Retrenchment of Workers in India: Notice, Compensation and Legal Procedure (2026)
Retrenchment can deprive a worker of income and job security. Indian labour law therefore imposes notice, compensation and procedural safeguards. The applicable central framework is now the Industrial Relations Code, 2020, brought into force on 21 November 2025. The earlier Industrial Disputes Act, 1947, including section 25F, remains important for understanding historical claims and transitional disputes, but the Code governs the current central framework, subject to applicable rules, notifications and savings provisions.
What is retrenchment?
Under section 2(zh) of the Industrial Relations Code, 2020, retrenchment broadly means termination of a worker's service by the employer for any reason whatsoever, otherwise than as punishment by disciplinary action, subject to statutory exclusions. Exclusions include voluntary retirement, retirement on superannuation where the employment contract provides for it, non-renewal or contractual termination in specified circumstances, completion of fixed-term employment, and termination on the ground of continued ill-health. Classification depends on the facts and statutory wording.
Section 70: Conditions precedent to retrenchment
For a worker in an industry who has been in continuous service for not less than one year under the employer, section 70 generally requires all of the following before retrenchment:
- Written notice: One month's notice stating the reasons, with the notice period allowed to expire, or wages in lieu of that notice.
- Compensation at the time of retrenchment: Fifteen days' average pay, or such number of days' average pay as may be notified by the appropriate government, for each completed year of continuous service and any part exceeding six months.
- Government notice: Notice in the prescribed manner to the appropriate government or specified authority.
These are statutory minimum conditions, not an automatic ceiling on contractual, settlement-based or other lawful entitlements. Whether a person is a covered worker and meets the continuous-service requirement must be checked in each case.
Illustrative compensation calculation
Suppose an eligible worker has 6 years and 8 months of continuous service. The part exceeding six months is counted as another year, giving 7 years for the statutory calculation. At the ordinary rate, retrenchment compensation is 7 × 15 days' average pay. The legal definition of average pay and any applicable notified rate must be used; monthly salary cannot automatically be substituted without calculation.
Section 71: Procedure for retrenchment
Where an Indian-citizen worker belongs to a particular category in an industrial establishment, section 71 generally follows the last-in, first-out principle: the last person employed in that category is ordinarily retrenched first, unless an agreement provides otherwise or the employer records reasons for selecting another worker. This principle does not remove the notice and compensation requirements.
Section 72: Re-employment of retrenched workers
If the employer proposes to hire workers within one year of retrenchment, section 72 requires an opportunity, in the prescribed manner, for eligible retrenched Indian-citizen workers to offer themselves for re-employment. Those who apply receive preference over other applicants as provided by law.
Sections 74 and 75: Closure notice and compensation
Section 74: Sixty days' advance notice
An employer intending to close an undertaking must ordinarily notify the appropriate government at least 60 days before the proposed closure, stating the reasons. The section provides exceptions, including undertakings employing fewer than 50 workers (or averaging fewer than 50 workers per working day in the preceding 12 months) and certain construction undertakings. Exceptional circumstances may also justify a government exemption under the section.
Section 75: Compensation on closure
An eligible worker with at least one year of continuous service immediately before closure is generally entitled to notice and compensation by reference to section 70. If closure results from unavoidable circumstances beyond the employer's control, the Code provides a compensation cap of three months' average pay in specified cases. Financial losses, accumulated unsold stock and expiry of a lease or licence do not, by themselves, qualify as such unavoidable circumstances. Special rules apply to mining closures and construction projects, including alternative employment and completion-of-project provisions.
Chapter X: Additional safeguards for certain industrial establishments
Section 77 governs the application of Chapter X to specified industrial establishments, generally those with 300 or more workers employed on average per working day in the preceding 12 months, or such higher number as may be notified by the appropriate government. The definition of industrial establishment and applicable state provisions must be checked.
Section 79: Prior permission for retrenchment
For establishments covered by Chapter X, an eligible worker generally cannot be retrenched without three months' written notice stating reasons (or pay in lieu) and prior permission from the appropriate government or specified authority. The employer must apply in the prescribed manner, explain the reasons and simultaneously serve the application on the affected workers.
The authority considers the reasons, workers' interests and other relevant factors after an opportunity of hearing. If no decision is communicated within 60 days of the application, permission is deemed granted under the statutory provision. An order normally operates for one year, subject to review or reference. Retrenchment without the required application, or after refusal, is treated as illegal under section 79. Where permission is granted or deemed granted, statutory compensation is payable at retrenchment.
Section 80: Closure of covered establishments
Chapter X separately regulates closure of covered establishments and generally requires an application for prior government permission at least 90 days before the intended closure, subject to the Code's exceptions and procedures. This is distinct from the ordinary 60-day closure notice under section 74.
How the former Industrial Disputes Act provisions correspond
| Earlier provision | Subject | Current Code provision |
|---|---|---|
| Section 25F | Notice and retrenchment compensation | Section 70 |
| Section 25G | Last-in, first-out procedure | Section 71 |
| Section 25H | Preference in re-employment | Section 72 |
| Section 25FFA | Advance notice of closure | Section 74 |
| Section 25FFF | Compensation on closure | Section 75 |
| Section 25N | Retrenchment in specified larger establishments | Section 79 |
Correction to the historical text: The former one-month notice and compensation conditions were prescribed by section 25F, not section 25G. Section 25G addressed the selection procedure for retrenchment.
Practical checklist for employers and workers
- Verify whether the person falls within the statutory definition of worker and whether continuous service meets the eligibility test.
- Identify the appropriate government, establishment category, applicable threshold and state rules.
- Record genuine business reasons and review contracts, standing orders and collective settlements.
- Issue the correct notice or pay in lieu, calculate compensation accurately and pay it at the legally required time.
- Serve government notices or obtain prior permission where required, and preserve acknowledgements.
- Follow the selection and re-employment provisions and maintain payroll, attendance and service records.
- Where termination is disputed, seek timely assistance through the appropriate conciliation, grievance or adjudication process.
Official legislation and guidance
- Industrial Relations Code, 2020 - official India Code PDF
- Ministry of Labour and Employment: implementation of four labour codes, 21 November 2025
- Ministry of Labour and Employment - official website
- India Code - search legislation, amendments and rules
Frequently asked questions
Is one month's notice enough for retrenchment?
Not necessarily. Section 70 also generally requires timely compensation and government notice. Section 79 can require three months' notice and prior permission for establishments covered by Chapter X.
Is compensation always 15 days' pay per year?
The ordinary statutory rate is 15 days' average pay for each completed year or qualifying part exceeding six months, but the Code permits a notified number of days and other entitlements may apply.
Does every employee qualify for retrenchment compensation?
No. Coverage depends on the statutory definition of worker, continuous service, the type of termination and any applicable exceptions.
Can an employer close a business without notifying the government?
Closure notice or prior permission may be required depending on the undertaking, workforce and applicable chapter. Sections 74, 75 and 80 should be checked before closure.
This article explains the central statutory framework as of October 2026. Transitional arrangements, state rules, notifications, collective agreements and individual facts can change the outcome. Obtain advice for a specific retrenchment or closure.