You need to reduce headcount. The question is what it costs, what process you owe, and whether you need to ask the government first.
Since 21 November 2025 the answer comes from the Industrial Relations Code, 2020 rather than the repealed Industrial Disputes Act, 1947. The substance is largely carried forward, but the section numbers changed and the permission threshold moved from 100 workers to 300 — the single most consequential change in the Code for mid-market employers.
| Notice | 1 month, in writing, stating reasons |
| Compensation | 15 days' average pay per completed year |
| Part-year rule | Any part over 6 months counts as a full year |
| Reskilling fund | 15 days' wages, within 45 days (s.83) |
| Prior permission needed at | 300+ workers (s.79) |
| Eligibility | Workers with 1 year continuous service |
Position stated as at July 2026. States may notify thresholds different from the central position; confirm your state before relying on the 300 figure.
What counts as retrenchment
Wider than most people assume. Section 2(zh) defines retrenchment as the termination by the employer of the service of a worker for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action. It expressly does not include:
- voluntary retirement;
- retirement on reaching superannuation age;
- termination on non-renewal or expiry of the contract, or under a stipulation in it;
- termination on completion of the tenure of fixed term employment;
- termination on the ground of continued ill-health.
Read that first line again. Any reason whatsoever, except disciplinary punishment. Redundancy is retrenchment. Restructuring is retrenchment. Role elimination is retrenchment. Performance-based exits that are not run as a disciplinary process are, on the face of it, retrenchment. So is a "termination as per contract" of a worker with a year's service — calling it something else does not move it out of the definition.
Is this person eligible? The 240-day test
The obligations bite for a worker in continuous service of not less than one year. Section 66 defines that, and it does not mean a year on the calendar.
Continuous service means uninterrupted service, including service interrupted by sickness, authorised leave, accident, a legal strike, a lock-out, or a cessation of work not attributable to the worker's fault. And where a worker is not in continuous service for a year, they are deemed to be if, in the preceding twelve months, they actually worked for:
| Category | Deemed one year | Deemed six months |
|---|---|---|
| Worker employed below ground in a mine | 190 days | 95 days |
| Everyone else | 240 days | 120 days |
Days on which the worker was laid off, was on leave on full wages earned in previous years, or was absent due to temporary disablement caused by employment-related accident all count towards the total. This is where employers most often get the arithmetic wrong — they count days physically worked, conclude the person is short of 240, and skip the compensation. The definition is broader than attendance.
What you owe: Section 70
No worker in continuous service of not less than one year may be retrenched until:
- One month's notice in writing indicating the reasons for retrenchment has been given and the notice period has expired — or wages in lieu of that notice have been paid;
- Compensation has been paid at the time of retrenchment, equivalent to fifteen days' average pay (or such other number of days as the appropriate Government may notify) for every completed year of continuous service or any part of it in excess of six months; and
- Notice has been served on the appropriate Government in the prescribed manner.
All three are conditions precedent. Missing the third is the one employers forget, and it is not curable after the fact.
What "average pay" means
Not last-drawn salary. Section 2(d) defines average pay as the average of the wages payable to the worker over:
- three complete calendar months, for a monthly-paid worker;
- four complete weeks, for a weekly-paid worker;
- twelve full working days, for a daily-paid worker,
preceding the date on which the average pay becomes payable. Where the worker has not completed that period, it is the average over the period actually worked.
And "wages" under s.2(zq) means basic pay, dearness allowance and retaining allowance — with a proviso that if the excluded items exceed one half of total remuneration, the excess is added back into wages. That last clause is the 50% rule, and it is why aggressive allowance-heavy salary structures no longer reduce statutory exposure the way they used to.
A worked example
| Average pay (3 months, monthly-paid) | ₹42,000 / month |
| Completed years | 6 |
| Part year (8 months, exceeds 6) | Counts as 1 more year → 7 |
| 15 days' average pay | ₹42,000 ÷ 2 = ₹21,000 |
| Retrenchment compensation | ₹21,000 × 7 = ₹1,47,000 |
| Notice pay in lieu (1 month) | ₹42,000 |
| Reskilling fund contribution (15 days' last-drawn wages) | ₹21,000, within 45 days |
Do you need government permission?
This depends entirely on establishment size, and the answer changed in November 2025.
| Workers employed | Chapter IX lay-off provisions | Notice & compensation (s.70) | Prior permission |
|---|---|---|---|
| Under 50 (average per working day, preceding calendar month) | Sections 67–69 do not apply | Applies | No |
| 50 to 299 | Applies | Applies | No |
| 300 or more (average per working day, preceding 12 months) | Chapter X applies | Applies | Yes — s.79 |
Section 77 sets the applicability of Chapter X at 300 or more workers, or such higher number as the appropriate Government may notify. Section 79 then imposes the prior-permission requirement on establishments within that Chapter. Section 78 separately prohibits lay-off without permission in those establishments.
Who goes: the last-come-first-go rule
Section 71 sets the procedure. Where an employer retrenches workers of a particular category, the ordinary rule is that the worker employed last in that category goes first. Departure is permitted, but the employer must record the reasons in writing.
In practice this is where selection-based redundancies are won or lost. What survives scrutiny:
- A defined category. The rule operates within a category of workers, so how you define the pool matters enormously. Define it honestly against the work, not around the individuals.
- An objective, documented selection matrix applied consistently, where you are departing from seniority.
- Written reasons, recorded at the time. Not reconstructed for the tribunal.
Section 72 then gives a retrenched worker a preferential right to re-employment if the employer later hires for that category — a provision employers regularly overlook when they backfill six months later.
The full obligation checklist
| Step | Provision | Timing |
|---|---|---|
| Confirm worker status and 240-day continuous service | ss.2(zr), 66 | Before anything else |
| Confirm establishment headcount and whether Chapter X applies | ss.65, 77 | Before anything else |
| Apply for prior permission, if 300+ | s.79 | Before the retrenchment |
| Define the category and apply last-come-first-go, recording written reasons for any departure | s.71 | At selection |
| Serve one month's written notice stating reasons, or pay wages in lieu | s.70(a) | Before the retrenchment takes effect |
| Pay retrenchment compensation | s.70(b) | At the time of retrenchment |
| Serve notice on the appropriate Government | s.70(c) | In the prescribed manner |
| Contribute to the worker re-skilling fund | s.83 | Within 45 days |
| Settle gratuity, leave encashment, bonus, PF exit | Code on Social Security, 2020 | On exit |
| Honour re-employment preference if you hire back into the category | s.72 | Ongoing |
Where this goes wrong
- Counting attendance instead of continuous service. Lay-off days, earned leave taken on full wages and employment-injury absence all count toward 240.
- Using last-drawn salary as the compensation base instead of average pay over the preceding three complete calendar months.
- Dropping the part-year. Six years and eight months is seven years for this calculation, not six.
- Paying compensation after the exit date. Section 70 requires payment at the time of retrenchment. Deferring it to the normal full-and-final cycle is a breach of a condition precedent.
- Skipping the notice to the appropriate Government.
- Forgetting the reskilling fund. New, separate from compensation, forty-five day clock.
- Structuring around the definition. Calling it a mutual separation, a non-confirmation or a performance exit does not change what it is if the substance is termination for a reason other than disciplinary punishment.
- Backfilling the role without offering it to the retrenched worker.
The arithmetic is the exposure
Every number above derives from records: 240 days from attendance and leave, average pay from three specific months of payroll, completed years from a precise joining date, the part-year rule from the exact months. A retrenchment computed from four exports that were reconciled once, by hand, is a computation nobody can reproduce two years later when it is challenged. Helion derives continuous service, average pay, the part-year rounding and the settlement statement from a single employment record, so the figure that goes into the notice is the figure that reconciles to the ledger.
Frequently asked questions
How is retrenchment compensation calculated in India?
Fifteen days' average pay for every completed year of continuous service, plus any part of a year in excess of six months counted as a full year, under Section 70 of the Industrial Relations Code, 2020. Average pay is the average of wages over the three complete calendar months preceding the date it becomes payable, for a monthly-paid worker.
What is the difference between lay-off and retrenchment?
Lay-off is a temporary failure or inability to give employment — because of shortage of coal, power or raw materials, accumulation of stocks, breakdown of machinery or natural calamity — where the worker's name stays on the muster roll. Retrenchment is termination of service. Lay-off compensation is 50% of basic wages and dearness allowance; retrenchment compensation is fifteen days' average pay per year.
Do I need government permission to retrench workers?
Only if the establishment employed 300 or more workers on average per working day in the preceding twelve months, under Section 79 read with Section 77. Below that threshold, notice and compensation are required but permission is not. States may notify a different threshold.
What is 240 days of continuous service?
Under Section 66, a worker who has not completed a full year is deemed to be in continuous service for one year if they actually worked at least 240 days in the preceding twelve months (190 for a worker employed below ground in a mine). Days spent laid off, on earned leave at full wages, or absent through employment-related temporary disablement count towards the total.
Is performance-based termination retrenchment?
If it is not imposed as a punishment by way of disciplinary action, it falls within the Section 2(zh) definition of retrenchment for any reason whatsoever, and the Section 70 conditions apply. Running a documented disciplinary process for proven misconduct is a different route; a performance exit dressed as a contractual termination is not.
Does retrenchment compensation replace gratuity?
No. They are separate entitlements arising under different statutes. Gratuity is payable under the Code on Social Security, 2020 on the usual qualifying service, in addition to retrenchment compensation under the Industrial Relations Code.
What is the worker re-skilling fund?
A fund introduced by Section 83 of the Code. On retrenchment, the employer contributes an amount equal to fifteen days' wages last drawn by the worker immediately before retrenchment, credited within forty-five days. It is in addition to, not part of, retrenchment compensation.
Can a retrenched worker claim their job back?
Section 72 gives a retrenched worker a preferential right to re-employment if the employer subsequently hires for that category of work. Separately, a retrenchment that breaches the Section 70 conditions can be challenged before the Tribunal, which under Section 50 may set the termination aside and direct reinstatement or grant other relief.