Retrenchment and Lay-off: Prior Government Permission Now Required for Units with 300+ Workers

Introduction

India’s labour landscape has witnessed significant transformation in recent years, particularly concerning the statutory requirements for workforce reduction and industrial closure. The Industrial Disputes Act of 1947 has long served as the foundational legislation governing the relationship between employers and workmen in matters of retrenchment and lay-off. However, recent amendments by several state governments have fundamentally altered the threshold for prior government approval, raising it from 100 workers to 300 workers in multiple jurisdictions across the country. This shift represents one of the most consequential labour law reforms in recent decades, directly impacting millions of workers and thousands of industrial establishments.

The amendment journey began when Rajasthan became the pioneering state in 2014 to increase the threshold, followed by states including Madhya Pradesh, Uttar Pradesh, Gujarat, Haryana, Assam, Karnataka, Andhra Pradesh, and Punjab [1]. These changes have generated considerable debate among stakeholders, with employers viewing them as necessary steps toward business flexibility and labour organizations expressing concerns about diminished worker protections. Understanding the legal framework, procedural requirements, and judicial interpretations surrounding these provisions becomes essential for employers, employees, trade unions, and policymakers navigating this evolving regulatory environment.

The Legal Framework of Chapter V-B

Applicability and Scope

Chapter V-B of the Industrial Disputes Act, containing Sections 25K through 25S, establishes special provisions relating to lay-off, retrenchment, and closure in certain establishments [2]. The provisions under this chapter specifically apply to industrial establishments, excluding those of a seasonal nature or engaged in intermittent work, which employed not less than one hundred workmen on an average per working day for the preceding twelve months. However, following state-level amendments, this threshold has been increased to three hundred workmen in multiple states, fundamentally altering the regulatory landscape for medium-sized enterprises.

The applicability threshold is calculated based on the average number of workmen employed per working day over the preceding twelve-month period. The term “workmen” as defined in the Act includes persons employed in any industry to do manual, unskilled, skilled, technical, operational, clerical or supervisory work, but excludes those employed in a managerial or administrative capacity or those drawing wages exceeding ten thousand rupees per month and exercising supervisory functions mainly of a managerial nature. This definition becomes critical in determining whether an establishment falls within the purview of Chapter V-B and consequently whether prior government permission is mandated for retrenchment or closure.

Understanding Retrenchment

Section 2(oo) of the Industrial Disputes Act provides the statutory definition of retrenchment as the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action [3]. However, this broad definition contains specific exclusions that are subject to strict interpretation by courts. Retrenchment does not include voluntary retirement by the workman, retirement on reaching the age of superannuation if the contract of employment contains a stipulation in that behalf, termination of service on the ground of continued ill-health, or termination of service as a result of the non-renewal of the contract of employment.

The judiciary has consistently held that the exclusionary clauses must be construed strictly, given the protective benefits conferred by the Act to retrenched workmen. The Supreme Court has clarified that while termination of service for any reason whatsoever generally implies discharge of surplus staff, it excludes termination as punishment inflicted through disciplinary action and the reasons specifically enumerated in the exclusionary clauses. Retrenchment may occur for various reasons including economic considerations, rationalization, installation of labour-saving machinery, or organizational restructuring, and so long as such actions are undertaken in good faith, authorities cannot question their propriety.

Section 25N: Conditions Precedent to Retrenchment

Mandatory Requirements

Section 25N of the Industrial Disputes Act establishes stringent conditions that must be satisfied before an employer can lawfully retrench any workman who has been in continuous service for not less than one year [4]. The first mandatory requirement under Section 25N(1)(a) stipulates that the workman must be given three months’ notice in writing indicating the reasons for retrenchment and the period of notice must expire, or alternatively, the workman must be paid wages in lieu of such notice for the three-month period. This notice requirement ensures that workers receive adequate time to prepare for the termination of their employment and seek alternative opportunities.

The second and more critical requirement under Section 25N(1)(b) mandates that prior permission of the appropriate government or such authority as may be specified by that government through notification in the Official Gazette must be obtained on an application made for this purpose. This requirement represents a significant departure from the principle of managerial prerogative and reflects the legislative policy of balancing employer flexibility with worker security. The application for permission must be made by the employer in the prescribed manner, clearly stating the reasons for the intended retrenchment, and a copy of such application must also be served simultaneously on the workmen concerned in the prescribed manner.

Government Decision-Making Process

Once an application for permission has been submitted under Section 25N(1), the appropriate government or the specified authority must undertake an enquiry as it deems fit and provide a reasonable opportunity of being heard to the employer, the workmen concerned, and persons interested in such retrenchment. In evaluating the application, the authorities must have regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the workmen, and all other relevant factors. The decision must be communicated through an order with reasons recorded in writing, and a copy of such order must be communicated to both the employer and the workmen.

An important procedural safeguard built into the statute is the deemed permission provision under Section 25N(4). Where an application for permission has been made and the appropriate government or the specified authority does not communicate the order granting or refusing to grant permission to the employer within sixty days from the date on which the application was made, the permission applied for shall be deemed to have been granted on the expiration of the said sixty-day period. This provision prevents indefinite delays in decision-making and provides certainty to employers regarding the timeline for receiving a determination on their retrenchment applications.

Consequences of Non-Compliance

The Act provides severe consequences for employers who fail to comply with the requirements of Section 25N. Where no application for permission is made, or where permission for any retrenchment has been refused, such retrenchment shall be deemed to be illegal from the date on which the notice of retrenchment was given to the workman, and the workman shall be entitled to all benefits under any law for the time being in force as if no notice had been given. This means the workman is entitled to reinstatement with full back wages and continuity of service. The Supreme Court has consistently held that non-compliance with Section 25N renders the retrenchment void ab initio, entitling the affected workman to all consequential relief.

Where permission for retrenchment has been granted or is deemed to have been granted, every workman who is employed in that establishment immediately before the date of application for permission shall be entitled to receive, at the time of retrenchment, compensation equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months. The method of calculating average pay involves dividing the last drawn monthly salary by twenty-five and then multiplying the dividend by fifteen for every completed year of continuous work. Section 25Q prescribes penalties for violations, providing that any employer who contravenes the provisions may be punished with imprisonment for a term which may extend to one month, or with fine which may extend to one thousand rupees, or with both.

Section 25O: Procedure for Closure of Undertakings

Application Requirements

Section 25O governs the procedure for closing down an undertaking and imposes even more stringent requirements than those applicable to retrenchment alone [5]. An employer who intends to close down an undertaking of an industrial establishment to which Chapter V-B applies must, in the prescribed manner, apply for prior permission at least ninety days before the date on which the intended closure is to become effective. The application must be made to the appropriate government, clearly stating the reasons for the intended closure of the undertaking, and a copy of such application must also be served simultaneously on the representatives of the workmen in the prescribed manner.

The ninety-day advance notice requirement provides a longer preparation period compared to the sixty-day requirement under the earlier Section 25FFA, which applied to establishments with fifty or more but less than one hundred workers. It is important to note that the provisions of Section 25O do not apply to undertakings set up for the construction of buildings, bridges, roads, canals, dams, or other construction work, recognizing the temporary and project-based nature of such establishments.

Government Evaluation and Decision

Upon receiving an application for closure, the appropriate government must make such enquiry as it thinks fit and provide a reasonable opportunity of being heard to the employer, the workmen, and persons interested in such closure. The government must evaluate the application having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the general public, and all other relevant factors. The decision must be made by order with reasons recorded in writing, and a copy of such order must be communicated to the employer and the workmen. This requirement for a reasoned order ensures transparency in decision-making and provides a basis for judicial review if necessary.

Similar to the provisions governing retrenchment, Section 25O(3) contains a deemed permission provision. Where an application has been made and the appropriate government does not communicate the order granting or refusing to grant permission within sixty days from the date on which the application was made, the permission applied for shall be deemed to have been granted on the expiration of the sixty-day period. This mechanism prevents administrative delays from indefinitely blocking legitimate business decisions while maintaining the protective framework for workers.

Compensation and Illegal Closure

Where an undertaking is permitted to be closed down or where permission for closure is deemed to be granted, every workman who is employed in that undertaking immediately before the date of application for permission shall be entitled to receive compensation equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months. This compensation requirement ensures that workers who lose their employment due to closure receive some financial cushion to tide over the period of unemployment.

Where no application for permission is made within the specified ninety-day period, or where the permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of closure, and the workmen shall be entitled to all the benefits under any law for the time being in force as if the undertaking had not been closed down. This means workers can claim wages, benefits, and continuation of service as if the illegal closure had not occurred. The Act also provides an exception under Section 25O(7) where the appropriate government may direct that the provisions shall not apply in exceptional circumstances such as accident in the undertaking or death of the employer.

State Amendments Raising the Threshold to 300 Workers

The Reform Movement

The movement to amend the applicability threshold of Chapter V-B from one hundred to three hundred workers represents a significant shift in India’s labour policy landscape. Rajasthan pioneered this reform in 2014 through the Industrial Disputes (Rajasthan Amendment) Act, projecting the change as a crucial step to attract investment and reduce compliance rigidity for medium-sized enterprises [1]. The Rajasthan government argued that the existing threshold of one hundred workers was unduly restrictive and discouraged businesses from expanding beyond this size, creating a perverse incentive against growth and employment generation.

Following Rajasthan’s lead, multiple states adopted similar amendments in subsequent years. Madhya Pradesh, Uttar Pradesh, Gujarat, Haryana, Assam, Karnataka, Andhra Pradesh, Punjab, and several other states progressively raised the threshold to three hundred workers. These amendments utilized the constitutional provision allowing state governments to modify central legislation on subjects in the Concurrent List, subject to Presidential assent. The reform spread across states governed by different political parties, suggesting a broader consensus on the need to ease restrictions on mid-sized enterprises, though the actual implementation timelines and specific provisions varied across states.

Economic Rationale

Proponents of the threshold increase argue that the original limit of one hundred workers created significant compliance burdens for growing businesses and deterred employment creation. They contend that the requirement for prior government approval for every retrenchment or closure decision introduced excessive rigidity into business operations, particularly in sectors facing rapid technological change or cyclical demand patterns. The reform was presented as part of a broader package of measures to improve the ease of doing business in India and make the country more attractive to domestic and foreign investors seeking to establish manufacturing operations.

Economic data suggests that establishments employing between one hundred and three hundred workers represent a substantial segment of the organized industrial sector. According to analysis of Annual Survey of Industries data for 2017-2018, approximately 9.3 percent of factories employed between one hundred and two hundred ninety-nine workers, while 8.9 percent employed three hundred or more workers [6]. The reform thus impacts a non-trivial portion of the industrial workforce, with states like Tamil Nadu, Gujarat, Maharashtra, and Karnataka containing a large proportion of establishments in this size category.

Impact on Worker Protection

Critics of the threshold increase express concern that it significantly narrows the protective umbrella previously available to workers in medium-sized establishments. They argue that workers employed in establishments with more than one hundred but fewer than three hundred employees lose the safeguard of mandatory government scrutiny before retrenchment or closure decisions can be implemented. This shift places greater reliance on post-facto compensation, collective bargaining, and access to industrial dispute resolution mechanisms, which may provide less effective protection than ex-ante government approval.

Labour organizations have pointed out that more than seventy-five percent of the organized sector workforce is employed in establishments with fewer than three hundred workers, suggesting that the reform potentially affects a substantial majority of industrial workers. The amendments also raise questions about the differential treatment of workers based solely on the size of their employer, creating what some characterize as a two-tier system of labour rights. Workers in smaller establishments now have fewer procedural protections, even though they may be equally vulnerable to arbitrary or economically-driven workforce reductions.

Judicial Interpretation and Constitutional Validity

The Meenakshi Mills Landmark Judgment

The constitutional validity of Section 25N was extensively examined by the Supreme Court in the landmark case of Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., decided on May 15, 1992 [7]. The case arose from conflicting decisions of various High Courts, with the Andhra Pradesh High Court upholding the validity of Section 25N, while the Madras High Court and Rajasthan High Court had held it to be violative of the fundamental right guaranteed under Article 19(1)(g) of the Constitution, which protects the right to practice any profession or to carry on any occupation, trade, or business.

The employers’ primary contention was that Section 25N imposed unreasonable restrictions on their right to conduct business by requiring prior government approval for retrenchment decisions. They argued that the provision lacked clear guidelines for the exercise of governmental discretion, provided no avenue for appeal or review against adverse orders, and essentially transferred managerial decision-making authority to government officials without adequate procedural safeguards. The employers also drew parallels to the Supreme Court’s earlier decision in Excel Wear v. Union of India, where Section 25O (in its original form) had been struck down on similar grounds.

The Supreme Court’s Reasoning

The Constitution Bench of the Supreme Court, in a comprehensive judgment, upheld the constitutional validity of Section 25N. The Court held that the restrictions imposed by the section on the employer’s right to retrench workmen were in the interest of the general public and did not violate Article 19(1)(g) of the Constitution. The Court emphasized that the fundamental rights guaranteed under Article 19(1)(g) must be read in conjunction with the Directive Principles of State Policy enshrined in Articles 38, 39-A, 41, and 43 of the Constitution, which mandate the State to secure a social order for the promotion of welfare of the people and to ensure right to work and just and humane conditions of work.

The Court found that the requirement for the government to record reasons in writing and afford an opportunity of hearing to all interested parties constituted sufficient safeguards against arbitrary action. Unlike the original version of Section 25O that was struck down in Excel Wear, the amended Section 25N required the authority to conduct an enquiry, hear all parties, and record reasons for its decision. The Court also noted that the exercise of power under Section 25N(2) being quasi-judicial in nature, the remedy of judicial review under Articles 226 and 32 of the Constitution was available as adequate protection against any arbitrary exercise of governmental authority.

The judgment distinguished the employer’s claimed right to retrench from the core right to carry on business, holding that while the right to close down a business might be an integral part of the fundamental right under Article 19(1)(g), the right to retrench individual employees was more appropriately characterized as an incident of management that could be subjected to reasonable restrictions in the larger public interest. The Court observed that given the great poverty and economic challenges facing Indian workers, legislative intervention to protect employment was constitutionally permissible and aligned with the constitutional vision of a welfare state.

Subsequent Judicial Developments

Following the Meenakshi Mills decision, courts have consistently applied its principles in subsequent cases involving challenges to retrenchment and closure provisions. The constitutional validity of Section 25O, as amended after the Excel Wear decision, was upheld by a five-judge Constitution Bench in Orissa Textile and Steel Ltd. v. State of Orissa in 2002 [8]. The Court found that the amended provision adequately addressed the deficiencies identified in Excel Wear by requiring enquiry, reasoned orders, and specified timelines for decision-making.

Courts have also consistently held that non-compliance with the procedural requirements of Sections 25N and 25O renders retrenchment or closure illegal and entitles affected workmen to full relief including reinstatement with back wages. In numerous cases, including Uttaranchal Forest Development Corporation v. Jabar Singh, courts have ordered reinstatement and continuity of service where employers failed to obtain the required prior government permission or did not comply with notice and compensation requirements. This jurisprudence underscores the mandatory nature of the statutory requirements and the serious consequences of non-compliance.

Practical Implications for Employers and Employees

Employer Compliance Requirements

For establishments falling within the purview of Chapter V-B, strict compliance with the procedural requirements becomes essential to lawfully effectuate retrenchment or closure. Employers must carefully determine whether they employ the threshold number of workmen by calculating the average employment over the preceding twelve months. This calculation should include all persons falling within the definition of “workmen” under the Act, including contract workers in certain circumstances. Once the threshold is met, the employer must ensure that all procedural steps are meticulously followed.

The application for government permission must be prepared with care, clearly articulating the genuine business reasons necessitating retrenchment or closure. These reasons might include financial losses, technological changes rendering certain positions obsolete, market conditions necessitating downsizing, or other bona fide business justifications. The application should be supported by relevant documentary evidence such as financial statements, market analysis, or technical reports that substantiate the stated reasons. Simultaneously, the employer must serve copies of the application on the affected workmen or their representatives, maintaining proof of such service.

During the enquiry process conducted by the government authority, employers must be prepared to participate fully, providing additional information or clarifications as requested. Failure to cooperate with the enquiry process may result in the application being rejected. Employers should also be mindful of the deemed permission provisions and track the sixty-day timeline carefully. If permission is granted or deemed granted, employers must ensure that proper compensation is calculated and paid to affected workmen before implementing the retrenchment or closure.

Worker Rights and Remedies

Workers employed in establishments covered by Chapter V-B enjoy significant protections that they should be aware of and actively assert. Upon receiving notice of intended retrenchment or information about a closure application, workers have the right to participate in the enquiry process and present their objections or concerns to the government authority. This participation can be individual or through trade union representatives. Workers should ensure they submit detailed representations explaining why the proposed retrenchment or closure should not be permitted, potentially including alternative suggestions for addressing the employer’s concerns.

If retrenchment or closure proceeds without obtaining the required government permission, or if the permission application is rejected but the employer proceeds anyway, workers have multiple remedies available. They can file complaints with labour authorities seeking enforcement action and penalties against the employer. More significantly, they can raise an industrial dispute seeking reinstatement with full back wages and continuity of service. Courts have consistently held that illegal retrenchment or closure entitles workers to be treated as if they had never been terminated, preserving all rights including seniority, provident fund accumulation, and other service benefits.

Even where permission has been lawfully obtained, workers retain the right to ensure they receive the statutory compensation of fifteen days’ average pay for every completed year of service. If disputes arise regarding the calculation or payment of compensation, these can be raised through the industrial disputes resolution machinery. Workers should maintain careful records of their service period, wages, and any communications from the employer to support potential claims. Given the three-year limitation period for raising industrial disputes, workers should act promptly upon learning of any potential violations of their rights.

Conclusion

The evolution of India’s legal framework governing retrenchment and lay-off reflects the ongoing tension between the imperatives of business flexibility and worker security. The recent amendments raising the threshold for prior government approval from one hundred to three hundred workers in multiple states represent a significant recalibration of this balance, expanding the sphere of managerial autonomy while narrowing the scope of worker protection. For establishments that continue to fall within the regulatory net, the requirements of Sections 25N and 25O remain stringent and must be scrupulously observed to avoid legal complications.

The Supreme Court’s consistent affirmation of the constitutional validity of these protective provisions, while recognizing legitimate business needs, establishes that worker interests remain a paramount consideration in industrial relations. As the regulatory landscape continues to evolve, both employers and workers must stay informed about applicable thresholds and procedural requirements in their respective states. The success of these reforms will ultimately be measured not merely by increased investment or reduced compliance costs, but by whether they contribute to sustainable industrial growth that generates quality employment while protecting vulnerable workers from arbitrary treatment. Achieving this delicate balance requires continued vigilance from all stakeholders and a commitment to upholding both the letter and spirit of labour legislation.

Authorized and Published by Rutvik Desai

References

[1] ACM Legal, “Mass Layoffs & Industrial Closures in India Law” (September 6, 2025). Available at: https://www.acmlegal.org/blog/mass-layoffs-and-industrial-closures-in-india/

[2] Corrida Legal, “Retrenchment Under the Industrial Disputes Act, 1947” (July 23, 2025). Available at: https://corridalegal.com/retrenchment-under-the-industrial-disputes-act-1947/

[3] The Industrial Disputes Act, 1947, Section 2(oo). Available at: https://labour.gov.in/sites/default/files/a1947-14_1.pdf

[4] The Industrial Disputes Act, 1947, Section 25N. Available at: https://indiankanoon.org/doc/700346/

[5] The Industrial Disputes Act, 1947, Section 25O. Available at: https://indiankanoon.org/doc/136320359/

[6] National Centre for Biotechnology Information, “A Note on Industrial Relations Code, 2020”. Available at: https://pmc.ncbi.nlm.nih.gov/articles/PMC9135385/

[7] Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., AIR 1994 SC 2696, (1992) 3 SCC 336. Available at: https://indiankanoon.org/doc/700780/

[8] Orissa Textile and Steel Ltd. v. State of Orissa, 2002 LLR 225. Available at: https://www.labourfile.com/section-detail.php?aid=35