Retrenchment, Layoff & Closure Under the IR Code 2020

Last verified: 2026-07-20

Retrenchment, layoff and closure under the Industrial Relations Code, 2020 are three distinct ways an employer reduces or ends work, and the Code treats each differently. Layoff is a temporary inability to give a muster-roll worker employment, defined in Section 2(t). Retrenchment is the termination of a worker’s service for any reason other than punishment, defined in Section 2(zh). Closure is the permanent shutting down of a place of employment, defined in Section 2(h). Each carries its own notice, its own compensation, and, for larger establishments, a prior-permission requirement from the government.

This article sets out how retrenchment, layoff and closure work under the Industrial Relations Code: the definitions, the compensation each attracts, the 300-worker permission regime, the worker re-skilling fund, the penalties, and what actually changed from the old Industrial Disputes Act.

For nearly eight decades the Industrial Disputes Act, 1947 governed how Indian employers could lay off, retrench or close. That changed on 21 November 2025, when the four labour codes were brought into force together and the Industrial Relations Code, 2020 took over this ground, folding in the 1947 Act along with the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946.

Much of the substance carried over almost word for word, so decades of Supreme Court rulings on what counts as retrenchment still bind employers today. What did change is the size threshold at which a firm must ask the government before it acts, plus the addition of a worker re-skilling fund. Both are covered in full below.

The difference between the three is simpler than the statute makes it look. Layoff is temporary: the worker stays on the rolls but is not given work, and is paid 50% of basic wages and dearness allowance under Section 67. Retrenchment is a permanent termination of surplus staff, paid at fifteen days’ average pay for every completed year of service under Section 70. Closure is the permanent shutting down of the establishment itself, which triggers sixty days’ notice under Section 74 and compensation under Section 75.

Retrenchment, layoff and closure under the Industrial Relations Code

Retrenchment, layoff and closure under the Industrial Relations Code, 2020 are governed by two chapters that work as a pair. Chapter IX holds the general rules that apply to most establishments. Chapter X holds the stricter rules for large establishments, the ones with 300 or more workers. Read the two together and the whole regime falls into place, because the second chapter simply raises the bar for the biggest employers.

Why does the Code split one subject across two chapters? Because it draws a policy line by size. A small workshop and a 5,000-worker factory cannot sensibly face the same exit rules, so the Code lets smaller units act on notice and compensation alone, while making the largest units ask the government first. That single design choice explains most of what follows.

The three concepts at a glance

Layoff, retrenchment and closure answer three different questions. Layoff asks: can the employer keep a worker on the books but stop giving work for a while? Retrenchment asks: can the employer permanently let surplus workers go? Closure asks: can the employer shut the establishment down for good? The Code gives each its own definition, and getting the category right is the whole game, because the wrong label attracts the wrong liability.

Layoff, under Section 2(t), is the failure, refusal or inability of an employer to give employment to a worker whose name is on the muster rolls, on account of shortage of coal, power or raw materials, accumulation of stocks, breakdown of machinery, natural calamity, or any other connected reason. The worker is not sacked. The relationship survives, the name stays on the roll, and the worker is waiting to be recalled.

Retrenchment, under Section 2(zh), is the termination by the employer of a worker’s service for any reason whatsoever, other than as a punishment inflicted by way of disciplinary action. That phrase, “any reason whatsoever,” is deliberately wide, and it is the reason retrenchment law reaches so many situations that employers assume it does not. Closure, under Section 2(h), is narrower and blunter: the permanent closing down of a place of employment or part of it.

Now in force since 21 November 2025

The single most important fact about this subject in 2026 is that the Code is now live. The Industrial Relations Code, 2020 came into force on 21 November 2025, alongside the Code on Wages, 2019, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020. On that date the framework you are reading about stopped being a proposal and became the operative law, part of India’s wider consolidation of 29 labour laws into four codes.

The Code subsumed the Industrial Disputes Act, 1947, which had governed retrenchment, layoff and closure since Independence. That matters for anyone reading older guidance, because most of what is still online was written when the Industrial Disputes Act was the live statute, and it cites sections (25C, 25F, 25N, 25O) that no longer apply. The correct citations today are the Industrial Relations Code sections used throughout this article.

One honest caveat belongs here. The Code is in force, but the central and several state rules that put operational flesh on it, the forms, the permission-application procedures, the state-specific variations, were still being finalised and rolled out through late 2025 and into 2026. So the primary law is settled, while the fine procedural detail continued to mature. Employers acting now should check the current rule position in their state before filing anything.

Who is a worker and which establishments are covered

The Code protects a “worker,” not every employee. The term broadly covers persons doing manual, unskilled, skilled, technical, operational, clerical or supervisory work, but it excludes those in mainly managerial or administrative roles and supervisors above a wage ceiling. So a factory operative or a clerk is a worker; a general manager is not. This is why a mass “layoff” of senior software managers reported in the press is often not a “layoff” in the Section 2(t) sense at all, a point that trips up readers who map the news headline onto the statute.

Coverage also turns on the size of the establishment. The layoff-compensation right under Section 67 does not extend to establishments employing, on average, fewer than fifty workers a day, nor to seasonal or intermittent establishments, because Section 65 carves them out. Above that floor, the general Chapter IX rules apply, and once an establishment reaches 300 workers, the stricter Chapter X permission regime switches on as well.

In practice, the coverage question is where many disputes begin. An employer who assumes the Code does not reach a small unit, or that a supervisor is not a worker, can find that assumption tested before a tribunal. A common question from HR teams is whether IT and white-collar staff count as workers, and the answer is genuinely fact-specific: it depends on the actual duties and the wage level, not the job title on the offer letter.

Layoff under the Industrial Relations Code

Layoff under the Industrial Relations Code is the employer’s temporary inability to give a muster-roll worker employment, without ending the employment relationship. The worker stays on the books. No termination happens. The employer simply cannot provide work for a stretch, usually because something upstream has failed, and the law says the worker should not bear the full cost of that failure.

This is the concept most often misunderstood, because in ordinary speech “laid off” has come to mean “let go.” Under the Code the two are opposites. A laid-off worker is still employed and is entitled to be recalled when work resumes, which is exactly why layoff carries compensation rather than a severance payout.

What triggers a lawful layoff

A layoff is lawful only when it rests on one of the grounds in the definition. Section 2(t) lists them: shortage of coal, power or raw materials, accumulation of stocks, breakdown of machinery, natural calamity, or any other connected reason. The common thread is that the cause is operational and largely outside the worker’s control, and the stoppage is expected to be temporary.

That “any other connected reason” wording gives some flexibility, but it is not a blank cheque. The reason has to be genuinely connected to the kind of operational disruption the section describes. An employer who “lays off” workers to dodge wages during an ordinary business slowdown, with no real shortage or breakdown behind it, is inviting a finding that the layoff was not lawful at all, and that the workers were owed full wages.

Layoff compensation of fifty per cent of wages

The core entitlement is set by Section 67. A worker who has completed not less than one year of continuous service, and whose name is on the muster rolls, is paid compensation for all days of the layoff. That compensation equals fifty per cent of the total of the basic wages and dearness allowance that would have been payable had the worker not been laid off. Weekly holidays that fall in the layoff period are excluded from the count.

Put concretely, a worker on basic wages plus dearness allowance of Rs. 20,000 a month who is laid off for a full month receives roughly Rs. 10,000 in layoff compensation for that month, not the full wage and not nothing. The point of the fifty-per-cent figure is to share the burden: the worker keeps half their pay while the employer weathers the disruption, and neither side is fully insulated from it.

One number is worth stating precisely, because it is widely misdescribed. Section 67 does carry a forty-five-day feature, but it is not a flat annual cap. The default rule is the fifty-per-cent-of-basic-and-dearness-allowance payment for every laid-off day.

The forty-five days come in through a proviso. Where a worker is laid off for more than forty-five days in any period of twelve months, no compensation is payable for the days beyond the first forty-five, but only if there is an agreement to that effect between the worker and the employer. In that situation the employer may instead retrench the worker under Section 70 after the first forty-five days, and any layoff compensation already paid in the preceding twelve months may be set off against the retrenchment compensation. So the limit bites only where the parties have agreed to it; absent such an agreement, the fifty-per-cent entitlement runs for the whole layoff.

Who is excluded

Not every laid-off worker gets Section 67 compensation. Section 65 removes the right for establishments employing fewer than fifty workers on average per working day in the preceding calendar month, and for seasonal or intermittent establishments. Below that size, the layoff-compensation machinery simply does not apply, though other contractual and wage protections still might.

Certain categories of worker are also outside the compensation net. Badli workers (stand-ins for absent permanent workers) and casual workers are generally not entitled to layoff compensation, and Section 69 addresses these situations. A frequent question on worker forums is whether a casual hand laid off during a slump can claim the fifty per cent, and the usual answer is no, because the entitlement is built around continuous service and muster-roll status that casual engagement does not satisfy. The precise line between “wages” and “basic wages plus dearness allowance” for this calculation follows the wage definitions in the codes, which we cover in our guide to the national floor wage and the Code on Wages.

Retrenchment under the Industrial Relations Code

Retrenchment under the Industrial Relations Code is the termination of a worker’s service for any reason whatsoever, other than as a punishment inflicted by way of disciplinary action. That definition, in Section 2(zh), is the widest of the three concepts, and it is where employers most often go wrong. They assume “retrenchment” means only cutting surplus staff in a downturn. The law means far more than that.

Because the definition is so broad, almost any employer-initiated termination that is not a disciplinary dismissal, and not one of the specific exclusions, is a retrenchment, and it drags the whole machinery of notice and compensation with it. Getting comfortable with that breadth is the single most useful thing an employer can do here.

The definition and its exclusions

The phrase “for any reason whatsoever” has a long judicial history. The Supreme Court read it expansively in State Bank of India v. N. Sundara Money, (1976) 1 SCC 822, holding that termination for practically any reason counts as retrenchment, so that even a non-renewal at the end of a term could fall within it. That wide reading was then authoritatively settled by a Constitution Bench in Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court, (1990) 3 SCC 682, which confirmed that retrenchment means termination for any reason other than the few that the statute expressly excludes.

It was not always read this way. The earliest view, in Hariprasad Shivshankar Shukla v. A.D. Divelkar, AIR 1957 SC 121, was narrow: retrenchment meant only the discharge of surplus labour while the business continued, so closures and transfers fell outside it. Parliament and later benches widened the concept until the broad meaning prevailed, which is precisely why the statutory definition today is drafted so defensively, listing what it leaves out rather than what it includes.

What Section 2(zh) leaves out is a closed list. Voluntary retirement, retirement on reaching the age of superannuation, non-renewal of a contract on its expiry, completion of the tenure of fixed-term employment, and termination on the ground of continued ill-health are all excluded. The fixed-term carve-out matters in practice: when a genuine fixed-term contract simply runs its course, that is not retrenchment, a point we explain in detail in our guide to fixed-term employment under the labour codes. For a clear side-by-side of the two most-confused categories, the iPleaders comparative analysis of lay-off and retrenchment is a useful companion read.

Conditions precedent: notice and compensation

Section 70 sets the price of a lawful retrenchment. No worker who has been in continuous service for not less than one year may be retrenched until two conditions are met. First, the worker is given one month’s written notice stating the reasons for retrenchment, or is paid wages in lieu of that notice. Second, the worker is paid compensation equal to fifteen days’ average pay for every completed year of continuous service, or any part of a year in excess of six months.

The compensation formula is worth walking through, because it is the number workers and employers most often need. Take a worker with eight completed years of continuous service on last-drawn average pay of Rs. 26,000 a month. The daily average pay is Rs. 26,000 divided by 26, which is Rs. 1,000. Fifteen days of that is Rs. 15,000, and across eight years the retrenchment compensation comes to Rs. 1,20,000, on top of one month’s notice or the wages in lieu of it.

The one-year gate turns on “continuous service,” which Section 66 defines. A worker is treated as being in continuous service for a period of one year if, during the twelve months preceding the relevant date, the worker has actually worked for not less than 240 days, or not less than 190 days in the case of a worker employed below ground in a mine. The practical effect is clear: a worker just short of the qualifying service does not get the notice-and-compensation protection, while a worker just past it does.

Last in, first out, and the right to re-employment

Retrenchment is not just about paying the right amount. It is also about picking the right people, in the right order. Section 71 lays down the “last in, first out” rule: where workers in a particular category are to be retrenched, the employer must ordinarily retrench the worker who was the last to be employed in that category, unless there is an agreement to the contrary or the employer records reasons for departing from the rule. Seniority, in other words, is protected by default.

There is a second protection on the way back up. Section 72 gives retrenched workers a preference in re-employment: if the employer proposes to take on more hands within a year, the retrenched workers get an opportunity to offer themselves before outsiders are hired. So the worker let go in a genuine cutback is not simply forgotten when business recovers.

Procedure is where otherwise valid retrenchments come undone. The courts have long insisted on fair process, and in D.K. Yadav v. J.M.A. Industries Ltd., (1993) 3 SCC 259 the Supreme Court held that a termination carried out without following the principles of natural justice cannot stand. A common question from workers is what they can do when the employer skips the notice or ignores seniority, and the short answer is that the retrenchment can be challenged as illegal, with reinstatement and back wages on the table, which is why cutting procedural corners is a false economy.

Closure under the Industrial Relations Code

Closure under the Industrial Relations Code is the permanent closing down of a place of employment or a part of it, defined in Section 2(h), and it ends the employer-worker relationship entirely. This is the most final of the three concepts. A layoff pauses work and a retrenchment removes surplus workers, but a closure shuts the establishment, or a distinct part of it, for good.

The permanence is the point. Because a closure is irreversible for the workers affected, the Code surrounds it with notice and compensation, and for large establishments with a prior-permission requirement that we come to in the next section. Even a partial closure, shutting one unit or line while the rest continues, counts, which surprises employers who assume the rules bite only on a total shutdown.

Sixty days’ notice and closure compensation

The general rule is in Section 74: an employer who intends to close down an undertaking must serve at least sixty days’ notice of that intention on the appropriate Government, stating the reasons. The sixty days give the government and the workers time to respond before the shutters come down. The section carries a proviso that exempts undertakings employing fewer than fifty workers, and certain construction-type undertakings set up for a specific project, from this notice requirement.

Compensation on closure is dealt with by Section 75, and it broadly tracks the retrenchment scale. Workers who lose their jobs because the establishment closes are entitled to notice and compensation as though they had been retrenched, that is, fifteen days’ average pay for every completed year of continuous service. So a lawful closure is not a way to send workers away empty-handed; the workers carry substantially the same compensation right they would have had on retrenchment.

The right to close a business and its limits

Can the state actually stop an employer from closing a business it no longer wishes to run? This question reached the Supreme Court decades ago and shaped the law we have now. In Excel Wear v. Union of India, (1978) 4 SCC 224, the Court struck down the closure-permission provision as it then stood, holding that forcing an employer to keep an unwanted business running was an unreasonable restriction on the fundamental right to carry on, or not carry on, a business under Article 19(1)(g) of the Constitution.

That is not the end of the story, and this is where most online guidance stops too early. After Excel Wear, the permission provision was redrafted, and the Supreme Court in Orissa Textile and Steel Ltd. v. State of Orissa, (2002) 2 SCC 578 upheld the amended version as a reasonable restriction.

So the position today is not that closure permission is unconstitutional. It is that a properly framed permission requirement, which allows the government to refuse only on genuine and stated grounds, is valid. The Chapter X permission regime in the current Code must be read in that light: the right to close is real, but for the largest establishments it is conditioned, not denied.

Transfer of an undertaking

A related situation is a transfer of the establishment rather than its closure, and Section 73 deals with it. When the ownership or management of an undertaking is transferred, a worker who has been in continuous service for not less than one year is, in principle, entitled to notice and compensation on the retrenchment scale, because for the worker the old employment has ended.

The section carries the standard exception, familiar from the earlier law: this entitlement does not arise where the worker’s service has not been interrupted by the transfer, the terms and conditions of service applicable to the worker after the transfer are not in any way less favourable, and the new employer is, under the terms of the transfer or otherwise, legally liable to pay the worker retrenchment compensation on the basis that the service has been continuous. All three conditions must be satisfied for the exception to apply. The practical rule is stable: a transfer that genuinely carries the worker across on the same terms does not trigger a payout, while one that leaves the worker worse off does.

The 300-worker rule and prior government permission

Establishments with 300 or more workers must obtain prior permission from the appropriate Government before they lay off, retrench or close, under the special provisions in Chapter X, Sections 77 to 80. This is the part of the Code that draws the most attention, because it is where the state inserts itself directly into the employer’s decision. For everyone below the threshold, notice and compensation are enough. At or above it, the government gets a veto.

The logic is scale. A shutdown or mass retrenchment at a very large establishment has consequences for a whole local economy, so the Code makes the biggest employers seek permission first, while leaving smaller units free to act on notice and compensation. Whether that line sits at the right number is a long-running policy debate, which the Code resolved in favour of a higher threshold than the old law used.

The 300-worker threshold and the power to raise it

Section 77 fixes the trigger. Chapter X applies to a non-seasonal industrial establishment in which not less than three hundred workers, or such higher number as may be notified by the appropriate Government, were employed on average per working day in the preceding twelve months. Two features stand out. The base figure is 300, and the government may notify a still higher number, but not a lower one, so the threshold can only move up from 300.

This is a significant shift from the past. Under the old Industrial Disputes Act the permission regime bit at 100 workers, and the move to 300 means a large band of mid-sized employers, those between 100 and 299 workers, no longer need government permission to retrench or close, though they still owe notice and compensation. Looking ahead, because Section 77 lets governments notify a higher figure, some industrial states are likely to set thresholds above 300, so employers operating across states will need to track the number that applies in each location rather than assume a single national figure.

Prior permission for layoff, retrenchment and closure

Within Chapter X, each of the three actions has its own permission rule. Section 78 prohibits layoff in a covered establishment without prior permission of the appropriate Government, except where the layoff is due to shortage of power, a natural calamity, or, in a mine, reasons such as fire, flood or excess of inflammable gas. Section 79 requires, before retrenchment, three months’ notice (or wages in lieu) stating the reasons, plus the prior permission of the government, with compensation again at fifteen days’ average pay per completed year. Section 80 requires an employer intending to close a covered establishment to apply for prior permission at least ninety days before the intended closure date, serving a copy on the workers’ representatives.

Notice the sharper timelines. A mid-sized employer retrenching under Chapter IX gives one month’s notice; a large employer under Chapter X gives three months and must secure permission. A closure under the general rule needs sixty days’ notice to the government; a closure under Chapter X needs a permission application ninety days ahead. The size of the establishment, in short, lengthens the runway and adds a gate.

Chapter IX versus Chapter X at a glance

The cleanest way to hold this in mind is as two tiers. Chapter IX is the general tier: notice plus compensation, no permission, for establishments above the fifty-worker floor. Chapter X is the special tier: everything in Chapter IX, plus longer notice and prior government permission, for establishments at or above 300 workers. A covered establishment does not escape Chapter IX; it carries the general duties and the special ones together.

One recurring source of confusion is who the “appropriate Government” actually is, because it decides which authority grants permission and receives the notices. For establishments in the central sphere, such as banks, mines, major ports, and central public-sector undertakings, the appropriate Government is the Centre. For most other establishments it is the State in which the establishment operates. Filing a closure notice or a permission application with the wrong government is a procedural own-goal that can invalidate the step, so this is worth settling before anything is filed.

For a step-by-step view of the registers, notices and filings a covered employer has to keep in order, our new labour code compliance checklist is the practical companion to this section.

Compensation, the worker re-skilling fund and penalties

Beyond notice and compensation, the Industrial Relations Code adds a worker re-skilling fund for retrenched workers and sharp penalties for employers who breach the layoff, retrenchment or closure rules. These two features, one a benefit and one a deterrent, are new machinery layered on top of the older notice-and-compensation structure, and both are easy to overlook until they bite.

Taken together they change the arithmetic of an exit. The re-skilling fund adds a further employer contribution on every retrenchment, and the penalty provisions mean that getting the Chapter X permission steps wrong is not just a civil risk but a punishable offence.

Retrenchment compensation and the worker re-skilling fund

The worker re-skilling fund is introduced by Section 83, and it is genuinely new to this area of law. On every retrenchment (and only on retrenchment), the employer must contribute an amount equal to fifteen days’ wages last drawn by the worker, or such other number of days as may be notified. That contribution is then credited to the retrenched worker’s account within forty-five days, to support the worker while they retrain and look for new work.

The point workers and employers most need to hear is that this is in addition to the retrenchment compensation, not instead of it. The fifteen-days-per-completed-year compensation under Section 70 (or Section 79 for large establishments) is one payment; the fifteen-days-last-drawn re-skilling contribution under Section 83 is a separate one. So a retrenched worker with several years of service receives the multi-year Section 70 compensation and a further fifteen days’ worth through the re-skilling fund. An employer who budgets only for the first has under-provisioned.

Penalties for illegal layoff, retrenchment or closure

The Code backs its rules with money. Section 86 provides that an employer who lays off, retrenches or closes a Chapter X establishment in contravention of Sections 78, 79 or 80 is liable to a fine of not less than Rs. 1,00,000, which may extend to Rs. 10,00,000. For a repeat offence the exposure rises steeply: a fine of not less than Rs. 5,00,000, which may extend to Rs. 20,00,000, or imprisonment for a term that may extend to six months, or both.

These are not trivial numbers, and they are aimed squarely at the permission-regime breaches that a large employer might be tempted to treat as paperwork. The message of Section 86 is that skipping the government-permission step for a big establishment is a criminal-law risk, not just a compensation dispute.

What a worker can do if the procedure is violated

None of this helps a worker who does not know how to enforce it, so the remedy side matters. A worker who is laid off, retrenched or removed on closure without the required notice, compensation or permission can raise it as an industrial dispute, and an illegal retrenchment or closure can be challenged before the labour authorities and tribunals, with reinstatement and back wages available where the termination is found bad. The downstream effect is that a botched procedure does not merely cost the statutory compensation; it can reopen the entire termination months later, which is the real reason compliance is cheaper than the shortcut. Where an exit also engages other statutory dues, such as gratuity, those run in parallel, and our guide to gratuity in India explains how that entitlement is calculated on exit.

What changed from the Industrial Disputes Act, 1947

The Industrial Relations Code kept most of the Industrial Disputes Act’s substance on retrenchment, layoff and closure, but changed the permission threshold and added new machinery. For anyone who learned this subject under the old Act, the reassuring news is that the core definitions and the core compensation numbers survived almost intact. The unsettling news is that the numbers around the edges, and the compliance obligations, did move.

Understanding the delta is not academic. It tells an employer which of their old habits are still safe and which now expose them, and it tells a practitioner which of the old cases they can still cite, which turns out to be most of them.

The main changes

Four changes stand out. The permission threshold rose from 100 workers under the old Chapter V-B to 300 workers under the new Chapter X, with the government now able to notify an even higher figure. Fixed-term employment was formally recognised and its expiry expressly excluded from retrenchment, closing an old grey area. The worker re-skilling fund was introduced as a new employer contribution on retrenchment. And three separate statutes, the Industrial Disputes Act, 1947, the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946, were consolidated into the single Industrial Relations Code.

The table below maps the shift on the points that matter most for exits.

Looking forward, the practical compliance story is still settling as central and state rules mature through 2026, so the sensible posture for employers is to treat the primary numbers above as firm while watching for state-level notifications, especially on the threshold, that could change the position locally.

Why the old case law still binds

Here is the point that most competitor articles miss. Because Section 2(zh), Section 2(t) and Section 2(h) reproduce the old definitions of retrenchment, layoff and closure almost verbatim, the Supreme Court’s decades of interpretation did not vanish on 21 November 2025. The expansive reading of retrenchment in Sundara Money and the Constitution Bench in Punjab Land Development, the closure-rights analysis running from Excel Wear to Orissa Textile, all of it continues to govern the identically worded new provisions.

A question worth answering directly is whether the Code’s definition of retrenchment differs from the old Section 2(oo) of the Industrial Disputes Act. In substance it does not; it carries the same “termination for any reason whatsoever” core and the same exclusions, updated to add the fixed-term carve-out. The second-order consequence is that labour lawyers who know the old cases remain valuable precisely because those cases still decide today’s disputes, and the marketable skill now is mapping each settled principle from its old section to its new one. Retrenchment under a state Shops and Establishments Act can differ in detail, so where a worker is covered by state-specific commercial-establishment law rather than the industrial regime, the applicable notice and compensation should be checked against that state statute as well.

Frequently asked questions

1. Is the Industrial Relations Code, 2020 in force yet? Yes. The Industrial Relations Code came into force on 21 November 2025, together with the other three labour codes, replacing the Industrial Disputes Act, 1947 and 28 other central labour laws. Some central and state rules under the Code were still being finalised into 2026, but the Code itself is the operative law now.

2. What is the difference between layoff, retrenchment and closure? Layoff is a temporary inability to give a muster-roll worker employment, with the worker still employed (Section 2(t)). Retrenchment is the permanent termination of a worker’s service for any reason other than punishment (Section 2(zh)). Closure is the permanent shutting down of the establishment or a part of it (Section 2(h)).

3. How much layoff compensation is payable under the Industrial Relations Code? A worker with at least one year of continuous service is paid fifty per cent of the total of basic wages and dearness allowance for the days of layoff, under Section 67. Weekly holidays in the layoff period are excluded, and establishments with fewer than fifty workers are outside this compensation right.

4. How is retrenchment compensation calculated? Under Section 70, retrenchment compensation is fifteen days’ average pay for every completed year of continuous service, with any part of a year over six months counting as a full year. A worker with eight years’ service on average pay of Rs. 26,000 a month receives about Rs. 1,20,000, plus one month’s notice or wages in lieu.

5. What notice must an employer give before retrenchment? For a general (Chapter IX) establishment, one month’s written notice stating the reasons, or wages in lieu of notice, under Section 70. For a large (Chapter X) establishment of 300 or more workers, three months’ notice plus prior government permission under Section 79.

6. What notice is required before closing an undertaking? Under the general rule in Section 74, at least sixty days’ notice of the intended closure to the appropriate Government. For an establishment of 300 or more workers, the employer must instead apply for prior government permission at least ninety days before the intended closure date under Section 80.

7. What is the 300-worker threshold under the Industrial Relations Code? Chapter X, the prior-permission regime, applies to non-seasonal industrial establishments employing at least 300 workers on average per working day over the preceding twelve months (Section 77). Below 300, only the general Chapter IX rules of notice and compensation apply.

8. When is prior government permission required for retrenchment or closure? Only for establishments covered by Chapter X, that is, those with 300 or more workers. Such establishments need prior permission to lay off (Section 78), to retrench (Section 79) and to close (Section 80). Smaller establishments need notice and compensation but not permission.

9. Can the government raise the 300-worker threshold further? Yes. Section 77 lets the appropriate Government notify a number higher than 300, but not lower. So the permission regime can be made to apply only to even larger establishments in a given state, and employers should check the threshold notified where they operate.

10. What is the worker re-skilling fund and how much does the employer contribute? Under Section 83, on every retrenchment the employer contributes an amount equal to fifteen days’ wages last drawn by the retrenched worker (or such other days as notified). The amount is credited to the worker’s account within forty-five days to support retraining and re-employment.

11. Is the re-skilling fund paid in addition to retrenchment compensation, or instead of it? In addition. The Section 70 (or Section 79) compensation of fifteen days’ average pay per completed year is one payment, and the Section 83 re-skilling contribution of fifteen days’ last-drawn wages is a separate one. An employer must budget for both on a retrenchment.

12. What are the penalties for illegal layoff, retrenchment or closure? Under Section 86, contravening the Chapter X permission requirements (Sections 78, 79 or 80) attracts a fine of not less than Rs. 1,00,000, up to Rs. 10,00,000. A repeat offence attracts a fine of Rs. 5,00,000 to Rs. 20,00,000, or imprisonment up to six months, or both.

13. Is being laid off the same as being terminated? No. A laid-off worker remains employed, stays on the muster roll, and is entitled to be recalled when work resumes, receiving layoff compensation in the meantime. A retrenched or terminated worker’s service ends. The two are legally opposite situations under the Code.

14. Can a company retrench workers without government permission? Yes, if the establishment has fewer than 300 workers, in which case only notice and compensation under Section 70 are required. An establishment with 300 or more workers cannot retrench without prior government permission under Section 79.

15. Are fixed-term or contract employees entitled to retrenchment compensation? When a genuine fixed-term contract simply expires, that is expressly excluded from retrenchment (Section 2(zh)), so no retrenchment compensation arises on expiry. If a fixed-term worker is instead terminated early for a non-disciplinary reason, that can be retrenchment and can attract Section 70 compensation, subject to the one-year continuous-service condition.

16. Does retrenchment compensation apply if I worked less than one year? The Section 70 notice-and-compensation protection applies to a worker with not less than one year of continuous service. A worker who has not completed the qualifying continuous service under Section 66 generally does not attract the retrenchment compensation, though other contractual dues may still be payable.

References

Case Law

1. D.K. Yadav v. J.M.A. Industries Ltd., (1993) 3 SCC 259
2. Excel Wear v. Union of India, (1978) 4 SCC 224; AIR 1979 SC 25
3. Hariprasad Shivshankar Shukla v. A.D. Divelkar, AIR 1957 SC 121; 1957 SCR 121
4. Orissa Textile and Steel Ltd. v. State of Orissa, (2002) 2 SCC 578; AIR 2002 SC 708
5. Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court, (1990) 3 SCC 682 (Constitution Bench)
6. State Bank of India v. N. Sundara Money, (1976) 1 SCC 822; AIR 1976 SC 1111

Statutes

1. Industrial Relations Code, 2020 (Act No. 35 of 2020). Provisions cited: Section 2(h) (closure), Section 2(t) (lay-off), Section 2(zh) (retrenchment), Section 65 (application/exclusions), Section 66 (continuous service), Section 67 (lay-off compensation), Section 69 (workers not entitled in certain cases), Section 70 (conditions precedent to retrenchment), Section 71 (last-in-first-out), Section 72 (re-employment of retrenched workers), Section 73 (transfer of undertaking), Section 74 (sixty days’ notice of closure), Section 75 (closure compensation), Section 77 (application of Chapter X, 300-worker threshold), Section 78 (prohibition of lay-off without permission), Section 79 (conditions precedent to retrenchment, Chapter X), Section 80 (procedure for closing down), Section 83 (worker re-skilling fund), Section 86 (penalties).
2. Industrial Disputes Act, 1947 (Act No. 14 of 1947). Referenced for comparison: the predecessor regime (Chapter V-A and Chapter V-B, the 100-worker permission threshold, and Section 2(oo) definition of retrenchment), now repealed and subsumed by the Industrial Relations Code, 2020.

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