Afraid of Layoffs? Analyzing its legality and impact

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Layoff is one of the most pervasive words in the news recently. Accenture announced that it will lay off 19,000 employees globally. Furthermore, six startup firms including Byju’s, Ola, Blinkit, Lido, Unacademy and Vedantu laid off over 11,000 employees. So what does the word layoff mean and entail with respect to the liability of the employer and the rights of the employees or workers?

Layoff means the failure, refusal or inability of the employer to give employment to a workman whose name is borne on the muster rolls of his industrial establishment on the grounds of shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery or natural calamity or for any other connected reason. However, the workman must not be retrenched. This definition, as mentioned in the Industrial Dispute Act, 1947 (hereinafter ‘the Act’), is applicable to industries which could mean any business, trade, service etc. A seven judge Bench of the Supreme Court, in the case ofBangalore Water Supply v. A. Rajappa, laid down a triple test to identify an industry. Accordingly, there is an industry in the enterprise “where there is

  1. Systematic activity,
  2. Organized by cooperation between the employer and employee,
  3. For the production and/or distribution of goods and services calculated to satisfy human wants and wishes.”

Nevertheless, the provision of layoff does not apply to certain establishments as per Section 25K of the Act which include industrial establishments that do not employ more than 100 workers on an average per working day and establishments that are seasonal.

But this definition is wide enough to cover the IT companies that are at the centre of mass layoffs recently. Therefore, it comes within the ambit of the Industrial Disputes Act.

Conditions to be fulfilled for a layoff

An employer needs to take prior permission from the appropriate government or such authority as may be specified by that government by way of an application along with the reasons for such layoff. This condition can be waived in cases of shortage of power or natural calamities. Any employer who violates this requirement shall be punished with imprisonment for a term which may extend to one month or with a fine which may extend to Rs. 1000 or both.

In the case of Mervin Albert Veiyra v. C.P. Fernandes & Anr., the Bombay High Court states that lay-off is an obligation imposed on the employer, rather than a right, when situations mentioned in the Act arise.

Rights of the workers

Only the workmen whose names are borne on the muster rolls of the establishment and who have completed at least 1 year of continuous service could be laid off by the employer. Furthermore, the workmen have the right to receive compensation for all days during which they are laid off. However, the employee is not bound to pay full wages to them. In certain situations, the workmen would not be bound to receive compensation. They are:

  1. If they refuse to accept alternative employment when offered by the employer;
  2. If they do not present themselves for work at the establishment at the appointed time during normal working hours at least once a day;
  3. If the layoff is due to a strike or slowing down of production on the part of workmen.

The compensation required to be paid is equal to fifty per cent of the total of the basic wages and dearness allowance that would have been payable to them had they not been laid off. But if any workman is laid off for more than forty-five days, they would not receive any compensation beyond the expiry of the first forty-five days. Furthermore, the employer can also lawfully retrench the employee after the first forty-five days as per the provisions of this Act and the compensation for that would have to be paid accordingly.

The provision of layoff violates the fundamental rights of the workers. Article 21, which guarantees the right to life also includes the right to livelihood. The compensation received by the workers who are laid off is not equivalent to their monthly salaries and remuneration. Furthermore, it is paid only for a period of forty-five days. This affects the livelihood of the workers and in turn, affects their standard of living and their ability to meet their basic needs. The Supreme Court in the case of Olga Tellis v. Bombay Municipal Corporation had stated that the right to life does not merely refer to an animal existence but also includes the means of livelihood required to live a life.

Even though there exist reasonable reasons for layoff and it requires prior permission from the government, it affects the life of the workers adversely leaving them in a situation of insecurity and anxiety with regard to their employment, it being their source of livelihood. It also has major psychological impacts on the workers.  

The psychological impact of layoff

Layoff causes anxiety and insecurity but it also impacts the survivors of layoffs by way of low morale and survivor’s guilt. This hinders their job performance as well leading to a decrease in the quality of work. The retained workers also grieve their co-workers who were laid off resulting in sadness, low productivity, loss of interest and job satisfaction. Moreover, the diminished future earning potential and searching for new jobs can harm the mental health of the workers.

Economic effect and impact on the establishment

There is a possibility that workers would resign due to the condition of the establishment as well as the fear of losing their jobs. This could damage the reputation of the establishment making it difficult for them to attract new high-quality workers.

The underperformance of the workers and the establishment ultimately affects the entire economy. Unemployment and reduced sources of income lead to reduced consumer spending and a slowdown in economic growth and low GDP.


Looking at the negative impact of layoffs on workers, establishments as well as the economy, it is necessary to deal with the causes of layoffs. Recession, cost-cutting, mergers etc. are a few reasons for layoffs. The recent covid-19 pandemic has also aggravated the issue of worker layoffs and unemployment. In such situations, other cost-cutting strategies like temporary pay cuts, reduced working hours, and exploring various avenues of finances should be adopted by the establishments. A furlough or appointment of contract labour could also be an alternative to layoffs.

This article is authored by Juhi Bhayani, 3rd year BA. LL.B student at Institute of Law, Nirma University, Ahmedabad.

All efforts are made to ensure the accuracy and correctness of the information published at Legally Flawless. However, Legally Flawless shall not be responsible for any errors caused due to oversight or otherwise. The users are advised to check the information themselves.

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