Retrenchment meaning

Retrenchment is one of the ways companies use to terminate employees. Retrenchment happens when the company wants to cost cut because of its financial situation and as a result, downsize the number of employees. 

What retrenchment does not include?

  • Voluntary retirement or resignation of a workman
  • Retirement of workmen on reaching the age of retirement
  • Termination due to the non-renewal of employment agreement/contract
  • Termination by employers on grounds of health and inability to work

Retrenchment strategies that are commonly used during an economic distress

Here are some common strategies companies worldwide follow:

retrenchment strategies

Layoff or retrenchment 

This involves terminating employees who the company feels are unnecessary or too expensive in the situation. The company can remove multiple employees doing the same work, job roles are not completely necessary, based on employee performance and more.

Revenue generation and profitability improvement

A focus on increasing sales, enhancing product or service quality, rebranding, or entering new markets can help a troubled company to improve its revenues.

Reduce outsourcing with salary and benefit cuts

If there is anything outsourced and can be cut down, you can shut it or make it in-house. You can also make employees take salary cuts and cut down on benefits and perks.

Debt restructuring

Addressing the company’s debt structure can be crucial, especially if high levels of debt are a primary cause of the company's problems. This may involve renegotiating terms with creditors or consolidating loans.

Strategic refocusing

Sometimes companies need to go back to their core competencies and move away from the sectors or markets that are not generating profits.

Cultural and management changes

Revamping the corporate culture, changing leadership or management practices, and instilling a sense of urgency can make a significant difference.

Performance measurement

Implementing rigorous performance measurement systems and benchmarks to monitor and guide the turnaround process.

Exit strategies

If the situation is beyond repair, considering selling the company, merging with another entity, or filing for bankruptcy might be the last resort.

Criteria to consider for retrenchment strategy

When working on retrenchment, it is important to have fair practices. It is necessary to have certain criteria to base retrenchment on to document and have a reson as to why an employee was retrenched.

Performance-based criteria

  • Evaluating employee performance reviews and productivity data.
  • Assessing an employee's history of disciplinary actions or frequent violations.

Skills and competencies

  • Prioritizing employees with essential skills that are hard to replace.
  • Evaluating the adaptability of employees to potentially take on new roles.

Job function

  • Considering whether the job function is crucial to the core business.
  • Evaluating if the function can be automated, outsourced, or merged with another role.

Seniority or tenure

Some companies prioritize keeping longer-serving employees, given their experience and loyalty.

Compensation and benefits

High salaries might be considered, especially if there's a need for drastic cost savings. However, this should be approached cautiously to avoid losing high-value talent.


Eliminating positions that have overlapping responsibilities.

Attendance and reliability

Employees with frequent absenteeism or punctuality issues might be considered for layoffs.

Future company strategy

Aligning layoffs with the company's future direction. If a certain product line or department will be deemphasized, it might face more layoffs.

Diversity and inclusion

Ensuring that layoffs don't disproportionately affect certain demographic groups to avoid legal repercussions and maintain a diverse and inclusive workplace.

Contractual obligations

Checking employment contracts, collective bargaining agreements, or any other relevant documents to see if there are any restrictions or stipulations regarding layoffs.

Laws to remember regarding retrenchment

Here are some important laws to note.

Notice period for retrenchment

Under Section 25F of the Industrial Disputes Act, a worker in any industry who has been continuously employed for a minimum of 1 year can't be let go until these specific requirements are met:

  • The employee has been served a notice of 1 month in writing that states the reasons for retrenchment.
  • The employee has been paid wages for the notice period.

Retrenchment compensation

The employee is paid compensation equivalent to the average pay of 15 days for every year completed in continuous service. The period of 6 months or more is considered equivalent to a year for the calculation of retrenchment compensation. 

Retrenchment compensation calculation:

Let’s understand with an example. 

If someone has served 1.8 years, they will receive 30 days average worth compensation. 

How is it calculated as 30 days? 

For one year, they will get 15 days average pay as compensation and for 8 months also they will get 15 days worth compensation as 8 months is equivalent to 1 year in retrenchment compensation. 

Inform state government

If a factory or big workplace has had 100 or more workers on most days over the past year, the rules for letting someone go are different. Unlike the usual rule (Section 25F), these workplaces can't just tell a worker they're letting them go.

Instead, according to 25F, they have to first ask the State Government for permission by telling them why they want to let the worker go. The State Government will then look into it and decide whether to say 'yes' or 'no'. If a workplace just fires someone without following this process and the worker complains, the employer will face the consequences of the same.

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