Employee Attrition and Retrenchment

Employee Attrition

Attrition in business describes a gradual but deliberate reduction in staff numbers that occurs as employees retire or resign and are not replaced. The term is also sometimes used to describe the loss of customers or clients as they mature beyond a product or company’s target market without being replaced by a younger generation.

How Attrition Works?

This type of reduction in staff is called a hiring freeze. It is one way a company can decrease labor costs without the disruption of layoffs.

Reducing staff by attrition naturally is less devastating to company morale. However, it can still have a negative impact on the remaining employees if it leads to an increase in their workload. It also can limit promotional opportunities and movement within the company, resulting in an unhappier workplace or more attrition than was intended.

About Customer Attrition

Attrition can also refer to a shrinking customer base. This, of course, is not deliberate. The word is most pertinent when used to describe a product whose customer base is shrinking because its loyal customers are aging and younger consumers are not taking their place.

Customer attrition is usually found when a company has failed to adapt its product to changing trends. The Sears department store chain and the Oldsmobile car brand might be examples of products that failed to capture a younger generation of customers.

 Because attrition is voluntary, as opposed to layoffs, it is seen as a less disruptive way for a company to decrease labor costs.

Attrition versus Layoffs

Changes in management, company structure, or other aspects of a company’s operations can cause employees to leave voluntarily, resulting in a higher attrition rate.

Laying off employees results in attrition as long as the company doesn’t immediately hire as many new employees as it laid off. For example, a company might reduce its administrative staff by six in order to create a new internet team of six.

Turnover occurs in a company for many reasons. It can only be called attrition if the company decides not to fill the vacated position.

When a company is faced with a financial crisis, it must make tough calls and cut back its workforce in order to stay afloat. In these cases, the company might implement a layoff with no intention of filling those positions again.

In less drastic cases, such as changes in the company structure or business model or a merger, certain departments are trimmed or eliminated. This usually requires layoffs rather than attrition.

Unlike layoffs, a reduction in staff due to attrition is voluntary. The employee has decided to take a new job, retire, or move to another new city. An attrition policy takes advantage of this inevitable changeover to reduce overall staff.

Employee Retrenchment

Retrenchment is a form of dismissal due to no fault of the employee, it is a process whereby the employer reviews its business needs in order to increase profits or limit losses, which leads to reducing its employees.

The employer must give fair reasons for making the decision to retrench and follow a fair procedure when making such a decision or the retrenchment may be considered unfair.

How retrenchment laws work in India?

The original legislation of 1947 does not have the definition of the word retrenchment; it was in 1953 that with an amendment Act this definition was inserted. It would also be interesting to know that till 1983 the courts of law used to consider termination of service due to nonrenewal of the agreement of employment as the act of retrenchment in pronouncements like of Hindustan Aluminium Corporation v. State of Orissa. later, the judgment was held to be a bad one and with the Amendment 49 of 1984 the provision of (bb) was inserted in the definition of retrenchment declaring such kind of termination not to be included within the ambit of retrenchment.

Retrenchment refers to discharge of surplus labour by the employer. It may be due to inevitable reasons including rationalization or installation of new labour-saving machinery. Retrenchment may also be said as the right of an employer. An employer has a right to organize his business in any lawful manner he considers best and courts cannot question its proprietary. If reorganization results in surplus employees, no employer is expected to carry their burden. There is a consensus of judicial opinion in deciding retrenchment on the facts and circumstances of each case. Courts have decided that termination of services is due to loss.

In the landmark case of State Bank of India v. Sundara Money, the Supreme Court adopted the literal meaning of retrenchment, which is exhaustive and comprehensive, and held that the expression “for any reason whatsoever” was very wide and admitted almost no exceptions to it. Therefore, the word retrenchment means termination of a worker’s services for any reason whatsoever other than those specified in section 2(oo) of the Industrial Dispute Act (IDA), 1947.

 Chapter V-A of the IDA requires an establishment employing 50 or more workers, in case of valid retrenchment to provide the workers with 30 days’ notice and 15 days’ pay for every year of continuous work by the workmen at the firm. In case of closure or sale, it must fulfil the same conditions unless the successor takes on these obligations. For an establishment employing 100 or more workers, the IDA, under Chapter V-B, requires prior permission from the Government before the firm’s closure or retrenchment.

The procedure of retrenchment has been given under Section 25G. It is when any workman in an industrial establishment, who is a citizen of India, is to be retrenched and he belongs to a particular category of workmen in that establishment, than in the absence of any such agreement between the employer and the workman in this behalf, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other workman. Section 25F of the IDA provides mandatory conditions for retrenchment of workers. It prescribes conditions to be obeyed for terminating services without conferring any right on the worker for permanent absorption. Any employee working in a firm for 240 days or more in the previous 12 months can in principle claim retrenchment compensation.

The employers in India have responded to the restrictive retrenchment laws in several ways including the greater use of contract, temporary and/or casual labour, the use of golden handshakes and setting up of production in the States where labour is not organized. The Government is pursuing privatization and disinvestment. Any anomaly in retrenchment laws, which addresses the basic functioning of companies, needs the immediate attention of lawmakers.

The legal requirements with respect to termination of services are more onerous once a company employs more than 100 employees. In terms of the IDA, if an industrial establishment employs more than 100 employees, it may not retrench, that is, terminate the services of any employee who has been in continuous service for not less than one year unless the (i) the employee has been given three months’ notice indicating the reason for retrenchment and the period of notice, and (ii) the prior permission of the concerned State Government has been obtained for the retrenchment (Section 25N of the IDA).

Moreover, if the permission is not obtained, the retrenchment will be deemed to be illegal from the date on which the notice was given and the employee will be entitled to all the benefits under law as if no notice had been given to him. From a practical standpoint, obtaining the State Government’s approval for retrenchment is considered nearly impossible due to the implications of the resulting unemployment. Therefore, companies rarely apply to the State Government for permission for retrenchment. Penalty for contravening the aforesaid provisions on retrenchment is imprisonment up to one month or fine which may extend to Rs 1,000, or with both. Assuming that the State Government’s approval is obtained, the services of the employees can be terminated upon provision of three months’ prior notice and payment of 15 days’ average pay for each completed year of service in excess of six months.