All you need to know about termination of employment and severance pay

‘Termination of employment’ will always be a frightening situation for any working professional. The livelihood of any salaried person is completely dependent upon him/her being in employment, and earning their monthly compensation. However, if this livelihood is taken away then it can be a very challenging situation for the person who is terminated from the job. To manage all the current and future expenses without being in a job can lead to a great extent of anxiety. But termination of any employee can be due to various reasons and the company which is taking such decision will and should have a valid reason for the same. In the western countries employers have to follow a few norms and procedures under law before firing an employee from the service and in some cases even pay compensation to them. But in India, majority of companies fail to stick to the norms and take impulsive actions.

In this article, we have listed down the rules and procedures for termination of service, and the monetary entitlements for both the parties – employer and the employee.

‘Workman’ and ‘Non-workman’
In India we have two categories of employees named ‘workman’ or ‘non-workman’. The term ‘workman’ as described under the Industrial Disputes Act, 1947 (“ID Act”), and would inter-alia mean all persons employed in any industry but does not include an employee who is in a managerial, administrative or supervisory role. The definition under the ID Act, has no such set formula to distinguish between a workman and a non-workman, and the position has been tested and established through various judgments, completely dependent upon the nature of work of an employee.

An employee who is considered to be a workman, will be governed under the ID Act, and their termination of service will have to be in accordance with the provisions of the ID Act.

Termination of employment
There are three main criteria for termination of employment – misconduct, discharge or retrenchment.

Misconduct
Termination of employment can be for employee’s misconduct, for which the employer would need to conduct disciplinary proceedings. The process for conducting a disciplinary proceeding has been set out under law, and includes constituting and having a disciplinary panel, serving a show cause notice to the misbehaving employee, and giving the employee a reasonable chance to put forth his point to defend himself/herself. Proceedings have to be conducted in an unbiased manner, keeping in mind principles of natural justice.

In some cases, as per the disciplinary panel proceedings some decisions may justify dismissal without notice, and any compensation. Under law, the term misconduct has a list of circumstances and events which would categorize as misconduct. It is a complete list, and hence, employers have the right to include in their company policies/ service rules, such other events or actins, which would fit to be as ‘misconduct’ as per their line of business. Misconduct includes wilful disobedience; theft, fraud or dishonesty; mindful damage or loss of organization’s or employer’s property; bribery for own good; habitual lateness or absence without any reason; striking unlawfully and sexual harassment.

The abovementioned procedure for termination will apply to all employees regardless he/she is a workman or non-workman.

Discharge
The termination of employment of employees who are not workman are governed by the notice period in their employment contract, and the shops and establishment act (“S&E’”) of the State in which they work. Generally, the State S&E’s provide for at least one month’s notice of termination, or pay in lieu of termination, and in some instances, termination needs to be with cause, and in some other cases, the employer needs to pay compensation to the employer for termination. The notice of dismissal under an employment contract should not be less than what is mentioned under law.

Retrenchment
The ID Act has defined the steps to be undertaken for retrenchment. The term retrenchment has been defined to mean termination by the employer of employment of a worker for any reason, other than disciplinary grounds, with certain exceptions.

An employer who proposes to retrench a workman, who have been employed with the organization for more than one year, must give one month’s notice (along with the reason for the retrenchment) or pay in lieu of such notice to the workman. The employer must also inform the local labor authorities of the retrenchment within a set time frame.

Additionally, employers are also required to apply the “last in-first out” rule in selecting the workman for retrenchment except for reasonable cause. A retrenched workman is entitled to retrenchment compensation as per the provisions of the ID Act, which is calculated at the rate of 15 days wages for every year of continuous service. Certain organizations (factories, mines, plantations) employing over 100 workers may not be retrenched unless three months’ of advance written notice, stating reasons for the retrenchment, or pay in lieu of notice, is given to the worker. Furthermore, prior approval from the relevant governmental authority is required to be taken before the retrenchment is carried out.

Severance Pay

Once an employee is terminated, the employer has to clear all dues, which are payable to the employee at the time of the termination of the service. Some of these payments are as below:

1. Notice pay, is the notice of termination has not been given to the employee
2. Salary for the days the employer has worked, but not paid for, basically during the month in which the employee has been terminated from the service
3. Payment of gratuity for employees needs to be paid for employees who have completed at least 5 years of service with the organization, as per the Payment of Gratuity Act 1972. This act is applicable to organizations which have 10 or more employees. The gratuity is calculated at 15 days salary for every completed year of service of the employee
4. Leave encashment if applicable in the case of terminated employee, for the leaves accrued, but not used during the service
5. Statutory bonus needs to be paid to the employee, if eligibility is there. Employees who are earning up to Rs. 10,000 per month and has worked in an organization for not less than 30 working days in a financial year will be entitled to statutory bonus as per the Payment of Bonus Act, 1965
6. Retrenchment compensation, in case of the workman employee, whose services have been retrenched by the employer
7. Such other dues that may have been contractually and mutually agreed between the employer and the employee at the time of joining, or is payable under the employer’s company policies
8. The employer needs to assist the employee in making applications to the right authority, for withdrawal of the provident fund dues, accumulated to the credit of the exiting employee

Apart from the above list there may be other dues payable to the employee which will vary from organizations or type of employment.

This article is a brief write up to disseminate information on different types of termination of employment and the severance pay which the employees are entitled to. However, each case of service termination is different and has to be dealt with independently, on a case to case basis.