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Legal Implications of Lay offs, Retrenchment and Wage cuts during Covid 19

The Covid-19 outbreak has been causing a great economic standstill affecting both public and private enterprises. To deal with the loses, many companies are resorting to wage cuts, lay-offs and termination as mitigating factors for losses during the ongoing crisis. This raises a few questions in the employee's mind that are now to be addressed.

What Measures Has The Government Taken?

As per the advisory dated March 20th 2020 by the Labour Ministry, all public and private enterprises were instructed to continue the payment of wages of their employees and not to reduce their wages during this time. The Ministry also requested the employers to not terminate or lay off their employees and that all employees on leave during this period will be treated as on-duty employees without any wage reduction.

On 29th March 2020, the Home Ministry issued an order under Section 10(2)(1) of the Disaster Management Act directing the state Governments to take necessary action in ensuring every employee has been made a payment of their wages without any deduction, on the due date. What must be noted that under Section 72 of the DM Act, any order passed by the State shall override or prevail over any other law at the time. Now, since the letter issued on 20th March was an advisory and not an order, it does not hold a binding nature.

The Legality Of Wage Cuts

Wage cuts are a common remedial solution adopted by employers as it is one of the biggest expenditures for a company. Wage cuts are often preferred over retrenchment and lay-offs by both parties, since the employers avoid losing human capital and paying retrenchment and lay-offs compensation, while for the employees, they still have an employment, and a salary influx.
Although the advisory dated 20th March suggested that the employers shall avoid relying on wage cuts as a measure to mitigate losses, Sectors such as the Automobile and Aviation industries in India have been severely affected by the Covid-19 outbreak and hence are forced to rely on salary cuts.

The prominent question that now lies is whether the order passed by the Government on Wage-cuts is binding in nature or not.

An argument can be made that a mere reading of the provisions of the Disaster Management Act, would suggest that powers have not been vested with the Government to direct private employers to pay wages during a disaster when the employees are not working, which hampers their prerogative of business decisions. The scope of the Act only talks about forming committees which frames plans to meet disasters.

HOWEVER, despite the fact that the DM Act does not specifically vest or confer any power to the Government (Central or the State) to direct the private employers to pay wages/not deduct wage, various other provisions of the Act do empower the Government to pass orders that are compulsory to be complied with, which includes the order talking about wage cuts.

The order passed was made in pursuance to Section 35(l) and 38(l) of the DM Act. These provisions state that the Government can take necessary measures to secure effective implementation of the DM Act. Further, Section 72 of the Act is a non-obstinate clause which gives overriding powers to the Government at the time of a disaster like the Covid-19 outbreak.

It states:
The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. Hence, Section 25M of the Industrial Disputes Act, 1947 which empowers an employer to pay only 50% of the wages to a worker during a calamity gets nullified.

An argument can also be made that the payment of wages to the workers in a way ensures that these workers can afford various healthcare and safety requirements, especially at times like the Covid-19 outbreak, and hence these could be held as a measure to prevent the spread of the Coronavirus.

The State Governments vis-à-vis the order of the Home Ministry, dated 29th March took necessary measures to implement the said order. The Maharashtra Government that all workers (contractual, temporary and daily-wage) in private factories and shops shall be paid their full salaries.

Separately, The Governments of Delhi and Telangana eventually invoked the Epidemic Diseases Act (EDA) on 22nd March and imposed a lockdown from the 22nd of March till 31st and stated that this period shall be treated as a paid holiday for all employees in shops and establishments. This set a precedent for various other states to follow suit. Further, in a new development, the states of Uttar Pradesh, Gujarat and Madhya Pradesh are introducing ordinances to ease labor Laws.

The Legality Of Lay-Offs

Lay-offs have been defined under Section 2 (kkk) of the Industrial Disputes Act, 1947. The measure taken by employers when they are unable to pay their employees or provide for employment for a period of time due to losses falls under the ambit of Layoffs. They can be of temporary and permanent nature, although the scope of IDA as well in practice in India only provides for temporary lay-offs, and the term is not to be used synonymously with Retrenchment.

As we already know the order dated 29th March 2020 does not specifically include lay offs, so there does lie some sense of ambiguity. Although the advisory issued by the Home Ministry on 20th March may include lay-offs apart from retrenchments and wage cuts. These advisories are also said to have an enforceable nature to them. The Chief Labour Commissioner's office is making sure that such advisories by the Home Ministry are adhered with, as was seen when the Spicejet CMD was asked to rescind the policy of Leave without pay that was passed by the airline, and follow the Government advisory during the Covid-19 outbreak.

This indeed does show that Lay-offs do have repercussions but what must be taken into consideration is the fact that if there does lie any other suitable alternative?
For instance, the hotel industry is said to be losing Billions of dollars in revenue every week, and the Hyatt Hotels Corp has decided to lay off around 1300 of their employees as a last resort. Companies such as OYO and UBER, who directly cater to the general public of India are amongst the worst hit and will be resorting to lay-offs as that is the only viable option for them.

Chapter VA of the Industrial Dispute Act states that lay-offs are not applicable for establishment with less than 50 workers. While for the establishments that can legally lay off their employees, a right for compensation is provided for all the workmen who have their names on the muster roll. The compensation must be 50% of the total basic wages that the worker must have earned had he not been laid off.

As far as the legal viability of lay-offs during the Covid-19 outbreak is concerned, the ID Act does mention that employers can lay-off their employees at times of natural disasters. Further, there are provisions in the act which mandate the employer to compensate the employee so laid off. Although another debate that does arise out of this is whether all employees can be legally laid off or only the defined workman under the Industrial dispute Act. The statute and further judgements on the same have provided that the definition of a workman falls under any person who does manual, unskilled, skilled, technical, operational, clerical or supervisory work.

Legality Of Retrenchment

Under the Industrial Disputes Act, 1947 Section 2(oo) defines Retrenchment as termination of a workman by the employer of a service for reasons other than a disciplinary action and punishment along with necessary compensation of 15 days average pay for continuous service per year.

Since the letter dated 20th March 2020 advising the employers to not terminate their employees does not have a binding nature, retrenchment is an option available to the employers and can be taken as a last resort. The Supreme Court on the question of retrenchment has observed that the employer holds the right to terminate their employees in case of a surplus unless barred by law.
Although all necessary processes such as notice period, intimation to government authorities, compensation of retrenchment to employees, gratuity payment e.t.c must be followed.

Measures By Other Countries

Denmark and England are said to cover 75 % and 80% of wage bills respectively while Canada, Australia, Ireland and Malaysia have come up with various wage subsidies.

In order to avoid lay-offs, Denmark is paying 75% of the entire salary of employees of a company for 3 months while Norway is giving partial to full wage compensation for those laid off. In Argentina, employers are barred from firing any worker for 60 days after which a minimum percentage of salary needs to be paid while Spain has put an outright ban on termination along with allowance for temporary workers.

While in India, states like Uttar Pradesh has suspended all labor laws barring three making it easier for employers to hire and fire employees, in determining the wages of the employees and helping the employers in reducing their liability and Madhya Pradesh made certain amendments to the labor laws encouraging the setting up of new industries while also doing away with the requirement of taking the government's permission to suspend the employees. However, the need to seek permission from the government for terminating the employees continues to be a requirement.

Written By:

  1. Saurabh Agnihotri- 3rd year student of law at Gujarat National Law University
  2. Ayushi Mehta- 3rd year student of law at Gujarat National Law University

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