The 2009 subprime crisis and the 2021 pandemic are two major events that have dramatically shaped the landscape of global employment. In both cases, employers around the world faced the daunting task of not only keeping their businesses afloat but also ensuring the sustainability of their workforce. During such crises, companies often resort to measures like layoffs, rightsizing, retrenchments, early retirement schemes, and other workforce restructuring initiatives. The underlying goal is to maintain financial discipline and minimize costs. While this approach is common in many parts of the world, India’s legal framework adds layers of complexity that make these decisions far from straightforward.
In India, employers face a distinct set of challenges due to the stringent employment laws that govern terminations and retrenchments. Unlike in many other jurisdictions, India’s legal system does not recognize the concept of rightsizing or termination of employment without just cause. Any action by an employer to reduce workforce numbers without a valid reason is legally treated as retrenchment, irrespective of how the employer might define the situation. Retrenchment, however, is not a simple process. Companies must navigate complex procedural requirements and legal challenges to execute a valid retrenchment, especially when the number of employees crosses certain thresholds.
For instance, under current legislation, companies employing more than 100 employees require prior government approval for retrenchment. The threshold is set to increase to 300 employees under the new Labour Codes, but this change offers little relief to employers as the policy surrounding government approvals remains restrictive. In practice, the government rarely grants permission for large-scale retrenchments, as it seeks to protect employment in the larger national interest. This effectively means that retrenchment, as a strategy for managing workforce costs, is often unavailable or fraught with challenges for larger companies.
Given this restrictive environment, companies must adopt a more nuanced approach to workforce management. Businesses need to develop separation strategies that not only comply with legal requirements but also mitigate risks to the organization’s reputation and operational stability. Moreover, such strategies must treat employees with fairness and dignity, maintaining morale among the remaining workforce while minimizing the risk of disputes or legal challenges.
One potential strategy that many companies adopt is the implementation of Voluntary Retirement Schemes (VRS). These schemes offer employees an opportunity to retire early, often with a financial package that makes the transition more attractive. VRS allows companies to downsize their workforce without the legal complications associated with retrenchment. Additionally, such schemes are seen as more employee-friendly and can help maintain the company’s image as a responsible employer.
Another avenue is capacity adjustment and rebadging, particularly in industries undergoing rapid technological changes or shifting market conditions. In capacity adjustment, businesses can reassign employees to different roles or departments where their skills can be utilized more effectively. In some sectors, such as IT and telecom, rebadging—where employees are transferred to a third-party service provider—offers an alternative that preserves jobs while reducing the employer’s direct workforce burden.
Severance packages also play a crucial role in these separation strategies. Offering generous severance terms can encourage voluntary exits while reducing the risk of litigation or employee unrest. Severance negotiations, however, must be handled with care, ensuring that they comply with statutory requirements while also addressing the specific needs and concerns of the employees involved.
Each of these strategies must be carefully tailored to the specific industry and the nature of the workforce. Different sectors may face different legal challenges, and certain workforce reduction measures may be more effective in one industry than another. This is why companies benefit from engaging legal professionals with deep expertise in employment law and a thorough understanding of industry-specific regulations.
Legal experts can help companies design customized workforce management plans that balance legal compliance with commercial needs. From advising on the best approach to downsizing to ensuring smooth execution of severance packages or VRS, legal counsel plays a critical role in ensuring that companies navigate these challenging scenarios without running afoul of India’s stringent employment laws.