Office closures are usually presented as a business decision that carries no legal steps beyond a severance offer. The Industrial Relations Code, 2020 says otherwise, and the obligations it imposes are worth knowing before the settlement conversation rather than after.
The three obligations
- Sixty days' notice to the appropriate Government. An employer intending to close down an undertaking must serve notice on the appropriate Government at least sixty days before the intended closure becomes effective, in the prescribed manner, stating clearly the reasons. This does not apply to an industrial establishment in which fewer than fifty workers are employed or were employed on any day in the preceding twelve months, nor to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or other construction work. The Government may relieve an employer from the notice requirement in exceptional circumstances such as an accident in the undertaking or the death of the employer.
- Notice and compensation to every affected worker. Where an establishment is closed down for any reason whatsoever, every worker in continuous service for not less than one year immediately before the closure is entitled to notice and compensation in accordance with the retrenchment provision, as if the worker had been retrenched. So the same one month's notice or wages in lieu, and the same fifteen days' average pay for every completed year of continuous service and any part over six months.
- Prior permission, but only for some establishments. The chapter that requires an employer to apply for prior permission at least ninety days before an intended closure applies to an industrial establishment which, for the purposes of that chapter, means a factory, a mine or a plantation, employing three hundred or more workers. An office in Bengaluru is outside it.
Where an undertaking is closed on account of unavoidable circumstances beyond the employer's control, the compensation is capped at the worker's average pay for three months. Employers reach for this. The Code then narrows it sharply by an Explanation: closure by reason merely of financial difficulties, including financial losses, or of accumulated undisposed stock, or of the expiry of a lease or licence, is not to be deemed closure on account of unavoidable circumstances. A loss making site does not attract the cap.
Closure or transfer
Where the business is not shut but sold or transferred, a different provision applies. On a transfer of the ownership or management of an establishment, whether by agreement or by operation of law, every worker with a year of continuous service immediately before the transfer is entitled to notice and compensation as if retrenched, unless three conditions are all met: the service has not been interrupted by the transfer, the terms and conditions after the transfer are not in any way less favourable, and the new employer is legally liable to pay retrenchment compensation on the basis that service has been continuous. Read a transfer letter against those three conditions before signing it, because the third one is the one usually missing.
What to do while the closure is being announced
- Ask in writing for the closure notice served on the appropriate Government, and its date
- Ask whether the site is being closed or the business transferred, and get the answer in writing
- Get the head by head computation: notice pay, closure compensation on years of service, leave encashment, gratuity, statutory bonus
- Check whether the re-skilling fund credit has been made, where the exit is treated as retrenchment
- Download payslips, appointment and revision letters and appraisals before your access is withdrawn
- Read any release clause in the settlement before signing, and diary the limitation periods that day
Gratuity is not part of closure compensation and is not traded off against it. It is payable on termination of employment after five years of continuous service, and the five year condition does not apply on death, disablement or the expiry of fixed term employment. The employer must determine the amount and pay within thirty days of it becoming payable, whether or not you applied, and simple interest runs on a delayed payment. Our note on gratuity under the Code on Social Security sets out the computation and the claim route.
Where the money is not paid
Money due under the lay-off, retrenchment and closure chapters can be recovered on an application to the appropriate Government, which certifies the amount to the Collector for recovery as an arrear of land revenue. That application should be made within one year of the money becoming due, extendable for sufficient cause. Where the closure itself is challenged, or where workers say it was a device to remove them, that is an industrial dispute, and the two year limit on conciliation and the ninety day limit for applying to the Tribunal both apply. Our guide on wrongful termination and employee rights in India sets out the sequence, and our overview of what the four labour codes changed for employees covers the wider restructuring.
One point for employees in Karnataka. Where the exit is really a dismissal presented as a closure, the appeal under the Karnataka Shops and Commercial Establishments Act, 1961 against removal without reasonable cause remains available on its own terms.