Termination of employees by the employer for any reason administered by disciplinary action is called Retrenchment. Financial compensation by the employer is provided to the terminated employee and this compensation is known as retrenchment compensation.
This article furnishes detailed information about the main aspects of retrenchment.
Compensation eligibility
The employee fulfilling the following conditions is considered to be eligible for the compensation of retrenchment.
- He/She must be working.
- He/She has worked for 240 days in the previous year considered as the year of continuous service.
Continuous Service
Performing services without any intervention is termed as continuous service. It does not include interruptions in services due to medical leave, authorized leave, lock-outs, legal strikes or any other interruptions for which the employee cannot be blamed. The employee who has been retrenched must be furnished with an average pay of 15 days of continuous service year or excess part in six months.
Average Pay
The retrenched employee must be compensated by furnishing an average of 15 days in the continuous service year as mentioned earlier. The compensation should be enacted in the following manner:
- The individual is paid on a monthly basis (Based on three calendar months).
- The individual is paid on a weekly basis (Based on four completed weeks).
- The individual is paid on daily basis (Based on the last twelve working days).
Retrenchment does not include –
- Employee’s retirement which is voluntary.
- The retirement of the employee while superannuation.
- Termination of the employee due to the non-renewal of the contract.
- Termination of the employee due to continued sickness.
Compliance – Requirements
The following regulations must be confirmed by the employer for the purpose of retrenchment:
- Notice informing about the decision of retrenchment must be issued to the employee prior to one month of enactment.
- The reason for infringement must be stated in the notice issued .
- The employee must be compensated during retrenchment only.
Calculation Components
The compensation for retrenchment should be calculated including the allowances like basic wages, attendance allowances, rent of house, conveyance, etc. The housing value provided and amenities value provided should be considered along with it.
Taxability
According to the Industrial Disputes Act, 1947, the retrenchment compensation would be exempted to the lower extent of the following:
- The average pay of 15 days for the year of continuous service or excess part thereof in 6 months.
- The amount actually received.
- Basic exemption limit of Rs.5,00,000.
If compensation exceeds the above-mentioned limits, it would be considered as the salary or profit on salary.
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