
A. They remain excluded fully
B. Only bonus is added back
C. The excess over 50% is added back to wages
D. Entire allowance amount is added to wages

 

3. Gratuity shall be payable under the Code on Social Security, 2020 to an employee who:
A. Completes five years of continuous service, and to a fixed term employee on completion of one year of service under the contract
B. Completes three years of service in all cases
C. Completes one year of service in all categories of employment
D. Is confirmed as a permanent employee only

 

4. Under the Code on Occupational Safety, Health and Working Conditions, 2020, the limit on leave accumulation will be:
A. Fixed permanently at 30 days
B. Not applicable anymore
C. Prescribed through rules to be notified by the Government
D. As per Shops and Establishments Acts only

 

5. When an employee is removed, dismissed, resigns or is retrenched, the employer must pay all dues:
A. On the same day of separation
B. Within 2 working days from the date of termination
C. Within 7 days from the date of termination
D. Along with the next monthly payroll

Answers:

1) B

2) C

3) A

4) C

5) B

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