‘Termination
rules for employees’ will always be a daunting term for any employee. An
employee’s livelihood is dependent upon them being in employment and earning
their monthly salary, and if that very livelihood is taken away, it can cast a
gloom in their lives. However, termination of employment can be for various
reasons, and a company will and should always have suitable reasons for taking
such decisions. Fortunately, we do not have a ‘hire and fire’ policy in India,
so there couldn’t be a termination without notice in India, unlike the West.
Employers need to follow certain procedures under the law before terminating an
employee’s service, and in some instances, even pay compensation. They do need
to follow Indian Labour laws for Termination of Employment.
In this article,
we will try and set down the manner and procedure for termination of service,
and the monetary entitlements thereto.
‘Workman’ and
‘Non-workman’
Employees in
India are generally categorized as a ‘workman’ or a non-workman. The term
‘workman’ has been defined under the Industrial Disputes Act, 1947 (“ID Act”),
and would inter-alia mean all persons employed in any industry but does not
include an employee who is in a managerial, administrative or supervisory role.
Apart from the definition under the ID Act, there is no set formula to
distinguish between a workman and a non-workman, and the position has been
tested and established through various judgments, depending upon the nature of
work being carried out by an employee.
An employee who
is considered to be a workman will be governed by the ID Act, and their
termination of service will have to be in accordance with the provisions of the
ID Act.
Types of
Termination of employment
Termination of
employment may take place due to misconduct, discharge or retrenchment.
Misconduct
Termination of
employment can be for misconduct, for which the employer is required to conduct
disciplinary proceedings. The procedure to terminate an employee in India, for
conducting a disciplinary proceeding has been set out under the law. It
includes constituting and having a disciplinary panel, serving a show cause
notice to the errant employee, and giving the employee a reasonable chance to
put forth his defense. Proceedings have to be conducted in a fair manner,
keeping in mind principles of natural justice.
In some cases,
the outcome of the disciplinary proceeding may justify dismissal without
notice, and any compensation. Under law, the term misconduct provides a list of
circumstances and events which would amount to misconduct. It is an inclusive
list, and hence, employers have the right to include in their company policies/
service rules, such other events, as it may deem fit, which would in their line
of business, amount to misconduct. Misconduct includes wilful insubordination
or disobedience; theft, fraud or dishonesty; wilful damage or loss of
employer’s property; bribery; habitual lateness or absence; striking unlawfully
and sexual harassment.
The aforesaid
procedure for termination will apply to all employees whether workman or
non-workman.
Discharge
The termination
of employment of employees who are not workman are governed by the notice
period in their employment contract, and the shops and establishment act
(“S&E’”) of the State in which they work. Generally, the State S&E’s
provide for at least one month’s notice of termination, or pay in lieu of
termination, and in some instances, termination needs to be with cause, and in
some other cases, the employer needs to pay compensation for terminating the
employment. The notice of dismissal under an employment contract should not be
less favourable than what is prescribed under law.
Retrenchment
The Industrial
Dispute Act sets out the steps to be undertaken for retrenchment. The term
retrenchment has been defined to mean termination by the employer of employment
of a worker for any reason, other than disciplinary grounds, with certain
exceptions.
An employer who
proposes to retrench a workman, who have been continuously employed for more
than one year, must give one month’s notice (together with the reason for the
retrenchment) or pay in lieu of such notice to the workman. The employer must
also inform the local labour authorities of the retrenchment within a
stipulated time frame.
Rules for
Retrenchment Compensation
Additionally,
employers are also obliged to apply the “last in-first out” rule in selecting
the workman for retrenchment except for reasonable cause. A retrenched workman
is entitled to retrenchment compensation as per the provisions of the ID Act,
which is calculated at the rate of 15 days wages for every year of continuous
service. Certain establishments (factories, mines, plantations) employing over
100 workers may not be retrenched unless three months’ written notice, stating
reasons for the retrenchment, or pay in lieu of notice, is given to the worker.
Furthermore, prior approval from the relevant governmental authority must be
taken before the retrenchment is made.
Severance Pay
Upon termination
of employment of any employee, the employer is required to clear all dues,
which are payable to the employee at the time of the termination. Some of these
payments are as follows:
1. Notice
pay, where notice of termination has not been given;
2. Salary
for the days worked, but not paid for, during the month where the employee has
been terminated;
3. Payment
of gratuity for employees who have completed at least 5 years of service, in
terms of the Payment of Gratuity Act 1972. This act is applicable to
establishments which have 10 or more employees. The gratuity is calculated at
15 days salary for every completed year of service;
4. Leave
encashment, for the leaves accrued, but not used by the exiting employee;
5. Statutory
bonus, if the employee is eligible for the same. Employees who are earning up
to Rs. 10,000 per month and who has worked in an establishment for not less
than 30 working days in a financial year will be entitled to statutory bonus
under the Payment of Bonus Act, 1965;
6. Retrenchment
compensation, if the employee is a workman, and his services have been
retrenched;
7. Such other
dues that may have been contractually agreed between the employer and the
employee, or is payable under the employer’s company policies;
8. Assist the
employee in making applications to the appropriate authority, for withdrawal of
the provident fund dues, accumulated to the credit of the existing employee.
There may be
other dues payable, and such will vary from employment to employment.
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