Labour Laws Q/A

Calculation and Payment of Retrenchment Compensation

How the retrenchment compensation is to be calculated?

An employee is eligible for retrenchment compensation when the following conditions are satisfied:

(a) The employee must be a ‘workman’.

(b) He must have put in a year of continuous service for a certain number (240) of days worked in the previous twelve months which is considered to be equal to a year of continuous service.

‘Continuous service’ means uninterrupted service. However, sickness, authorised leave, legal strikes and lock-outs, and work stoppages not due to a worker’s fault, do not interrupt one’s service. Over the above the one month’s wages where notice is not given, the retrenched workman should be given 15 days’ average pay for completed year of continuous service or any part thereof in excess of six months. The meaning of average pay depends on whether a workman is daily, weekly or monthly paid. The table below gives the system:

Status of a                                                                              Average

Daily rated                                                                Last 12 full working days
Weekly rated                                                            Last 4 complete
Monthly rated                                                           Last 3 complete
calendar months

The wages for calculation of retrenchment compensation means Basic, D.A. and other allowances and the value of any accommodation, amenities and travelling concession. Retrenched workers should be paid their compensation immediately at the time of retrenchment. Failure to do so can invalidate the process with the result that the retrenched workman continues to be an employee.

Earlier the Bombay and Madras High Courts have held that the retrenchment compensation be calculated @ 15 days, but the Calcutta High Court has distinguished both the judgments in holding that according to the scheme of section 25F of the Industrial Disputes Act, the calculation of the retrenchment compensation is to be made as if a month comprises of 30 days.1 The Supreme Court has also held that retrenchment compensation shall be equivalent to 15 days’ ‘average pay’ of 30 and not 26 days.2 However, for dispensing with contractual employment, the principle of ‘last come, first go’ will not be applicable.3

Retrenchment compensation is to be calculated @ 15 days’ wages for every month comprising 30 days and not assuming 26 days as applicable under the Payment of Gratuity Act.4

Source: H L Kumar, Labour Problems & Remedies

1. Parrys (CAL) Employee’s Union v. Third Industrial Tribunal West Bengal, 2001 LLR 462 (Mad HC).

2. GuruJambheshwarUniversity, Hisar v. Dharam Pal, 2007 LLR 297 (SC): AIR 2007 SC 1040: 2007 AIR SCW 834.

3. Haryana State Agricultural Marketing Board v. Subhash Chand, (2006) 2 SCC 794: AIR 2006 SC 1263: 2006 (2) LLN 63: (2006) 2 SCR 780: 2006 LLR 393 (SC).

4. Management of TANSI Mettur Dam v. Presiding Officer, Labour Court Salem, 2010 LLR 159 (Mad HC).

1 Comment

  • If a company is not in position of continuing business because of lossess and willing to close its operations by giving one month notice to the employees agreeing to pay and settle all their accrued benefits of service, then do the Company need to pay the retrenchment compensation to the employees?

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