Three separate numbers get mixed up in these conversations: the statutory notice, the statutory compensation, and the contractual notice period in your appointment letter. They are cumulative in the sense that the better of the statutory and contractual notice applies, and the compensation is payable on top of the notice.
| Situation | Notice | Compensation | Permission |
|---|---|---|---|
| Worker with one year of continuous service, general position | One month in writing with reasons, or wages in lieu | Fifteen days' average pay for every completed year and any part over six months | No, but notice to the appropriate Government is required |
| Factory, mine or plantation with three hundred or more workers | Three months in writing with reasons, or wages in lieu | Fifteen days' average pay for every completed year and any part over six months | Yes, prior permission of the appropriate Government |
| Worker with less than one year of continuous service | Statutory conditions do not apply | Contractual only | No |
| Fixed term employment ending on expiry of the term | Outside the definition of retrenchment | None on that account | No |
How the money is actually computed
Two figures do the work, and they are not the same figure.
- Average pay. For a monthly paid worker this is the average of the wages payable in three complete calendar months; for a weekly paid worker, four complete weeks; for a daily paid worker, twelve full working days, in each case preceding the relevant date. Retrenchment compensation is expressed in average pay.
- Wages. The Code defines wages as all remuneration expressed in money, including basic pay, dearness allowance and retaining allowance, and excludes listed items such as statutory bonus, house accommodation and amenities, employer contributions to pension or provident funds, and certain other heads. Notice pay in lieu is expressed in wages for the notice period.
The practical consequence is that neither figure is simply the "basic" line on your payslip, and neither is your cost to company. Run the computation on the actual definition before you accept the employer's number. Our overview of what the four labour codes changed for employees explains why the common wage definition across the codes changed the arithmetic for several statutory payments at once.
The compensation is fifteen days' average pay or average pay of such days as may be notified by the appropriate Government, and the re-skilling contribution is fifteen days' wages or such other number of days as the Central Government may notify. Both are subject to change by notification, and States may notify differently within the space left to them. Where a figure matters to your case, take it from the notification in force in Karnataka rather than from an article.
What is due alongside the notice and compensation
- The re-skilling fund credit. Fifteen days' wages last drawn, or such other number of days as notified, credited to the retrenched worker's account within forty-five days of the retrenchment. This is separate from retrenchment compensation and is frequently left out of settlements.
- Gratuity, if you have the qualifying service. Retrenchment is a termination, and gratuity follows on the usual conditions. Our note on gratuity rules, eligibility and calculation in India sets out the formula and the claim procedure.
- Earned salary, leave encashment and any statutory bonus, which are wage claims and go to the authority under the Code on Wages, 2019.
- Provident fund, including any months not remitted, which is an EPFO matter.
Where the contract beats the statute
The Code preserves better benefits. Where under any other law, standing orders, an award or a contract of service a worker is entitled to benefits on a matter that are more favourable than the Code gives, the worker continues to be entitled to the more favourable benefit on that matter. So a three month contractual notice period is not displaced by the one month statutory figure, and a severance policy that pays a month per year of service is enforceable as a contract on top of the statutory floor. Read the appointment letter and the policy document before you negotiate.
A settlement offering "three months' salary" is not the same as compliance. The statute requires notice or wages in lieu and compensation calculated on service and notice to the appropriate Government. An employer that pays a lump sum and calls it everything is often short on at least one head. Ask for the computation, head by head, in writing, before you sign anything.
If the employer paid nothing at all, or gave a letter with no reasons in it, the retrenchment itself is open to challenge and not merely the arithmetic. Our guide on wrongful termination and employee rights in India sets out that route and the periods within which it has to be started.