India — Termination & Severance

Termination and severance protections in India are primarily governed by the Industrial Disputes Act, 1947 (the "ID Act"), a central legislation enacted to provide investigation and settlement of industrial disputes and to protect workers from arbitrary dismissal, retrenchment, layoff, and closure. The ID Act extends to the whole of India and came into force on 1 April 1947.

The ID Act consolidates multiple employer obligations into a comprehensive framework. "Retrenchment" is defined broadly under section 2(oo) to include the termination by the employer of the service of a workman for any reason whatsoever, other than as a punishment inflicted by way of disciplinary action, and subject to specific statutory exceptions. The ID Act distinguishes between "appropriate Government" authority—Central Government for industries such as those carried on by or under the authority of the Central Government, railways, and certain controlled industries; State Government for other industrial establishments.

Chapter VA of the ID Act (sections 25A through 25J) governs conditions precedent to layoff and retrenchment for establishments employing fewer than 100 workers. Section 25F establishes three mandatory conditions for retrenchment: (a) one month's notice in writing indicating the reasons for retrenchment, or wages in lieu of notice; (b) retrenchment compensation equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months; and (c) notice served on the appropriate Government or specified authority. These protections apply to any workman who has been in continuous service for not less than one year.

Chapter VB (sections 25K through 25R) imposes stricter requirements for larger establishments—those employing 100 or more workers on any day of the preceding twelve months. Under section 25N, no workman employed in such an industrial establishment who has been in continuous service for not less than one year may be retrenched until: (a) the workman has been given three months' notice in writing indicating the reasons for retrenchment, or wages in lieu of such notice; and (b) prior permission of the appropriate Government or specified authority has been obtained. The government or specified authority must conduct an inquiry, afford a hearing to the employer, the workmen concerned, and other interested persons, and then grant or refuse permission by order with reasons in writing, having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the workmen, and all other relevant factors. If the government does not communicate its decision within sixty days from the date of application, permission is deemed granted. Section 25Q prescribes penalties—imprisonment for a term which may extend to one month, or fine which may extend to one thousand rupees, or both—for an employer who contravenes section 25N.

Section 25FFF addresses closure compensation. Where an undertaking is closed down for any reason whatsoever, every workman who has been in continuous service for not less than one year immediately before closure is entitled to notice and compensation in accordance with section 25F (as if retrenched). However, where the closure is on account of unavoidable circumstances beyond the control of the employer, the compensation shall not exceed the worker's average pay for three months. Financial difficulties (including financial losses) and accumulation of unsold stocks do not, by themselves, constitute unavoidable circumstances beyond the employer's control.

The Industrial Relations Code, 2020 (the "IR Code") was enacted to consolidate and simplify three central labour statutes: the Industrial Disputes Act 1947, the Trade Unions Act 1926, and the Industrial Employment (Standing Orders) Act 1946. The IR Code was passed by the Lok Sabha on 22 September 2020, by the Rajya Sabha on 23 September 2020, and notified in the Gazette on 29 September 2020. The IR Code raises the establishment-size threshold requiring government permission for retrenchment from 100 workers to 300 workers, expands the definition of "worker" to include sales promotion employees, working journalists, and supervisory employees earning up to ₹18,000 per month, and provides a uniform definition of "wages" with a 50% ceiling on exclusions to ensure retrenchment compensation is calculated on a fair and substantial portion of actual earnings.

As of May 2026, the IR Code has not yet come into effect. "Labour" is a subject in the Concurrent List of the Constitution of India, and implementation requires both Central and State Governments to finalize and notify rules. The Central Government pre-published draft rules under the IR Code; however, full implementation awaits coordinated State rule-making. Until the IR Code is notified and brought into force, the Industrial Disputes Act 1947 remains the operative statute governing termination, retrenchment, layoff, and closure across India.

Employers hiring in India for the first time should design termination procedures, severance calculations, and prior-approval workflows around the ID Act's Chapter VA and VB requirements, noting that larger establishments (100+ workers) face the three-month notice period and mandatory government-permission hurdle for retrenchment, and that closure triggers separate compensation obligations under section 25FFF even when the employer ceases operations entirely.

Source: The Industrial Disputes Act, 1947 Source: Industrial Disputes Act, 1947 (full text) Source: Industrial Relations Code, 2020 (Press Information Bureau) Source: Implementation of Labour Codes (PIB release)

As of May 2026, India’s regime for dismissal for misconduct has undergone a significant statutory shift with the operationalization of the Industrial Relations Code, 2020 ("IR Code") and the notification of the Industrial Relations (Central) Rules, 2026 alongside the Model Standing Orders, 2026. This new framework supersedes the Industrial Employment (Standing Orders) Act, 1946 and the Industrial Employment (Standing Orders) Central Rules, 1946 on all matters now governed by the IR Code and its Model Standing Orders.

Statutory exclusion from retrenchment requirements: Section 2(oo) of the Industrial Disputes Act, 1947 (and its cognate provision in the IR Code) continues to exclude dismissal for misconduct—i.e., termination as a punishment following disciplinary proceedings—from the statutory definition of "retrenchment." Accordingly, such dismissals remain exempt from the notice, severance, and government-permission requirements applicable to retrenchment under sections 25F/25N of the ID Act (or their IR Code equivalents). This structural exclusion has not changed: if the employer dismisses a worker for proven misconduct following a valid disciplinary process, no retrenchment compensation, statutory notice, or prior government approval is mandated under central law for the dismissal itself.

Procedural and fairness guarantees under the IR Code and the Model Standing Orders, 2026: What has changed is the procedural law governing how disciplinary dismissals must be conducted. Under the now-operative Industrial Relations (Central) Rules, 2026 and the Model Standing Orders, 2026 (notified 8 May 2026), all establishments and workers to which the IR Code applies must now follow the rules, process, and procedural safeguards specified in the 2026 Model Standing Orders (or applicable state variants or certified standing orders).

These Model Standing Orders prescribe:

• Formal identification and communication of alleged misconduct in writing to the worker;
• Opportunity for the worker to respond to the allegations and participate in a domestic (departmental) enquiry;
• The right to assistance and a representative during the enquiry;
• Maintenance of a written record of proceedings;
• Substantive findings of guilt before the imposition of any punishments, including dismissal (see Chapter 6 of the Model Standing Orders, 2026, "Disciplinary Action and Procedure");
• Provision of enquiry outcome and reasoning to the worker.

Dismissal for misconduct without compliance with these procedures is unlawful, and Labour Courts/Industrial Tribunals retain authority under the IR Code to set aside such dismissals, order reinstatement, or grant other remedies. Notably, the IR Code maintains the principle that all dismissals—even for misconduct—must comply with the principles of natural justice as recognized in leading Supreme Court and High Court decisions interpreting the predecessor statutes.

Transitional guidance: Establishments and practitioners should discontinue reference to the Industrial Employment (Standing Orders) Act or the Central Rules of 1946 for current compliance purposes, except as historical context or where state rules delay IR Code adoption. For all Central Government and most states/jurisdictions, as of May 2026, disciplinary dismissal must be assessed, documented, and executed in compliance with the Model Standing Orders, 2026 and any certified or state-modified standing orders adopted under the new Code.

If a certified standing order is in force for a particular establishment and has been confirmed under the IR Code, its procedures prevail to the extent they are not inconsistent with the core natural justice requirements enshrined in the Code and Model Standing Orders.

In summary: dismissal for misconduct remains outside the retrenchment protections of the central labour statutes—but the operative procedural rules are now those of the IR Code and Model Standing Orders, 2026, not those of the 1946 central rules.

Source: Industrial Disputes Act, 1947 — Section 2(oo) (gov.in) Source: Industrial Relations (Central) Rules, 2026 — Model Standing Orders notification

The Industrial Disputes Act, 1947 (ID Act) imposes mandatory minimum notice periods for retrenchment that vary by establishment size. The notice requirement is distinct from severance compensation and from the prior-government-permission threshold; an employer must satisfy all three conditions before a lawful retrenchment can take effect.

## One-month notice for smaller establishments — section 25F(a)

Section 25F(a) of the ID Act provides that no workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until "the workman has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice."

This provision applies to establishments employing fewer than 100 workers on any day in the preceding twelve months. The notice must be in writing, must state the reasons for retrenchment, and must specify the period of notice. If the employer chooses not to require the workman to serve out the notice period, the employer may pay wages in lieu of notice for the full one-month period. The payment in lieu is due at the time of retrenchment, together with the retrenchment compensation mandated by section 25F(b).

Continuous service for not less than one year is the qualifying threshold. Under section 25B of the ID Act, a workman is deemed to have been in continuous service for one year if the workman has worked for a period of 240 days in the twelve months immediately preceding the date of retrenchment. The 240-day calculation includes periods of lay-off, authorized leave, and interruptions due to strikes and lock-outs that did not break the employer–employee relationship.

## Three-month notice for larger establishments — section 25N(1)(a)

Section 25N(1)(a) of the ID Act, which governs establishments employing 100 or more workers on any day in the preceding twelve months (Chapter VB), raises the minimum notice period to three months. The section provides that no workman employed in such an industrial establishment who has been in continuous service for not less than one year shall be retrenched until "the workman has been given three months' notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice."

The three-month notice applies in addition to the government-permission requirement under section 25N(1)(b). An employer who obtains government permission for retrenchment but fails to provide the three-month notice (or pay wages in lieu) has not complied with the statute.

As with section 25F(a), the employer may elect to pay wages in lieu of the three-month notice period rather than requiring the workman to serve out the notice. The payment in lieu must be made at the time of retrenchment, together with the fifteen days' average pay per completed year retrenchment compensation prescribed by section 25N(9).

## Payment in lieu of notice: wages for the notice period

The statutory language — "wages for the period of the notice" — is the formula specified in both sections 25F(a) and 25N(1)(a). The statute does not define the precise calculation methodology for converting the notice period into a lump-sum payment, and practice varies. The term "wages" as defined in section 2(rr) of the ID Act typically includes basic wages and dearness allowance but excludes certain other components; employers and tribunals apply that definition by analogy when computing payment in lieu of notice.

The payment-in-lieu mechanism allows the employer to effect an immediate separation without requiring the workman to continue working during the notice period. However, if the employer elects to give notice rather than pay in lieu, the full notice period must run. If the employer dismisses the workman before the notice period expires without paying wages in lieu for the remaining period, the retrenchment may be challenged as non-compliant with section 25F(a) or 25N(1)(a).

## Distinction from ordinary termination notice under standing orders

The notice requirements in sections 25F(a) and 25N(1)(a) apply specifically to retrenchment — the termination of a workman for any reason whatsoever other than as punishment inflicted by way of disciplinary action, and excluding the statutory exceptions listed in section 2(oo) (voluntary retirement, superannuation, non-renewal of a fixed-term contract, continued ill-health).

Ordinary termination notice for non-retrenchment scenarios (resignation by the workman, mutual termination by agreement) is governed by the Industrial Employment (Standing Orders) Act, 1946 and the certified standing orders applicable to the establishment. The model standing orders typically prescribe notice periods for resignation or termination, but these standing-order notice periods do not apply to retrenchment; the statutory retrenchment-notice periods in sections 25F and 25N control.

Conversely, dismissal for misconduct following a disciplinary inquiry under the standing orders is excluded from the definition of "retrenchment" by section 2(oo) and therefore does not trigger the one-month or three-month retrenchment-notice requirement. An employer who has conducted a valid departmental inquiry in accordance with the principles of natural justice and the certified standing orders may dismiss a workman for proven misconduct without statutory retrenchment notice.

## Interaction with contractual notice provisions

Employment contracts in India frequently specify notice periods for termination by either party. Where the contract specifies a notice period longer than the statutory minimum, employers typically honor the longer contractual period to avoid contract-breach claims. Where the contract specifies a notice period shorter than the statutory minimum, the statutory minimum prevails, because the ID Act is protective legislation and its floor cannot be waived by contract. For example, a contract stating "one month's notice by either party" cannot reduce the three-month retrenchment-notice requirement under section 25N for an establishment with 100 or more workers.

## Practical guidance for cross-border employers

Count the workforce on any day in the preceding twelve months to determine whether the establishment is subject to Chapter VA (< 100 workers, one-month notice under section 25F) or Chapter VB (≥ 100 workers, three-month notice under section 25N, plus government-permission requirement).

Verify continuous service: the workman must have worked 240 days in the twelve months immediately preceding retrenchment to qualify for notice and retrenchment compensation protections under section 25B.

Draft the notice in writing, state the reasons for retrenchment, and specify the notice period. If you elect to pay in lieu, tender wages for the statutory notice period (one or three months) at the time of retrenchment, together with retrenchment compensation.

Do not conflate retrenchment notice with standing-order notice. Retrenchment (termination for economic or operational reasons) triggers sections 25F/25N. Resignation, mutual separation, and lawful dismissal for misconduct do not.

For establishments with 100+ workers, the three-month notice is only one of two conditions precedent: you must also obtain prior permission from the appropriate government or specified authority under section 25N(1)(b) before the retrenchment can take effect.

Source: Industrial Disputes Act, 1947 — Section 25F, Chapter VA (Delhi Labour Department) Source: Industrial Disputes Act, 1947 — Section 25N, Chapter VB (Delhi Labour Department) Source: Industrial Disputes Act, 1947 — Section 25N (Income Tax India official compilation)

Section 25F(b) of the Industrial Disputes Act, 1947 (ID Act) establishes the statutory retrenchment compensation formula: before terminating a workman by retrenchment, an employer must pay "compensation which shall be equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months." This formula applies to all covered industrial establishments, with Chapter VB layering additional administrative requirements (but not altering the compensation quantum) for establishments with 100 or more workers.

Calculation of compensation:

• The basic formula: fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months (e.g., 4 years, 7 months’ service is treated as 5 years for compensation—partial years over six months round up).

Averaging method:

• "Average pay" is defined in section 2(aaa) of the ID Act:
• For monthly-paid workmen: average wages in the three complete calendar months before retrenchment;
• For weekly-paid: average of the last four full weeks;
• For daily-paid: average of the last twelve full working days.
• The definition excludes bonuses, overtime, or other allowances not forming part of the regular wage (per section 2(aaa)).

Continuous service requirement:

• A workman must have completed at least one year of continuous service (deemed fulfilled if at least 240 days actually worked in the previous twelve months, per section 25B) to qualify for compensation.

Large establishments (Chapter VB, section 25N(9)):

• For industrial establishments with 100 or more workers, section 25N(9) imposes the same compensation quantum as section 25F(b), but with prior government permission and three months’ notice also required.

Timing:

• Compensation must be paid at the time of retrenchment—delays or non-payment may invalidate the termination and trigger reinstatement or liabilities.

Favorable contract or state law:

• Any more favorable severance term in contract or state law prevails over the ID Act minimum (section 25J).

Worked example:

• A monthly-paid workman with 4 years and 7 months' service (average pay for last 3 months = ₹20,000/month): qualifying service is 5 years. Compensation = 15 days × 5 = 75 days’ pay = (75÷30) × ₹20,000 = ₹50,000.

Source: Industrial Disputes Act, 1947 — Section 25F(b) (legislative.gov.in) Source: Industrial Disputes Act, 1947 — Section 2(aaa) (average pay definition); Section 25N(9)

Indian labour law establishes both categorical bars and heightened procedural safeguards against termination for certain worker groups—most centrally, women on maternity leave, workmen designated as “protected workmen” during industrial-dispute proceedings, and workers on certified medical absence. These obligations exceed the baseline retrenchment protections of the Industrial Disputes Act, 1947 (ID Act), and, since November 21, 2025, are primarily sourced in the Code on Social Security, 2020 (SS Code).

Women on maternity leave: categorical bar on dismissal With the effective repeal and consolidation of the Maternity Benefit Act, 1961 into the SS Code (Sections 60, 68 & 72, effective 21 November 2025), the core prohibition remains: “No employer shall, during the period of [maternity] absence, discharge or dismiss her” (SS Code s. 68). If a woman is dismissed during this period, she is entitled to all maternity benefits and medical bonus (s. 68(2)), and dismissal for gross misconduct is permitted only after due inquiry (s. 68(3)), in which case she remains entitled to accrued benefit up to the actual date of dismissal. This operates as a substantive bar, not just a procedural protection, and is now under the SS Code for all terminations after the effective date.

Protected workmen (trade union office-bearers): prior approval requirement during disputes The parallel rule under Section 33 of the ID Act remains: an employer may not dismiss or alter the conditions of service of a "protected workman" during the pendency of any industrial dispute without explicit permission from the designated Labour Court, Tribunal, or Arbitrator. Under the Industrial Disputes (Central) Rules, 1957 (rule 61), this applies to 1% of the establishment's workforce (minimum five, maximum 100) as designated union officials. Permission can be granted on just cause, but unilateral action during dispute pendency is barred.

Certified sick leave: protection of continuous service, not absolute bar Neither the ID Act nor the Industrial Employment (Standing Orders) Act, 1946 imposes an absolute bar against dismissal during certified sick leave. However, section 25B of the ID Act and the model/certified standing orders provide that authorised sick leave counts toward "continuous service" for retrenchment notice and compensation eligibility. Wrongful dismissal during sickness may be challenged as an unfair labour practice, but there is no codified ban—Labour Court relief turns on facts and demonstrated unfairness.

Summary for practitioners:

• Do not dismiss a woman while she is on maternity leave (now per SS Code, s. 68, post-Nov 2025), except for gross misconduct after inquiry.
• Do not discipline or discharge a protected workman during an active industrial dispute without written permission from the tribunal (ID Act, s. 33; Central Rules, rule 61).
• Count sick leave towards continuous service; dismissal during sick leave is not strictly barred but must be demonstrably fair and lawful.

Source: Code on Social Security, 2020 — Section 68 (maternity dismissal protection, effective Nov 2025) Source: Industrial Disputes Act, 1947 — Section 33; Industrial Disputes (Central) Rules, 1957 — rule 61 Source: Industrial Employment (Standing Orders) Act, 1946

Section 25M of the Industrial Disputes Act, 1947 (“ID Act”) governs the procedural requirements for mass layoff and collective redundancy in industrial establishments employing 100 or more workmen (on any day in the preceding twelve months). Chapter VB (Sections 25K–25S) applies to factories, mines, and plantations meeting this threshold.

Scope of the rule: Per Section 25K, the special layoff and retrenchment provisions of Chapter VB apply to "industrial establishments" with 100 or more workmen. Section 25M specifically applies to “lay-off” of workmen other than badli (substitute) or casual workers, for reasons including shortage of power, raw materials, accumulation of stocks, breakdown of machinery, or natural calamity. Layoff, as defined, is the employer’s inability or refusal to provide employment due to such conditions (Section 2(kkk), Section 25M(1)).

Prior permission required: No employer can lay off workmen in these establishments without prior written permission from the appropriate government or specified authority. The employer must apply in the prescribed manner, explaining the reasons for the intended layoff (Section 25M(1),(2)). The Government must inquire with all concerned parties (employer, workmen, and others) and either grant or refuse permission, giving reasons in writing.

Deemed permission: If no order is communicated within sixty days of the application, permission is deemed granted by law (Section 25M(4)). Any layoff carried out without permission is deemed illegal, and the workmen are entitled to full benefits as if no layoff occurred (Section 25M(8)).

Exceptions: Layoffs due to power failure or natural calamity do not require prior permission at the outset, but if the layoff period exceeds thirty days, formal permission must be requested as soon as possible (Section 25M(1), second proviso).

Compensation during layoff: Workmen laid off with permission (or deemed permission) are entitled to compensation as per Section 25C: 50% of total basic wages and dearness allowance for all layoff days, unless excluded from compensation under Section 25C or 25M(10).

Penalties: Contravention of Section 25M (i.e., layoff without permission) is punishable under Section 25Q by imprisonment up to one month, or fine up to one thousand rupees, or both.

Threshold change (pending): The Industrial Relations Code, 2020 proposes to raise the size threshold for government permission from 100 to 300 workers, but this is not yet in force as of June 2026.

Source: Industrial Disputes Act, 1947 — Section 25M (legislative.gov.in) Source: Industrial Disputes Act, 1947 — Chapter VB, Section 25K and 25M (Puducherry Labour)

Section 2A of the Industrial Disputes Act, 1947, grants an individual workman a direct right to challenge termination, dismissal, discharge, or retrenchment before a Labour Court or Industrial Tribunal. Under Section 2A(1), such disputes are expressly “deemed to be an industrial dispute,” even if no trade union or co-worker sponsors the claim. This was a major legislative shift: it removed the requirement for union participation in dismissal disputes, ensuring that an individual worker—dismissed, retrenched, or otherwise terminated—may initiate industrial-dispute proceedings on their own.

Section 2A(2) mandates a strict time bar: any application to the Labour Court or Tribunal under this section must be presented within three years from the date of dismissal, retrenchment, discharge, or termination. Applications filed after three years are generally not maintainable under the statute.

The effect is procedural, not substantive: Section 2A enables the worker to approach the relevant forum directly, and, once seised, the Labour Court or Tribunal determines whether the termination was lawful under the criteria set out elsewhere in the Industrial Disputes Act and related statutes (e.g., proper notice under section 25F or 25N, compliance with standing orders, protected categories). Remedies and substantive rights arise under the wider Act; Section 2A simply ensures the ability to bring the dispute forward as an “industrial dispute” in its own right.

Employers operating in India must recognize this procedural access—a worker whose employment is terminated can unilaterally commence proceedings before a Labour Court or Tribunal, without the need for union intervention, provided they act within the statutory three-year window.

Source: Industrial Disputes Act, 1947 — Section 2A (individual disputes deemed industrial disputes)

Employers in India who fail to observe the statutory conditions for retrenchment—including giving required notice, paying retrenchment compensation, or obtaining prior government permission when mandated—remain subject to both criminal penalties and substantial Labour Court remedies under the Industrial Disputes Act, 1947 (ID Act). Recent amendments through some state notifications now allow certain violations to be compounded, materially changing compliance and enforcement outcomes.

1. Statutory offences and criminal penalties (Sections 25Q, 25U) Section 25Q of the ID Act makes it a criminal offence for an employer to contravene the requirements of Sections 25F, 25N, or 25M (covering notice, government permission for retrenchment, and layoff authorization in large establishments). Penalties include imprisonment up to one month or a fine up to one thousand rupees, or both. Section 25U imposes identical penalties on employers for "unfair labour practices" detailed in the Fifth Schedule, including dismissing workmen in bad faith or for union activity.

2. Compounding of offences (new enforcement mechanism) Recent statutory amendments in several Indian states have introduced the ability to "compound" offences under Sections 25Q and 25U via Section 31A, allowing settlement of certain violations by payment of a prescribed sum in lieu of criminal prosecution. For example, the Arunachal Pradesh amendment (October 2020) allows compounding on payment of 25 days’ wages for each workman affected by a Section 25Q offence. Other states may specify different rates or procedures. Employers should carefully check the operative text of the ID Act as amended for the relevant location. This compounding authority provides a significant alternative to prosecution and should be assessed as part of compliance and risk management for any contemplated mass retrenchment or layoff.

3. Labour Court remedies: reinstatement and back wages The most impactful practical remedies remain those awarded by Labour Courts. Under Section 2A, individual workmen can challenge their retrenchment directly. If the Labour Court finds statutory retrenchment requirements unmet, it typically deems the termination invalid. Usual remedies include:

• Reinstatement: Return to employment with continuity of service.
• Back wages: Potential award for unpaid wages between the date of illegal termination and reinstatement, subject to deductions and judicial discretion (see Supreme Court rulings such as Deepali Gundu Surwase (2013) 10 SCC 324).
• Compensation in lieu of reinstatement: Where practicalities prevent return to work, tribunals may order monetary compensation greater than statutory retrenchment pay.

4. Strict compliance and material note Statutory conditions in Sections 25F, 25N, and 25M are strictly interpreted; procedural errors, shortfalls, or non-compliance typically lead to adverse orders. Payment of statutory dues after-the-fact does not cure the original defect. Employers must now also review state-level compounding rules as these materially alter consequences and enforcement approaches for certain offences.

Update (June 2026): Compounding provisions under Section 31A have materially changed enforcement for offences under Sections 25Q and 25U in several states. Check local ID Act amendments.

Source: Industrial Disputes Act, 1947 — Section 25Q, 25U, 31A; state amendments Source: Industrial Disputes Act, 1947 — full text incl. remedies and state compositions

Indian law expressly distinguishes the non-renewal or expiry of a fixed-term employment contract from "retrenchment" under the Industrial Disputes Act, 1947 (ID Act). This distinction directly affects statutory notice, severance, and, most recently, gratuity obligations for employers.

Section 2(oo) exclusion under the ID Act Section 2(oo) of the ID Act defines retrenchment widely but carves out (since the 1984 amendment) "termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein." As a result, when a fixed-term contract naturally expires, or is ended in accordance with a specific clause, this does not amount to “retrenchment.” Accordingly, statutory retrenchment notice, severance compensation, and government permission requirements of Sections 25F, 25N, or 25M are not triggered, so long as the fixed-term structure is bona fide and not a device to circumvent employee protections.

2025 Labour Codes and gratuity entitlement (material change) As of November 21, 2025, the central government brought into force the four Labour Codes, including the Code on Social Security, 2020. The new regime retains the previous exclusion of fixed-term contract expiry from “retrenchment” but introduces a clear, material new obligation: fixed-term employees are now statutorily entitled to pro-rata gratuity at contract expiry, regardless of service length (Section 53 of the Social Security Code, 2020). The five-year minimum service requirement for gratuity that previously applied is expressly waived for fixed-term employees. The Code also explicitly preserves the rule that contract expiry/non-renewal is not retrenchment for notice, severance, or government approval purposes.

Judicial interpretation and compliance caveats

• Early termination: If an employer ends the contract before expiry and the contract does not contain a stipulation permitting termination, courts may treat the event as retrenchment, potentially triggering ID Act (or Labour Codes) protections.
• Serial renewals: If fixed-term contracts are successively rolled over so as to mimic continuous service, courts may look through the form and treat the employment as regular/indefinite, ignoring the section 2(oo)(bb) exclusion.
• Local law overlay: Sectoral/State laws or collective agreements may create further protections not displaced by the Codes.

Summary of the current rule:

• Expiry or non-renewal of a bona fide fixed-term contract is not "retrenchment"—no ID Act/Labour Code retrenchment notice, severance, or government approval is due.
• From November 21, 2025, pro-rata gratuity is owed at expiry, regardless of the five-year threshold.
• Early termination or misuse of fixed-term rollovers can still attract statutory protection or litigation.

Sources: Source: Industrial Disputes Act, 1947 — Section 2(oo) definition of 'retrenchment', exclusion for fixed-term contracts Source: Code on Social Security, 2020 — Section 53, pro-rata gratuity for fixed-term employees (legislative.gov.in)

The Industrial Disputes Act, 1947 (ID Act) protects “workmen”—a defined statutory class engaged in manual, technical, operational, or clerical work. However, most of the Act’s safeguards for retrenchment, notice, and severance do not extend to employees working mainly in a managerial or administrative capacity, or to supervisors earning above a wage threshold set by government notification.

Definition of “workman” and exclusions Section 2(s) of the ID Act defines "workman" as any person employed to do manual, unskilled, skilled, technical, operational, clerical, or supervisory work for hire or reward. The definition expressly excludes those employed in a managerial or administrative capacity, and those performing supervisory functions who draw wages above the threshold prescribed by the Central Government. The current central wage limit is Rs. 10,000 per month, as introduced by the 1982 amendment, but practitioners should always check for later central notifications or amendments as this figure may be revised.

Legal consequences of exclusion If an employee falls outside the "workman" definition—due to managerial status, administrative duties, or supervisory wages exceeding the notified ceiling—they are not entitled to statutory retrenchment notice, government permission before termination, or mandatory severance compensation under the ID Act (sections 25F, 25N, 25M). Instead, termination is governed by contract law, notably the Indian Contract Act, 1872: the courts enforce the terms of the employment contract (including notice or severance provisions), and remedies for breach are limited to damages rather than reinstatement or statutory compensation. Labour Courts under the ID Act do not have jurisdiction for these disputes.

Operational guidance

• Evaluate actual job content, not just title—Indian courts look through labels to duties performed. For example, a “manager” conducting mainly routine supervision and clerical tasks, or not exercising genuine managerial authority, may still qualify as a workman if earning under the wage cap.
• Keep documentation of job roles and salary structures, and check the latest central government notifications for the supervisory wage bar before excluding staff from ID Act coverage.
• For non-workmen, set out clear notice and severance terms by contract. Disputes will be heard in civil court rather than a Labour Court, and only contract damages are typically available.

Summary: Protections for termination and severance under the ID Act center on the statutory “workman”. Managerial, administrative, and highly-paid supervisory staff do not receive these statutory protections—and must rely on contract law and civil remedies. The statutory wage threshold may be updated by central notification; practitioners should confirm the applicable figure at the time of termination.

Source: Industrial Disputes Act, 1947 — Section 2(s) definition of "workman"

Section 25FFF of the Industrial Disputes Act, 1947 (ID Act) sets out the employer’s core legal obligations when permanently closing down an undertaking or part thereof. "Closure" is defined under section 2(cc) as the permanent shutting down of a place of employment, and is legally distinct from "retrenchment" (individual or group terminations for reasons other than misconduct).

Compensation on closure: Every workman who has been in continuous service for not less than one year immediately before the date of closure is entitled to notice and compensation as if retrenched under section 25F: that is, fifteen days’ average pay for each completed year of continuous service, or any part thereof exceeding six months. This compensation is payable unless the closure is due to "unavoidable circumstances beyond the control of the employer." If so, the employer's compensation liability is capped at an amount not exceeding three months’ average pay (per the second proviso to section 25FFF(1)). The statute is explicit that certain events—financial difficulties, accumulation of stock, expiry of lease—do not, by themselves, constitute "unavoidable circumstances."

Procedural requirements: Section 25FFF itself does not impose a minimum period for government notice or prior approval requirements. However, employers are generally required to notify the "appropriate government" authority about a closure under section 25FFA, usually in the manner and within the period prescribed by relevant central or state rules—but the specific notice period (such as 60 days) is not stated in section 25FFF and may vary by state. The ID Act does not require advance government "permission" for closure under section 25FFF, as it does for certain large industrial establishments under section 25O.

Summary:

• Pay statutory compensation (fifteen days' pay per year of service; cap of three months’ pay for closure from truly unavoidable causes) to each eligible workman.
• Notify government as prescribed (timing and form as set out in section 25FFA and rules), but section 25FFF is silent on the precise procedure or timeline.
• No requirement for prior government approval under section 25FFF itself; separate regime under section 25O applies to large factories, mines, and plantations only.

Employers must read state rules and amendments alongside the central Act, as federal structure may create additional procedural steps for certain sectors or locations. For the core rule on compensation, however, section 25FFF is the controlling provision for most closures unrelated to large factories, plantations, or mines.

Source: Industrial Disputes Act, 1947 — Section 25FFF (closure)

June 2026 material update:

With effect from 21 November 2025, the Industrial Relations Code, 2020 ("IR Code") has come into force, repealing the core provisions of the Industrial Disputes Act, 1947 ("ID Act") as regards retrenchment, layoff, and closure in industrial establishments. The IR Code materially increases the threshold for mandatory prior government permission under Chapter V‑B from 100 or more workers to 300 or more workers. As of this publication (June 2026), the operative rule is:

Prior governmental permission for retrenchment, layoff, and closure is now required only for industrial establishments employing 300 or more workers on any day in the preceding twelve months.

• The process requires the employer to apply in writing to the “appropriate government” stating the reasons for retrenchment, layoff, or closure; an order must be issued (granting or refusing permission) within sixty days, or permission is deemed granted by law if no decision is issued in that time.
• Affected workmen must have at least one year of continuous service to qualify for statutory protections. The three core requirements remain: (1) at least three months’ notice in writing or wages in lieu; (2) retrenchment compensation of fifteen days’ average pay per completed year of service; (3) prior written governmental permission at the revised threshold.
• Unauthorized retrenchment, layoff, or closure is void and attracts the penalties provided in the IR Code.
• The IR Code also permits states to further raise (but not lower) the threshold for government permission, so always check for operative State amendments or notifications in the establishment’s location.

Transitional provision: Establishments previously subject to Chapter V‑B of the ID Act at the 100‑worker threshold should re‑evaluate their compliance flows based on the IR Code. Where state amendments under the repealed ID Act had provided for a higher threshold, or new state IR Code rules have since been notified, practitioners must confirm the local rule.

Summary:

• As of June 2026, the government-permission threshold is 300 workers nationwide under the IR Code, except where a State has adopted a higher threshold.
• The historic 100‑worker threshold in the ID Act has been expressly superseded.

Source: Industrial Relations Code, 2020 — s. 77, s. 78, s. 79 (legislative.gov.in) Source: Press Information Bureau — Labour Codes implementation (Nov 2025) Source: India Ministry of Labour & Employment — IR Code Rules 2025 (MOLE)

Section 25-O of the Industrial Disputes Act, 1947 (ID Act) governs the permanent closure of factories, mines, and plantations in India that employ 100 or more workmen on any day in the preceding twelve months. This regime sits separately from the general closure provision of Section 25FFF and imposes a strict, mandatory government-permission requirement—a major compliance hurdle for large employers.

Permission application process:

• The employer must apply to the “appropriate government” (statutorily defined, typically the State Labour Department or the Central Ministry of Labour, but this should be verified for each case) at least 90 days before the intended closure date (Section 25-O(1)).
• The application must clearly state the reasons for the intended closure and be served simultaneously on the workers’ representatives.
• The government conducts an inquiry into the validity of the reasons provided, gives both employer and workmen an opportunity to be heard, and must communicate an order (granting or refusing permission) within 60 days. If no order is issued, permission is deemed granted (Section 25-O(3)).

Consequences and worker protection:

• Any closure effected without permission is void; the undertaking is legally deemed open, and affected workmen are entitled to full wages and benefits as if no closure had occurred (Section 25-O(6)).
• When permission is granted (express or deemed), eligible workmen (at least one year of continuous service) are entitled to notice and compensation as if retrenched. Section 25-O(8) cross-refers to the Section 25N(9) formula: “fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months.”
• Orders (granting or refusing permission) are binding for one year, unless revoked or modified due to changed circumstances (Section 25-O(7)).

Strict enforcement and penalties:

• Breach of Section 25-O attracts criminal penalties under Section 25R: imprisonment up to six months and/or fine up to five thousand rupees.

Who is covered:

• Applies only to factories, mines, or plantations meeting the 100-worker threshold—other undertakings fall under the general closure requirements (Section 25FFF).
• The pending Industrial Relations Code, 2020 proposes to raise the threshold to 300 workers, but as of June 2026, Section 25-O remains operative and enforceable at the 100-worker threshold.

Practical guidance: Foreign employers shutting down large operations in India must not simply provide notice to workers or the government; they must apply for and receive written government permission to lawfully close the establishment. Any closure without this is void and exposes the employer to wage liability and prosecution, regardless of the business rationale.

Source: Industrial Disputes Act, 1947 — Section 25O: closure of undertaking by large establishments

## The legal landscape: central versus state laws on termination

In India, "labour" is a subject in the Concurrent List under the Constitution (Schedule VII, List III, entry 22). This means both Parliament and individual State Legislatures can enact laws governing employment termination, retrenchment, layoff, and closure. The Industrial Disputes Act, 1947 (ID Act) is a central law, but States may—and often do—modify or add to these rules by amendment or State-specific notifications.

What practitioners must know

• State amendments prevail within that State: Section 2A and the main termination and retrenchment rules (sections 25F, 25N, 25M, 25O, 25Q) are frequently amended by State laws or notifications. For example, as of June 2026, states like Rajasthan, Madhya Pradesh, Gujarat, and Uttar Pradesh have raised the threshold for prior government permission for retrenchment/layoff/closure under Chapter VB from 100 to 300 workers—by amending the central Act as it applies within their state. Other states may impose stricter advance-notice, extra severance, or industry-specific standing orders.
• Amendment process: State amendments are valid when granted presidential assent under Article 254(2) of the Constitution (to resolve conflicts with central law); once so assented, the State variant controls inside that state. This means the legal requirements for termination in (say) Maharashtra or West Bengal may materially differ from those in Delhi or Karnataka—even for establishments covered by the same central legislation.
• Finding the operative law: The Ministry of Labour maintains compilations of central statutes and State amendments (see Central rules and State amendments link below). Most state labour departments maintain their own sites or publications listing State-level rules, notifications, or model standing orders.

Practical compliance steps

• Always check the State variant of the ID Act. Before proceeding with any termination, layoff, retrenchment, or closure, review the full text of the Act as modified by amendments and notifications of the relevant state (where the establishment/factory/employee is located).
• Thresholds and formulas may differ: For example, the retrenchment permission threshold (Section 25K/25N), the required notice period, or the compensation quantum may be higher or lower than under the central statute. This is especially common for large redundancy programs, where noncompliance with a local State rule can void the entire exercise—even if you complied with the central Act.
• Consult official sources: Use the Ministry of Labour's index of central acts with State amendments, or the State Labour Department’s website for the latest rules, notifications, and application forms.

Summary: India is not a unitary jurisdiction for termination and severance. Cross-border/corporate employers must always check the relevant State’s amendments and regulations to avoid critical compliance failures.

Source: Industrial Disputes Act, 1947 (Ministry of Labour summary and link to State amendments)

Material update as of November 21, 2025: the Payment of Gratuity Act, 1972 has been replaced in substance by the Code on Social Security, 2020 ("SS Code"). The operative rules on statutory gratuity payment—eligibility, calculation formula, wage definition, and fixed-term entitlement—are now controlled by the SS Code, section 53 onward, for terminations and retirements occurring after the code’s effective date. Practitioners and employers must apply the current code framework, not the repealed 1972 Act, except for pre-November 2025 terminations or legacy disputes.

Eligibility criteria and coverage (SS Code § 53):

• The employer must pay gratuity to eligible employees on retirement, resignation, superannuation, layoff, retrenchment, discharge (other than for gross misconduct), closure, death, or disablement.
• Applies to every establishment with ≥10 employees (any day in the prior 12 months). Coverage is permanent—even if headcount later drops below 10 (SS Code § 1; same rule as old act).
• Gratuity is due after five years’ continuous service—with one major exception: for fixed-term employees (see below), as well as in cases of death or disablement, there is no minimum service period.

Fixed-term employees (SS Code § 53(2)):

• Any employee on a fixed-term contract is now eligible for gratuity at the end of the contract, regardless of length of service, on a pro-rata basis. This is a material change versus the five-year service rule under the old act. Employers must track and pay out gratuity for all eligible fixed-term contract expiries after November 2025.

Calculation formula and new wage definition:

• The basic quantum remains unchanged: gratuity = 15 days’ “wages” for every completed year of service (partial years > 6 months count as full year).
• New wage-floor rule: “Wages” for all gratuity calculations must now comprise not less than 50% of the employee’s total remuneration (cost to company, or CTC)—meaning basic plus dearness allowance and all other components, if these together are less than half of total pay, must be grossed up to 50% for calculation purposes (SS Code § 2(y), read with Central Rules on wage calculation). This rule is mandatory and overrides narrow definitions in employment contracts.
• Section 4(3)/Rule 34 caps maximum gratuity payout at ₹20 lakh (same as latest old act ceiling); this can be raised by central notification.

Coordination with retrenchment/severance:

• Gratuity and retrenchment compensation are cumulative: payment of one does not waive or offset the other (SS Code § 53(1) second proviso; see also retained Supreme Court precedents).
• Termination for “moral turpitude,” riotous conduct, or willful damage to property can trigger full or partial forfeiture, but ordinary resignation, discharge, or layoff cannot (SS Code § 54; substantially similar to old act § 4(6)).

Procedural requirements:

• Employer must pay gratuity within 30 days of it becoming due; otherwise, simple interest accrues (SS Code § 56).
• Application forms and documentary requirements are set by the new Central Rules (2026), not the prior 1972 regime.

Worked example (as of June 2026): -An employee (basic + DA + commissions = ₹48,000/month; CTC = ₹90,000/month) with 7 years, 11 months’ continuous service is entitled to gratuity. If total wages < 50% of CTC, gross up to ₹45,000/month for calculation (since 50% × 90,000 = 45,000). Gratuity = (15/26) × 8 (rounded) × ₹45,000 = ₹207,692.

Practitioner note: For pre-November 21, 2025 terminations, apply the old Payment of Gratuity Act, 1972. For all terminations after that date, use the Code on Social Security, 2020 and new wage-floor rules, and monitor any further upward adjustment to the maximum ceiling by central notification.

Source: Code on Social Security, 2020 — Section 53, definition of wages, fixed-term rules Source: Payment of Gratuity (Central) Rules, 2026 — key forms and procedures Source: Press Information Bureau — Labour Codes implementation (Nov 2025)