An Overview on Lay off, Retrenchment and Closure

An Overview on Lay off, Retrenchment and Closure

Lay off, retrenchment and closure are terms defined in the Industrial Disputes Act, 1947 which was later amended numerous times. The layoff is a situation where the employees are unemployed due to certain circumstances. They are also compensated for the same. Under retrenchment, employees are removed from work due to excess labour. The closure is shutting down of an establishment permanently where employers and employees are equally affected.

Lay off

The definition of lay-off is given under Section 2(kkk) of the Industrial Disputes Act, 1947. Lay off means temporary unemployment of the workers due to lack of resources, raw materials or breakdown of machinery, or even due to natural calamity. The employer cannot give work to the employees due to aforesaid reasons. The worker should not have been retrenched and his name should be there in the muster rolls of the establishment. The employer must maintain the muster rolls which have to be entered by the workers whenever they are present for work. It works like an attendance sheet.

A lay-off occurs only in a continuing business and not if an industrial establishment is closed permanently. This does not end the employer-employee relationship. A person would be laid-off for an entire day or half a day if there is no work for him at the particular time. 

As given under Section 25A of the Industrial Disputes Act, 1947, lay-off compensation does not apply to the following kinds of establishments:

  • An industrial establishment which has less than fifty workmen.
  • Establishments involved in seasonal work.
  • All the establishment to which chapter V-B is applied. 

Compensation under lay-off

A person who is laid off is entitled to compensation which is equivalent to fifty percent of his wages as given under Section 25C. However, there are certain conditions for the compensation:

  • A casual or a badli worker is not entitled to such compensation. A worker who is employed in place of another worker for a short period of time is a badli worker. 
  • The worker’s name should be on the muster rolls.
  • The worker should have completed one year of service under the employer.

The compensation cannot be paid for more than forty-five days. If the lay-off period extends the prescribed time then, the employer can continue paying the compensation or can be retrenched. The lay-off compensation is provided to overcome unemployment pains that are not under employers control. A lay- off can be declared only in unforeseeable situations and not to victimise the worker.

There are certain situations where the worker is not entitled to lay-off compensation:

  • He will not be entitled to compensation if he refuses to accept alternative employment provided in the same establishment or another establishment of the same employer which carries the same wages and skills as the previous work.
  • If he is not present at the establishment for work at least once a day he will not be entitled to the compensation.
  • Lay off due to strikes will not be entitled to compensation.

In Industrial Employees’ Union, Kanpur v. J.K. Cotton Spinning and Weaving Mills Company[1], it was held that offering unskilled work to a skilled worker does not amount to compensation. The workmen are entitled to compensation if and only if he/she has been in continuous service. Continuous service is defined as providing uninterrupted service(including interrupted service due to sickness or accidents) for at least a year.

Layoff Process 

It is a formal process that involves obtaining prior permission. Firstly, the employer has to file an application for permission to the government or the appropriate authority stating the reason for the lay-off. A copy of the same is sent to the concerned worker. Once the application has been made, the authority shall make appropriate enquiries for the same. After considering all the factors, the government or the authority shall in writing grant or refuse to grant permission. Copy of the order shall be sent to the employer and the workmen. 

Once the application has been made, if there is no response from the authority within sixty days, the permission shall be considered to be granted at the end of sixty days. The order by the government shall be final and binding to all for a year from the date of such order. A layoff is considered illegal if no permission has been granted. The employer shall also apply for continuing the layoff if he deems it necessary.

Transfer of suits under the Civil Procedure Code


Retrenchment is defined under Section 2(oo) of the Industrial Disputes Act, 1947. It is the termination of a portion of staff or labour force due to surplusage. Retrenchment could be for any reason. Retrenchment does not include the following:

  • Voluntary retirement. 
  • Retirement due to age factors and terms of the contract.
  • Termination due to continued sickness of the workman.

Section 25F talks about essential conditions to be fulfilled prior to retrenchment. These are:

  • The workmen have to be given one month’s written notice stating reasons for retrenchment and wages for the notice period. 
  • At the time of retrenchment, the worker has to be paid with compensation of fifteen days’ wages.
  • The notice should also be served on the appropriate government.

It was held in Byram Pestonji Gariwala v. Union Bank of India and Others[2] that retrenchment can occur only when there is a labour surplus.

Retrenchment Procedure

Section 25G of the Act mentions the procedure for retrenchment. A person who was employed most recently in a particular group of workmen will be dismissed in case of retrenchment. There are certain exceptions to this rule. If the contract between the employer and employee says otherwise, he can not be retrenched. If a person’s service and skills are necessary for the organisation, he could be retained for the interest of the business. Last in, the first out system is followed in retrenchment. It starts with the newest employee and goes up the seniority scale. 

Re-employment of a Retrenched Person

According to Section 25H of the Act, in the case of retrenchment of a workman and if the employer plans to hire, then reemployment of the retrenched worker shall be considered before any other person. 

As mentioned in Section 5Q, the employer is required to mandatorily seek permission from appropriate authorities prior to laying off and follow respective procedures for retrenching workmen in establishment. The employer shall be imprisoned for a month or fined rupees one thousand or both if he fails to follow the same.


The Industrial Disputes Act, 1947 has no separate provision for closure. Later, the meaning and explanation of closure were expressly defined in a landmark Supreme Court Judgement Hariprasad Shiv Shankar Shukla v. A.D. Diwelker[3]. The permanent closing down of a place of employment is closure defined under Section 2(cc) which was inserted by an amendment in 1982. The employer shuts down the establishment permanently.

Procedure for closure

A set of procedures have to be followed to implement a closure plan. This procedure does not apply to construction work such as bridges, roads, dams, canals, and buildings. An application has to be made to the appropriate government for the closure of any establishments before ninety days of clearly stating the reason for closure. The representatives of the workmen should be informed about the closure by providing a copy of the application. Once the application has been made, the Government shall make appropriate enquiries for the same. After considering all the factors, the government shall in writing a grant or refuse permission for closure. Once the application has been made, if there is no response from the government within sixty days, the permission shall be considered to be granted at the end of sixty days. If the employer fails to adhere to the closure procedure, such closure shall be deemed to be illegal.

The government may allow the closing of establishments without prior notice or application under exceptional circumstances which is the death of the employer or accident in establishments. Once the establishment is about to be closed permanently, every workmen is entitled to compensation which is corresponding fifteen days’ average pay for every year completed. 


Section 25(o) of the Act provides for appeal by an employer against the order of grant or rejection of permission of closure. This appeal should be filed within thirty days of the order.

Restarting a Closed Undertaking

Any industrial establishment which comes under the purview of Chapter VB and was closed down before the announcement of the Amendment Act in 1976 can be restarted with the order from the respective government. This does not apply to establishments closed after 1976.

If the closure of the establishment is due to unavoidable situations that are outside the powers of the employer then there is an opportunity of restarting again. This not only improves the well being of the society but also makes sure workmen get employed. Before passing an order of restarting an establishment the government should allow the employer and the employees to voice out their opinions on this matter. This order, which will be published in the Official Gazette, will state that the undertaking shall be restarted under a period of time.


Employers tend to misuse their powers and discriminate against the workmen. Various laws regulate the employer-workman relationship. This is essential to control the employer’s dominance over the employee. Lay off, retrenchment and closure are mentioned in the Industrial Disputes Act, 1947. Lay off is temporary unemployment whereas retrenchment is permanent. Closure on the other hand results in a permanent shut down of the establishment. Even though there are separate provisions for these terms, there are certain loopholes in them. These are interpreted through precedents and landmark judgements. 


[1] 1956 1 LLJ 325.

[2] AIR 1991 SC 2234.

[3] AIR 1957 SC 151.


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