Layoff, Retrenchment and Closure Under the Industrial Relations Code, 2020

Introduction

The Industrial Relations Code, 2020 has changed the regulatory framework governing layoffs, retrenchment and closure in India. Brought into force on 21 November 2025, the Code raised the threshold for the application of the special prior-permission regime under Chapter X from 100 to 300 workers, subject to the scope of the statutory provisions and any applicable changes made by the appropriate Government.

Under the earlier Industrial Disputes Act, 1947, specified industrial establishments employing at least 100 workers were subject to additional restrictions on layoffs, retrenchment and closure. The Industrial Relations Code, 2020 increases this threshold to 300 workers, giving qualifying establishments below that threshold greater flexibility while retaining statutory notice, compensation and other requirements applicable under the general provisions.

The change does not mean that every employer with fewer than 300 workers can terminate employment or close an undertaking without complying with labour law. The general provisions of the Code continue to regulate retrenchment and closure, while the applicability of layoff compensation and certain other requirements depends on the nature and size of the establishment. The special prior-permission regime also applies to specified categories of industrial establishments rather than every business employing 300 people.

For employers, the distinction between the general provisions and the special regime is essential. This article examines how the Code distinguishes layoff, retrenchment and closure, when prior government permission is required, how compensation is calculated, what notice periods apply and which procedural steps employers should complete before implementing a workforce reduction or shutting down an undertaking.

Layoff, Retrenchment and Closure: Understanding the Legal Distinction

The Industrial Relations Code, 2020 treats layoff, retrenchment and closure as distinct legal events. The classification matters because each attracts different statutory conditions, notice requirements and compensation consequences.

Layoff refers to an employer’s failure, refusal or inability to provide employment to a worker whose name is borne on the muster rolls of an industrial establishment and who has not been retrenched, for reasons such as a shortage of coal, power or raw materials, an accumulation of stocks, a breakdown of machinery, natural calamity or another specified reason. The employment relationship continues, but the worker is temporarily not provided work.

Retrenchment generally refers to the termination by an employer of a worker’s service for any reason whatsoever, subject to the exclusions specified in the Code. These exclusions include voluntary retirement, retirement on reaching the age of superannuation, termination as a result of non-renewal of a contract of employment on its expiry or termination under a stipulation contained in that contract, and termination on the ground of continued ill health. Termination as a disciplinary punishment is also excluded from the statutory definition.

Closure means the permanent closing down of a place of employment or part of it. Unlike a layoff, which ordinarily involves a temporary inability to provide work, closure concerns the cessation of operations at the relevant undertaking.

These distinctions have practical consequences. A temporary interruption in production does not necessarily amount to retrenchment or closure, while a permanent decision to discontinue an undertaking cannot simply be treated as a layoff to avoid the applicable procedure. Before acting, an employer should identify the legal character of the proposed measure and assess the relevant provisions of the Code, including any applicable state-specific requirements.

When Does the 300-Worker Threshold Apply?

Chapter X of the Industrial Relations Code, 2020 contains special provisions relating to layoff, retrenchment and closure in certain establishments. Under Section 77, these provisions apply to an industrial establishment of the specified kind in which not less than 300 workers were employed on an average per working day during the preceding twelve months.

The establishments covered by this special chapter include factories, mines and plantations, as specified in the Code. The appropriate Government may also increase the threshold by notification where authorised by the statutory framework. Consequently, employers should verify the applicable threshold and any relevant notification before determining which regime governs their establishment.

The framework can be understood through the following broad categories:

The table is a starting point, not a substitute for checking the statutory definition of the establishment, the relevant twelve-month or preceding-month measurement period, any applicable exclusions and the identity of the appropriate Government.

The 50-worker threshold should not be mistaken for a general exemption from all provisions governing retrenchment and closure. Section 65 specifically addresses the applicability of Sections 67–69, which deal with layoff compensation and related matters. It does not exclude every establishment below 50 workers from the entire chapter governing layoff, retrenchment and closure.

Similarly, the 300-worker threshold should not be applied indiscriminately to all offices, commercial establishments and businesses. The nature of the industrial establishment and the statutory definition of the workers concerned must be examined before the applicable regime is determined.

Retrenchment: Notice, Compensation and Re-employment

Retrenchment is governed by the general provisions of Chapter IX and, where Chapter X applies, by the additional requirements of that chapter. Under Section 70, a worker who has been in continuous service for not less than one year generally cannot be retrenched unless the employer gives one month’s written notice indicating the reasons for retrenchment, or pays wages in lieu of the notice, and pays retrenchment compensation as required by law.

The ordinary retrenchment compensation formula is fifteen days’ average pay for every completed year of continuous service, or any part of a year in excess of six months, subject to the statutory provisions and any applicable notification. The compensation requirement is separate from the notice obligation.

For establishments covered by Chapter X, Section 79 imposes additional requirements. A worker who has completed at least one year of continuous service cannot be retrenched unless the employer provides three months’ written notice stating the reasons for retrenchment, or pays wages in lieu of that notice, and obtains prior permission from the appropriate Government.

The employer must also submit an application for permission in the prescribed manner, clearly stating the reasons for the proposed retrenchment, and simultaneously serve a copy on the workers concerned. The application procedure and the notice to the affected worker are separate requirements and should be planned accordingly.

Where retrenchment is permitted, the compensation formula under the special provisions is also fifteen days’ average pay, or such other number of days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months.

The Code also retains the last-in-first-out principle under Section 71, subject to the statutory qualifications. Where workers in a particular category are being retrenched, the employer should ordinarily retrench the worker who was the last person employed in that category unless the employer records reasons for departing from the principle.

Section 72 further provides for re-employment in specified circumstances. Where the employer proposes to recruit workers within one year of retrenchment, retrenched workers who are citizens of India must be given the prescribed opportunity to offer themselves for re-employment, subject to the statutory requirements.

These provisions demonstrate that retrenchment compliance involves more than calculating compensation. Employers must assess the applicable notice period, permission requirements, worker selection principles and potential re-employment obligations.

Layoff: Compensation and Prior Permission

The legal requirements governing layoff depend on the nature of the establishment, the number of workers and whether Chapter X applies.

Under Section 67, a worker other than a badli or casual worker, whose name is borne on the muster rolls of a qualifying industrial establishment and who has completed at least one year of continuous service, is generally entitled to layoff compensation for eligible days of layoff. The compensation is equal to 50% of the total basic wages and dearness allowance that would have been payable had the worker not been laid off, subject to the statutory conditions and exceptions.

The Code contains qualifications concerning the duration of a layoff, the circumstances in which compensation may not be payable and the treatment of workers in certain categories of establishments. Employers should therefore assess the relevant provisions rather than assume that every interruption of work automatically attracts the same compensation.

For an industrial establishment covered by Chapter X, Section 78 imposes a prior-permission requirement before a worker can be laid off, subject to the statutory exceptions. The employer must apply to the appropriate Government for permission, stating the reasons for the intended layoff and following the prescribed procedure.

Under the Industrial Relations (Central) Rules, 2026, applications for the relevant permissions must be made within the prescribed advance timelines. For a layoff covered by the central framework, the application is required at least fifteen days before the intended layoff. The applicable state rules and notifications should be checked for establishments falling under state jurisdiction.

An employer should not treat layoff as a substitute for retrenchment merely because the business is facing reduced demand or a temporary operational difficulty. The legal character of the action, the reasons for it and the relevant statutory conditions must be assessed before the employer proceeds.

Closure: Notice, Permission and Compensation

The Industrial Relations Code distinguishes between closure under the general provisions and closure of an establishment covered by Chapter X. Under Section 74, an employer intending to close an undertaking is generally required to give the appropriate Government at least sixty days’ notice before the intended closure, stating the reasons for closure. The provision contains exceptions, including for an industrial establishment in which fewer than fifty workers are employed or were employed on any day during the preceding twelve months, and for specified construction-related undertakings. The precise applicability of the notice requirement should be assessed against the statutory wording and any relevant exception.

Where Chapter X applies, Section 80 imposes a more stringent requirement. The employer must apply for prior permission at least ninety days before the intended closure, stating the reasons and serving the required copy on the workers’ representatives in the prescribed manner, subject to the statutory exceptions.

The appropriate Government considers the application and may grant or refuse permission after following the prescribed procedure. Where it does not communicate an order within sixty days of the application, permission is deemed to have been granted in accordance with the provision.

Closure compensation must also be considered. Under Section 75, a worker who has completed at least one year of continuous service in an undertaking immediately before closure is generally entitled to compensation equivalent to retrenchment compensation, subject to the statutory qualifications and exceptions.

For a closure permitted under Section 80, the compensation provision specifically covers workers employed in the undertaking immediately before the date of the application for permission. The applicable compensation is fifteen days’ average pay, or such other number of days as may be notified by the appropriate Government, for every completed year of continuous service or any part thereof in excess of six months.

Employers should distinguish the notice period for closure under the general provisions from the ninety-day advance application requirement under Chapter X. The two operate under different statutory conditions and should not be treated as interchangeable.

Prior Permission: Application Timelines and Deemed Approval

For establishments covered by Chapter X, the requirement to obtain prior permission makes procedural sequencing particularly important. The Code requires the employer to apply to the appropriate Government and provide the reasons for the proposed action. The relevant application must be accompanied by service of the prescribed copy on the affected workers or their representatives, as applicable.

Under the Industrial Relations (Central) Rules, 2026, the prescribed application timelines for establishments falling under the central framework are:

• Layoff: at least fifteen days before the intended layoff.
• Retrenchment: at least sixty days before the intended retrenchment application timeline under the Rules, alongside the separate three-month notice requirement under Section 79.
• Closure: at least ninety days before the intended closure.

These timelines must be read with the corresponding statutory provisions, including the requirement to give three months’ notice or wages in lieu to a worker proposed to be retrenched under Section 79. The application deadline and the notice to the worker serve different purposes.

The appropriate Government may grant or refuse permission after making the necessary inquiry and providing the prescribed opportunity to the employer and affected workers or other interested persons to be heard. The decision must be made in accordance with the applicable provisions.

Under Sections 79 and 80, where the appropriate Government does not communicate its decision within sixty days of the relevant application, permission is deemed to have been granted as provided by the Code. This deemed-permission mechanism does not remove the need to file a valid application, follow the prescribed procedure or satisfy other applicable requirements. Employers should maintain evidence of filing, service, communications with the authorities and compliance with the applicable notice and compensation obligations.

Where permission is refused, or where the employer proceeds without the required permission, the consequences can be significant. Sections 79 and 80 address the illegality of retrenchment or closure carried out without the required permission and provide for the consequences specified by the Code.

Worker Re-skilling Fund: An Additional Retrenchment Obligation

Section 83 of the Industrial Relations Code, 2020 establishes the framework for a worker re-skilling fund. The fund is intended to support workers affected by retrenchment. The employer’s contribution is an amount equal to fifteen days’ wages last drawn by the worker immediately before retrenchment, or such other number of days as may be notified by the Central Government, for every retrenched worker, subject to the statutory provisions.

This contribution is separate from the ordinary retrenchment compensation payable to the worker. It should therefore be identified as a distinct item when calculating the financial implications of a proposed retrenchment.

The Industrial Relations (Central) Rules, 2026 prescribe the procedure for depositing the contribution under the central framework. The employer is required to transfer the prescribed amount within ten days of retrenchment, while the amount is to be credited to the worker’s account within forty-five days in accordance with the applicable procedure.

Employers should distinguish the deadline for depositing the contribution from the period within which the amount is credited to the worker. Treating the forty-five-day period as the employer’s own deposit deadline would misstate the procedural requirement. The applicable rules and administrative arrangements should be verified for the relevant establishment, particularly where the appropriate Government is a state government.

A Practical Compliance Checklist for Employers

Before implementing a layoff, retrenchment or closure, employers should take the following steps.

• Confirm the applicable legal regime: Determine the nature of the establishment, the categories of workers involved, the relevant headcount measurement period and whether the general provisions or Chapter X apply.
• Identify the appropriate Government: Establish whether the central or state government is the appropriate Government for the establishment, and verify the applicable rules, notifications, forms and filing procedure.
• Classify the proposed action correctly: Determine whether the circumstances amount to layoff, retrenchment or closure, as the statutory requirements differ.
• Calculate the applicable notice and compensation: Assess the relevant service requirements, notice periods, wages in lieu, statutory compensation and any other amounts payable.
• Complete the permission procedure where required: File the application within the applicable timeline, state the reasons for the proposed action and serve the required copy on the workers or their representatives.
• Document the selection process: For retrenchment, record the application of the last-in-first-out principle and the reasons for any departure from it, where applicable. Consider the statutory re-employment obligations before recruiting for the same category of work.
• Account for the worker re-skilling fund: Calculate the contribution separately from retrenchment compensation and follow the prescribed deposit procedure and timeline.
• Retain supporting records: Maintain headcount records, muster rolls, service records, notices, applications, proof of service, government orders, compensation calculations and payment evidence.

This approach helps employers avoid treating headcount, permission, notice and compensation as interchangeable compliance steps. Each requirement must be assessed and completed according to the statutory framework applicable to the establishment.

Conclusion

The Industrial Relations Code, 2020 has raised the threshold for the special prior-permission regime governing layoffs, retrenchment and closure from 100 to 300 workers. This provides greater operational flexibility to qualifying establishments below the threshold, while retaining a more stringent approval framework for specified industrial establishments that meet the statutory test.

The change does not eliminate the general obligations governing retrenchment and closure, nor does it create a blanket exemption for every employer with fewer than 300 workers. Notice, compensation, worker selection, re-employment and other requirements continue to apply according to the relevant provisions and the circumstances of the establishment.

For employers, the most important step is to determine the applicable statutory regime before taking action. A correct assessment of the establishment’s status, worker headcount, notice periods, permission requirements and compensation obligations can help reduce the risk of unlawful retrenchment, layoff or closure and support compliance with India’s evolving labour law framework.

Frequently Asked Questions

Last Updated on 22 October, 2026