What is Retrenchment

It means forced lay off of employees by companies usually for cutting down on payroll. The company needs to follow all the policies and procedures laid down at the time of retrenchment. Usually as per section 25 F of industrial disputes act the company has to give a retrenchment compensation for 15 days for every completed year of continuous service. You have to serve one month’s notice before retrenchment or pay salary thereof to the Workmen. Further you have to give a notice in FORM P/Form PA depending on the applicability of Chapter VA or Chapter VB of the Act if the Central rules are applicable to u in otherwise cases please refer state rules. IF your firm is a Government undertaking or engaging more than 100 workmen in preceding 12 months Chapter VB will be applicable. In these circumstances you have to take the approval of the appropriate government for retrenchment. If the retrenched person is already involved in any court case against your corporation, in such circumstances it is better to take legal opinion.

There are different retrenchment strategies followed by companies. Mainly there are three types of strategies which shall be discussed:

Turnaround strategy: it derives its name from the action involved that is negative trend. There are certain indicators which point out when a turn around is needed for the organization:

  • Persistent negative cash flow
  • Negative profits
  • Declining market share
  • Over manning, high turn over of employees, and low morale.
  • Mis management
  • Uncompetitive services.

Divestment strategy: involves the sale or liquidation of a portion of business. Divestment is usually a part of restructuring plan is adopted when a turn around strategy has proved unsuccessful. The following may be the reason for divestment:

  • The business that has been acquired proves to be a gap and cannot be combined within the company.
  • Severity of competition and the inability of a firm to cope
  • Divestment may be done because by selling off a part of a business the company may be in a position to survive
  • Divestment by one firm may be a part of merger plan executed with another firm
  • Lastly a firm may divest in order to attract the provisions of the MRTP Act

Liquidation strategies: this is the extreme strategy that a company may resort to, that involves closing down the firm and selling all its assets. It is considered as a last resort because it leads to serious consequences such as loss of payment to employees, termination of opportunities where a firm could pursue any future activities. As per company’s act of 1956 this strategy is termed as “winding up”.

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