Adapting to change

It has been well known since ages that it is easy to open a company in India, but it is difficult to downsize it. Cost control is not the only factor that leads a company to downsize. Many times it is depleting efforts and unproductivity that force employers to take such steps. Downsizing is also done sometimes in order to restructure and revamp the whole setup, to increase company value, and reduce extra costs, etc. Companies downsize primarily to increase the peak of efficiency and productivity.

The effective way of downsizing is strategizing the whole process rather than mass terminations in one go, an absolute blunder many companies commit. Terminating managerial and administrative-level employees in private companies, as per India laws, is not difficult as they are governed by their contract of appointment and can be terminated as per clauses of the same. A contract of personal service, as per the Specific Relief Act, can't be enforced. This means managerial and administrative-level employees cannot seek reinstatement, backwages, etc. They can, at most, sue for damages, but that takes heaps of evidence to prove. Such categories can be sacked first, of course, based on performance, value additions, and other such considerations.

The issue arises when the concerned employee is a 'workman' as defined under the Industrial Disputes Act, 1947. The definition ropes in a variety of employees in the country. For such a category, the provision of retrenchment is to be followed, which includes giving 15-day wages for each completed year, notice/notice pay, etc. Furthermore, the last-come-first-go rule is to be complied with, which means the senior-most employee is retrenched last. In case the company plans to reopen, the retrenched worker has to be given an option to join back.

The legal framework is more complicated for factories, mines, and plantations that employ more than a prescribed number of workmen, i.e., one hundred, as permission from the government is required, which is given in the rarest of rare cases. In case the number is less than one hundred, no permission is required, only intimation is to be given. Some states like Uttar Pradesh have this number set at three hundred. No permission is required even for entities that are shops and establishments.

Mass terminations invite mass agitation, attract media attention, and can be grossly illegal, attracting major penalties. Rather than opting for mass terminations, separations should be done in batches. For instance, companies should shortlist probationary and fixed-term employees. For such employees, retrenchment is not required to be complied with. Termination of inefficient employees could be done thereafter by following the procedure. Companies may also offer some money to these employees so that they resign peacefully and do not enter into litigations.

Thereafter, the company may do away with other regular employees. For this category, VRS (voluntary retirement/resignation scheme), golden handshake, and other schemes are the best options. There may be a possibility that at first go, not all employees may apply. If that be so, companies may again reopen the scheme after a few days, as there could be a fair possibility of left over employees, looking at the condition of the company and in a tendency of bandwagonism, resigning and accepting the compensation. Speaking amicably to union leaders or kingpins helps. While there is no straightjacket formula, it is better to downsize strategically, rather than in one go.

Where permission from the government is not involved, carrying out retrenchment, or closing down such industries is not difficult. According to various pronouncements of the Supreme Court, the courts are not supposed to go into the bonafide of closure. Many times, companies in the process of downsizing commit grave mistakes like suspending a massive number of workers or transferring them to far-off places. Such acts should be avoided as they are ultimately held to be illegal by the courts and have serious financial consequences for the businesses. Mass severing exercises do run an inherent reputational and loss of goodwill risk. A proper scheme in this regard is usually drawn up to ensure that the downsizing process goes smoothly.

While generally, the endeavour of all is to avoid downsizing, however, at times such decisions are unavoidable. The legislature should consider easing retrenchment and closure laws to make it more lucrative for foreign investments. The threshold of a hundred, which in some states is three hundred, should be considered to be increased. There has been a spurt in employee downsizing. With correct laws and applicability, procedures can be simplified for both employers and employees.

The writer is a practising Advocate in Supreme Court and High Court of Delhi. Views expressed are personal