Voluntary exit pathways: Indian employment law on separation strategies
A. Introduction
Mergers and acquisitions transactions often trigger operational changes related to workforce management. Such operational changes include workforce downsizing, workforce right-sizing, termination, retrenchment, lay-offs, amongst others. Recently, Air India announced that it will introduce two separation schemes for its non-flying permanent staff ahead of its merger with Vistara. It has announced that it will offer a voluntary retirement scheme to employees with at least five years of continuous service with Air India, while the voluntary separation scheme will be offered to those who have provided services for less than five years to the airline. The employees have been given a window of one month by the airline to participate in these schemes. The complete details of both these schemes offered to the employees have not yet been revealed by Air India. In 2022, Amazon had also introduced voluntary separation schemes for certain employees in exchange of certain severance benefits and had reportedly come under the radar of labour law authorities. Given the legal risks associated with these schemes, it is imperative to understand the structure of voluntary termination of employees as set out under various labour laws.
B. Framework of termination of employees as provided under the Indian employment laws
In India, voluntary termination of employees attracts several employment law legislations such as the Industrial Disputes Act, 1947 ("ID Act"), Employment (Standing Orders) Act, 1946, and state-specific shops and establishment acts, amongst others. Additionally, the internal human resource policies of the company and the provisions of the relevant employment contract are also considered when formulating strategies on these issues.
Before terminating employees, certain critical factors need to be taken into consideration, including: (i) the reason for termination, (ii) the pool of employees being terminated, (iii) whether the employees fall under the definition of employees or workmen as per the ID Act, (iv) how courts view the grounds for termination, (v) how courts interpret what constitutes "voluntary termination", (vi) the statutory process required to be followed before termination, and (vii) the statutory payments required to be made in relation to such terminated employees.
One of the key reasons often cited for termination of employees arising from mergers and acquisition transactions is "redundancy". Under Indian employment law, redundancy falls under the broader category of "retrenchment". As per the ID Act, retrenchment is the termination by the employer of the service of a workman for any reason, other than as a sanction by way of disciplinary action. The ID Act also provides for certain conditions that must be fulfilled before retrenchment, if the employee has been in continuous service for at least one year. These conditions include: (i) serving a one-month notice in writing to the employee clearly stating the reasons for retrenchment or payment of wages in lieu of notice, and (ii) payment of severance compensation equivalent to fifteen days' average pay for every completed year of continuous service or any part of a year in excess of six years, and (iii) approvals or intimations to the statutory authorities, as may be required statutorily.
Given that labour courts in India tend to take a pro-employee view while deciding cases, it is vital that these conditions laid down under section 25-F of the ID Act are strictly adhered to and demonstrated through adequate documentation. In cases where employers fail to adhere to the conditions for retrenchment as prescribed under section 25-F of the ID Act, labour courts have held such terminations to be unlawful and have ordered payment of retrenchment compensation and reinstatement of the employees with back wages (M. Co-op. S. Mills vs. O.P Jyosthi, 1977 (34) FLR 57).
C. Risk mitigation: Formulating a low risk voluntary separation schemes for employees
Voluntary separation schemes are one of the methods by which employers implement voluntary termination of employees. These are offered by employers to encourage employees to voluntarily resign from their positions in exchange for certain benefits. These schemes are often used as a strategy for workforce reduction, cost management, or organizational restructuring without resorting to involuntary layoffs. Employers should draft voluntary separation schemes very carefully, considering the possibility of future legal disputes, as a poorly designed voluntary separation scheme could lead to employee dissatisfaction, which could further give rise to the possibility of employee-employer disputes. The following key aspects must be considered by employers before implementing a voluntary separation scheme:
i. Defining the pool of employees
While choosing the pool of employees eligible for voluntary separation schemes, some key factors that need to be considered include tenure of employees and nature of work performed. Tenure is a key aspect of the conditions that must be fulfilled before employees are retrenched as per the ID Act. Another important factor is whether the employees fall under the definition of workmen as per the ID Act. The applicability of the ID Act and the benefits to be provided to the retrenched employees in relation thereto primarily hinge on the basic difference between an employee and a workman. The ID Act defines the term "workmen" under section 2(s) and applies only to all employees who fall under the definition of "workmen" as prescribed under the said provision. It is pertinent to highlight that labour courts in India have, from time to time, taken a very fact-specific view while deciding which category of employees would fall under the definition of workmen as per the ID Act. For example, some courts in India have held highly skilled IT employees to be falling under the definition of workmen, while others have held that only employees performing manual work must fall under this definition. It is critical to keep this differentiation in mind while selecting the pool of employees eligible for voluntary separation schemes.
ii. Mapping compliance of the structure of the voluntary separation with applicable labour laws
Compliance with labour laws is imperative, as non-compliance can result in legal disputes, fines, and penalties. Ensuring that the scheme adheres to legal requirements is crucial to avoid litigation.
iii. Adequate documentation outlining the objective of the voluntary separation scheme
Adequate documentation is crucial not just for clarity in communication but also to avoid any future disputes. For example, the notice required to be issued to the employee by the employer for fulfilling conditions precedent before retrenchment should be precise and clear. It should make a clear case that the role was redundant, and should demonstrate that there is a definitive business rationale behind such retrenchment, and indicate that given the nature of the employee's skills, it is difficult to re-train or reassign them to other establishments/units of the same entity.
It is also critical to clearly state in the voluntary separation scheme that the employee will not be eligible to claim any future employment in case there are latent concerns. Courts often refer to these documents when deciding disputes. For example, in the case General Manager, Electrical Rengali Hydro Electric and Ors vs. Giridhar Sahu and Ors., 2019 (10) SCC 695, a voluntary separation scheme was implemented for employees whose posts were declared redundant. A union of employees claimed that signatures related to the voluntary separation schemes were obtained through misrepresentation and sought future employment with another unit of the same entity, approaching labour courts against the employer. The Supreme Court scrutinized the documents presented as evidence and decided in favour of the union.
iv. Severance benefits
It is vital to ensure that severance benefits comply with the ID Act and all other applicable labour laws, such as the Payment of Gratuity Act, 1972, and state-specific shops and establishment laws (if applicable). Severance benefits should be based on tenure and salary, as provided under section 25-F of the ID Act.
v. Waiver
In voluntary separation schemes, providing a waiver whereby employees agree to relinquish certain rights or claims in exchange for the severance benefits provided could help avoid future disputes. These claims could include claims related to future employment or the right to approach any court regarding future litigation arising in relation thereto.
vi. Creating feedback loop and monitoring the impact of the voluntary separation scheme
It is essential for employers to create a feedback loop to address any issues that eligible employees may have regarding the voluntary separation schemes. Additionally, it is critical to monitor the impact of the voluntary separation scheme on the eligible employees, assess its effectiveness, and incorporate softer interventions like career counselling, etc., for the affected employees.
D. Conclusion
To effectively mitigate risks associated with voluntary separation schemes, employers should adopt a comprehensive approach that balances financial, operational, and human resource considerations. Legal compliance must be rigorously ensured by consulting with legal advisors to avoid potential disputes and claims related to future employment or any wages except those required by law. Clear communication and adequate documentation can help safeguard the company against future disputes. Critical clauses such as waiver, eligibility, severance benefits, and timelines must be carefully drafted and incorporated into the voluntary separation schemes. By proactively managing these risks, employers can enhance the success of the voluntary separation scheme and support a smooth organizational transition.
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