Calculation of Retrenchment Compensation under Indian Employment Laws

The definition of retrenchment as interpreted by Courts is quite wide. It is so wide that every termination, for any reason whatsoever, except those expressly excluded under Section 2(oo) of the Industrial Disputes Act, 1947  is considered a retrenchment.

However, there are provisions under Indian employment law covering retrenchments. Chapters V-A and V-B of Industrial Disputes Act have provisions relating to retrenchment under certain situations. Section 25F provides for conditions precedent to retrenchment of workers, Section 25F(b) provides for payment for retrenchment compensation which shall be equivalent to 15 day’s average pay for every completed year of continuous service or any part thereof in excess of 6 months.

As per employment law in India, the payment of retrenchment compensation is condition precedent and failure to pay will vitiate the retrenchment. Therefore calculation of retrenchment compensation is very important. While calculating retrenchment compensation unlike Gratuity component of wages includes Basic, Dearness Allowance and all allowances. Since, payment of retrenchment compensation is a condition precedent; one will have to consider definition of Wages as provided in Section 2(rr) in Industrial Disputes Act. As per labour laws in India, while calculating retrenchment compensation, Basic Wages, Dearness Allowance, all allowances such as attendance allowance, House Rent Allowance, Conveyance Allowance etc shall have to be considered. The value of housing provided as well as value of amenities provided along with housing also will have to be considered.

The period of 6 months or excess thereof will be considered a full year, if period of employment is less than 6 months, it will not be considered a full year. The following illustration will help explain the calculation of retrenchment compensation –

Mr ABC has worked in an organization for 24 years, 5 months and his last drawn package is as under –

Basic Wages – Rs 5, 000 + Dearness Allowance – Rs 3, 000 + Conveyance Allowance – Rs 1, 500 + Washing Allowance – Rs 1, 000 + House Rent Allowance – Rs 1, 000 + Canteen facility worth Rs 1, 000 + Dress Allowance – Rs 1, 000. The total amount to be considered for retrenchment compensation is Rs 13, 500.

13, 500

_______         = 519.23 (1 Day’ salary)

26 days

519.23 X 24 years X 15 days = Rs 1, 86, 922. 80/-

Therefore the amount of retrenchment compensation to be payable to Mr ABC is Rs 1, 86, 922. 80/-

2 Responses to Calculation of Retrenchment Compensation under Indian Employment Laws

  1. Anu says:

    Thanks, it is very helpful information…

  2. naheedhafiz says:

    thank you ! it was very helpful, cleared my doubts.

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