Retrenchment, letting an employee go for reasons unrelated to their conduct, typically due to restructuring or redundancy, comes with a statutory compensation obligation under the Industrial Disputes Act that catches a lot of first-time HR teams off guard. Here’s both the compensation figure and the notice pay in lieu that’s typically owed alongside it.
Section 25F of the Industrial Disputes Act, 1947 sets retrenchment compensation at 15 days’ average pay for every completed year of continuous service, with any extra period beyond 6 months rounding up to a full year, the same rounding convention used for gratuity. This applies to employees classified as “workmen” (broadly non-supervisory roles, or supervisors below a defined salary threshold) with at least one year of continuous service. Separately, statutory notice, or pay in lieu of it, is also typically required before retrenchment.
This is distinct from termination for misconduct, which doesn’t attract this compensation, and from voluntary resignation. Establishments with 50 or more workmen on average generally need prior government permission before retrenching (100+ under some state amendments).
Only employees who meet the legal definition of “workmen” under the Industrial Disputes Act are covered by this specific provision, senior managerial and supervisory roles above a salary threshold typically fall outside it.
“Layoff” in Indian labour law has a specific, narrower meaning (temporary inability to provide work due to shortage of raw material, breakdown, etc.), while retrenchment is a permanent termination for reasons like redundancy. The compensation rules differ between the two.
The 15-days-per-year formula structure is similar, but they’re separate entitlements, an eligible employee could be owed both retrenchment compensation and gratuity. Use our Gratuity Calculator to work out that figure independently.
Beyond retrenchment compensation and notice pay, a full exit payout usually also includes pro-rated salary and leave encashment, our Full & Final Settlement Calculator pulls all of that together.
No, EDLI is unrelated, it’s specifically a death-in-service insurance benefit under EPF, not connected to retrenchment. Our EDLI Calculator covers that separately if you need it.
If you’re planning a larger restructuring, our Workforce Cost Calculator helps estimate the ongoing savings against the one-time compensation outlay calculated here.