In the recent past, given the disruptions caused across the Indian market on account of COVID-19, corporate restructuring, advent of reliable artificial intelligence tools and the economic slow-down, several organisations were forced to downsize their workforce. Organisations in the pharmaceutical and healthcare industries which upscaled their workforce particularly in the wake of the pandemic, are now seen struggling to retain talent. Despite the financial turmoil, some companies saw a huge upsurge in funding and consequently, hiring, with a move towards digitisation during the pandemic. Sustenance of workforce, however, dwindled on account of several reasons including funding winter and lowered demand from customers. Employers were forced to re-adjust their cost structures to available demand. Reports suggest that close to twenty-four thousand employees were let go in the previous year from across industries in the private sector including information technology, ed-tech, e-commerce and consumer services companies – unicorns and soonicorns included. Given the socialist proclivity in India, as disgruntled workforce could potentially lead to a disruptive and powerful force in these scenarios, balancing complex relationships between employees and management, employers and government, while complying with local laws, becomes crucial.
In India, labour laws are enacted and administered by both the Central Government as well as the State Governments. These legislations, in most cases, are more beneficial to workforce. Terms and conditions of employment, including those relating to termination are governed under the Industrial Disputes Act, 1947 (“ID Act”), the Model Standing Orders of the Industrial Employment (Standing Orders) Act, 1946, along-with the shops and commercial establishment legislations which are enacted by individual States.
Some of the ways in which an employer-employee engagement can be temporarily or permanently terminated include (a) lay-off, (b) retrenchment, (c) voluntary retirement, (d) superannuation, (e) non-renewal of contract upon expiry, (f) misconduct, (g) continued ill-health, or (h) death. While commonly, different terminologies are often used interchangeably with respect to employment termination, workforce ‘lay-off’ in fact, differs from ‘retrenchment’. Both lay-off as well as retrenchment are however, statutorily recognised under the ID Act.
Employers very often believe that their employees can be released or terminated from employment at the employer’s will – akin to issuance of a ‘pink’ slip, a legally accepted practice in the United States. However, in India, ‘workmen’ class of employees is largely a protected category and the law prescribes certain protocols for effecting release of such class of workers. Under the ID Act, workmen belonging to identified class of establishments having served a continuous period of one year cannot be retrenched without, inter alia, (1) serving of one months’ notice in writing indicating reasons for retrenchment, or payment of wages in lieu of such notice; and (2) payment of retrenchment compensation equivalent of prescribed amounts. Hence, unless cause of termination falls within the retrenchment exemptions under the ID Act, an employer is required to comply with these conditions prior to retrenching its workforce. In cases of retrenchment, as an employer is required to satisfy certain additional administrative requirements (such as catering to last-in-first-out principle, overview of employees’ seniority list, prior approval for certain establishments and intimation for others, etc.), employers tend to prefer if the employees resign instead with a severance package, equivalent of what they would otherwise get if retrenched. Further, in view of the unfortunate yet prevalent social stigma associated with employment termination (howsoever justified on account of business exigencies, workforce reduction or other legitimate causes) employers intending on terminating (or, ‘retrenching’) employees often provide employees with this option.
However, in doing so, employers should be cautious that the employee opts for such resignation only out of their free will. In certain instances, by having employees resign, employers tend to leverage the resignation as a façade to avoid payment of statutory retrenchment compensation which would have otherwise been a requirement to comply with, had the employer terminated employment instead. These instances could result in employees raising claims of constructive dismissal.
‘Constructive dismissal’ is a situation where an employee is forced to leave their employment not out of choice, but on account of an employer’s conduct, wilful or facilitated. The resignation could be the result of changes in employment terms leaving an employee with no choice but to resign, or on account of unfavourable or inferior working conditions or arising out of an employer’s instructions to quit employment. Circumstances where an employer creates or permits working conditions that are so egregious that an employee feels that he or she has no reasonable alternative but to resign, could result in a constructive dismissal or discharge of services. Even though in such cases the employee would have resigned, it could be treated as a termination. In the recent past, incidents of ‘quiet quitting’, forced resignations, unrealistic business targets and more stringent ‘performance’ parameters – also commonly termed as ‘passive layoffs’, have been prevalent. Resignations on account of employee victimisation, colourable exercise of employer rights, trumped up allegations without reasonable grounds, mala fide transfers under the guise of management policy, etc., while being incidents of unfair labour practise, could also fall within the bracket of undue or forced reasons of resignation, resulting in claims of constructive dismissal.
It is important to note that mass layoffs or retrenchments are not illegal in India and employers have the right to downsize workforce, subject to adherence with prescribed principles and processes laid down under applicable laws. Indian courts have taken the view that an employer retains the right to reorganise its business where such right is exercised bonafide and not with the ulterior objective to victimise employees. Courts have also held that management has the freedom to calculate the strength of its labour force and the number of workers that it requires – and hence, retrenching surplus labour on grounds of rationalisation, economy, corporate restructuring, cost-cutting measures to reduce excessive workforce or redundancies due to job eliminations, could be justified. Courts have further upheld that downsizing for the purpose of maximising profits, even if the business is loss-making, is a justified ground for retrenchment, however, an employer’s right to hire and fire should not be exercised colourably as an act of thievery of employee’s legitimate rights and interests.
Having employees resign as a measure to safeguard their potential employment prospects would not absolve an employer from fulfilling their statutory and contractual obligations. Retrenchments without a comprehensive plan of action and preparation can misfire, as seen in some cases. In the recent past, addressing issues of constructive dismissals, based on an evaluation of facts and circumstances on a case-to-case basis, courts have directed reinstatement of employment, which has even resulted in organisations reversing their business decisions to close down project or branch office and letting go of their workforce. Claims of constructive dismissal may even result in employers paying penalties by way of adequate monetary compensation to employees for loss of employment opportunities, etc. While a mere assumption of neglect or intent cannot by itself prove that an employee’s dismissal (through resignation) was in fact, coerced, a determination on a case-to-case basis and based on circumstances and evidence, would have to be made in order to conclude if there has been any malice aiding an employee’s resignation, leading up to a matter of constructive dismissal.
Partner at JSA.
As mentioned above, in such cases, courts will lean on assessing whether an employee’s rights within the working environment was protected. Hence, in addition to the law, employers are required to also abide by the respective protocols, codes of conduct and due processes before dismissing an employee. By simply creating a hostile working environment for their employees in hope that the employees will be compelled to resign, employers might be subjecting themselves to a larger risk of statutory as well as contractual non-compliances relating to workforce management and decision making.
