What is Retrenchment?

Retrenchment means cutting down expenditures by relieving employees to become financially solvent. In HR, termination is very common when an employee does not perform up to the mark or does not follow the professional code of conduct.

Retrenchment is another way of terminating the employees where the reason is not the employee’s performance but the company’s financial position. When an organization is forced to downsize the number of employees to balance losses in the operation of a business, it is called retrenchment.

The Industrial Dispute Act, 1947 deals with employment-related disputes in India and Section 2(oo) of the Act states that ‘retrenchment means termination of service of a workman by an employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. However, the following are not covered within the meaning of retrenchment:

  • Voluntary retirement of a workman
  • Retirement of workmen on reaching the age of superannuation if the employment agreement contains a provision regarding superannuation
  • Termination of service of a workman due to the nonrenewal of employment agreement
  • Termination on grounds of continued ill-health
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