An employer and employee share a relationship in which an employer and employees associate on a professional front and behave accordingly in a working setup.
An employer and his employee come into a relationship when the person signs an employment contract with the company. The nature of the relationship is based upon many factors that vary from institution to institution, including the work environment and the nature of the business industry.
Retrenchment compensation, in relation to the above discussion on employee-employer, is essential to understand. It is something wherein the employee is terminated from the organisation for any reason other than any unwanted disciplinary action.
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The following items do not form a part of Retrenchment compensation:
1)Self retirement of the employee.
2)Employee’s retirement at the superannuation age.
3)End of contract and suspension due to non-renewal of the contract.
4)End of contract and suspension due to continued illness.
Retrenchment Compensation meaning: It is the termination of an employee's employment by a manager for reasons other than a failure resulting in disciplinary action. The employer is then legally obligated to financially compensate the employee who was fired in this manner. In the corporate world, this is referred to as the retrenchment compensation procedure.
Eligibility for Employee Retrenchment Compensation
An employee can be brought under the scanner of the retrenchment compensation process upon fulfilling the following requisites.
- The employee should be employed.
- Completion of 240 days in the last 12 months of service continuously by an employee is then mathematically calculated upon the year of regular service.
Continuous Service of Retrenchment Compensation
Continuous service under Retrenchment Compensation refers to the performance of interruption-free service. The following reasons are not considered an interruption of service: sickness, officially approved leave, lawful strikes, locking up of industries, work halts, etc. In such cases, the cut back employee must be given his average pay of 15 days for his one year of regular service or provided with 15 days of average pay for a year of regular employment or any part beyond that for a period of half a year.
Average Pay as per Retrenchment Compensation
As already observed under the Retrenchment Compensation scheme, the cut back employee must be given his average pay of 15 days for his one year of regular service or provided with 15 days of average pay for a year of regular employment or any part beyond that for a period of half a year.
The employee must be reimbursed in the following manner listed below:
- The employee is made his payment under a monthly wise ground scheme based on three months.
- The employee is made his payment under a week base scheme for four weeks.
- The employee is made his payment on regular grounds based on the last 12 working days.
Compliance Requirements As Per Retrenchment Compensation
The employer is expected to compulsorily adhere to the following regulations in the case of a retrenchment compensation process:
- The employee should be given about the retrenchment decision with the help of a notice.
- The notice should be issued one month prior and brought into action.
- The notice should strictly mention the grounds behind the failure of compliance.
- The employee should be compensated well at the time of the reduction process and not beyond the passage of time.
Components of Calculation
Retrenchment compensation calculation is calculated keeping in mind the allowances such as basic wages, dearness allowance (DA), all attendance attendees, house rent allowance, conveyance etc. Additionally, the value of housing and amenities have given according to the housing should be considered.
The following should be exempted from being taxed:
- The amount of average pay provided to the employee is ₹5,00,000.
- The net amount received.
- If reimbursement crosses the above limits, it will be treated as salary or profit in the garb of salary.
However, compensations of such nature will incur relief by the regulations of the Income-Tax Act.
The above points need to be calculated for retrenchment compensation.
Prerequisites of a Valid Retrenchment Process
Section 25F mentions the requirements for a valid reduction process. These requisites are put into force if an employee has been in regular service for a minimum of 12 months in the situation of the retrenchment process.
Requisites For A Valid Reduction Process Are
- Within 30 days, the manager should provide a written notification that should contain the reduction process's basis; the retrenchment should only be put into force when the employee has been given the notice.
- If the manager cannot send a note to the workmen within the specified period, they are eligible to pay an amount in compensation for such an act.
- The employee must be reimbursed with a sum of money equal to their wages of 15 days for one full year of continuous service in the company or any portion of their service exceeding 6 months or half-year.
The respective government authority is sent a notice in a particular pattern as mentioned in the authorised gadget. Regulations provided by the notice must adhere to the provisions of rule 76, which regulates the warnings of the retrenchment process. The requisites of reimbursing an employee are a compulsory precondition for the retrenchment process of an employee. Therefore non-compliance with the provisions will lead to the retrenchment process being invalid. For example, if the retrenchment process is proved invalid or is left unapproved by the government officials, in that case, an employee has the authority to get back to his service and get his respective wages for the period of his retrenchment.
The retrenchment compensation has been made in compliance with the constitutional rights of a citizen. The Supreme court approved labour laws when they were challenged on the grounds of constitutional validity, and the Parliament has kept the principles of social welfare and economic justice under consideration while drafting these laws of retrenchment compensation.
The industry has been given proper consideration, and its success is linked to worker happiness. Employees must therefore be heard if India is to become a welfare state with a socialist structure.
Employers in a company use the retrenchment process to bring down the number of employees in the company if they experience problems in terms of giving ample salary or wages to each one of them. The retrenchment terms and conditions are laid in the HR Policies of any firm.
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