Retrenchment without prior approval and gratuity below ten years
Sunrise Auto Components runs a factory in Tamil Nadu with 320 workmen. On 1 April 2024, after losing an export order, the management issued one month's written notice to 80 workmen, including Kumar, terminating their services with effect from 30 April 2024. Kumar had 9 years and 7 months of continuous service and his average monthly wage was ₹24,000. The company paid retrenchment compensation of 15 days' average pay for each completed year of service, but did not seek the prior approval of the appropriate government. It also did not record reasons for selecting Kumar while retaining two junior workmen in the same category. Kumar's gratuity was not paid; the company says he had not completed 10 years. The union raised an industrial dispute. The company argues that the factory is not covered by Chapter V-B of the Industrial Disputes Act, 1947, and that the compensation paid is adequate.
1. Was the retrenchment lawful? Consider Chapter V-B, Section 25F and Section 25G of the Industrial Disputes Act, 1947.
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Issue: Whether the retrenchment of 80 workmen was legally valid.
Rule: Chapter V-B of the Industrial Disputes Act, 1947 applies to industrial establishments employing 100 or more workmen. Section 25N requires prior approval of the appropriate government before retrenchment in such establishments. Section 25F prescribes conditions precedent: one month's notice or wages in lieu, retrenchment compensation at 15 days' average pay for every completed year or part exceeding six months, and notice to the appropriate government. Section 25G requires the employer to retrench the last come first, unless reasons are recorded for retaining a junior.
Application: The factory has 320 workmen, so Chapter V-B applies. The company did not seek prior approval under Section 25N. That alone makes the retrenchment illegal. The company also retained two junior workmen in the same category without recording reasons, violating Section 25G. The one month's notice and payment of compensation do not cure the absence of prior approval or the seniority violation.
Conclusion: The retrenchment is unlawful. The workmen are entitled to reinstatement with continuity of service and back wages, or such other relief as the industrial tribunal grants.
2. Compute Kumar's retrenchment compensation and state whether the company's payment was correct.
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Issue: Whether Kumar was paid the correct retrenchment compensation under Section 25F.
Rule: Section 25F(b) requires 15 days' average pay for every completed year of continuous service or any part thereof in excess of six months. Average pay is computed on the basis of the last drawn wages.
Application: Kumar has 9 years and 7 months of continuous service. The 7-month part exceeds six months, so it counts as a full unit. He is therefore entitled to 10 units of 15 days' average pay. His monthly wage is ₹24,000. Fifteen days' average pay is ₹24,000 × 15/30 = ₹12,000. Ten units amount to ₹1,20,000. The company paid for only nine completed years, i.e. ₹1,08,000. The shortfall is ₹12,000. The one month's notice was given, so no separate notice pay is due on these facts.
Conclusion: The correct retrenchment compensation is ₹1,20,000. The company underpaid Kumar by ₹12,000, in addition to the illegality of retrenchment without prior approval.
3. Is Kumar entitled to gratuity despite not completing 10 years?
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Issue: Whether the company's 10-year rule for gratuity is correct.
Rule: Under Section 4 of the Payment of Gratuity Act, 1972, gratuity is payable on termination of continuous service after five years of continuous service. The formula is 15 days' wages based on the last drawn wages for every completed year of service, computed at 15/26 of the monthly wage. Part of a year is not counted as a completed year for this calculation.
Application: Kumar has 9 years and 7 months of continuous service. He has completed more than five years and is therefore eligible. The company's claim that he needed 10 years is wrong. For gratuity, only completed years are counted, so he gets 9 years. The calculation is ₹24,000 × 15/26 × 9 = ₹1,24,615.38, rounded to ₹1,24,615. Retrenchment is a termination, so the gratuity obligation is triggered.
Conclusion: Kumar is entitled to gratuity of about ₹1,24,615. The company must pay it with interest for delayed payment.