One of the most critical needs of India’s burgeoning software industry and other outsourcing service providers is to have the flexibility and independence to hire the most dignified workforce and lay off unproductive employees. There is also a growing need to strike a fine balance between employer hiring and firing policy and workers’ rights. This article proposes to discuss India’s downsizing laws, the right to employee compensation and the applicability of these laws to India’s information technology industry (the “IT”).
Termination of employment must be in accordance with the Stores and Establishments Act as applicable to the jurisdiction where the IT company is located and the Industrial Disputes Act of 1947 (hereinafter the “Identification Act”). The Stores and Establishments Act generally allows an employer to dismiss its employee, who is not an employee hired for a specific period or on a leave vacancy, from service by providing the employee with thirty (30) days notice or a longer period as may be required under the terms of employment or salary in lieu thereof.
The Commerce and Establishments Law does not usually apply to employees who occupy positions of a confidential, managerial or supervisory nature, that is, all non-workers can be fired at will in terms of the employment contract entered into with the respective employee.
The Identification Law, which is applicable to all industrial and commercial establishments, defines employees / workers, and both qualified and unskilled persons can be considered “workers”. However, a person employed primarily in a managerial or administrative capacity or if the nature of the services provided by an employee is supervisory in nature, the employee cannot be considered a worker. In view of this, the Boss, Project Managers, Manager (business development) of project teams in an IT or outsourcing company cannot be classified as ‘workers’ subject to a real assessment of their roles and responsibilities. . However, it is likely that the other team members, associates, trainees, etc., employed by an IT company may be considered ‘workers’ subject to evaluation of their specific job profiles, roles and responsibilities.
Termination of a worker’s service (other than for the specific reasons described below) is called “downsizing.” In terms of section 2 (oo) of the Identification Act, downsizing “means the termination by the employer of a worker’s service for any reason, except as a punishment inflicted through disciplinary action, but does not include :
a) voluntary retirement of the worker; gold
(b) retirement of the worker upon reaching retirement age if the employment contract between the employer and the worker contains a stipulation to that effect; gold
bb) the termination of the worker’s service as a consequence of the non-renewal of the employment contract between the employer and the worker in question upon its expiration or of the termination of said contract by virtue of a stipulation in his name contained therein;
(c) termination of the service of a worker due to persistent illness “.
In view of the above definition, it is clear that employees who have been hired during a specific training period can be asked to retire at the end of that period without being offered a job offer by the company’s technology company. information. If the company needs to extend its training period, it can extend the specified period and reserve the right to offer employment at the end of the extended training period, otherwise, the training period of each of these employees would be considered concluded.
The legal requirements regarding termination of services are more onerous once a company employs more than 100 workers. In terms of the Identification Act, if an industrial establishment employs more than 100 workers, a company cannot reduce, that is, terminate the services of any worker who has been in continuous service for not less than one year, unless (i) the worker has received a three (3) month written notice indicating the reason for the reduction and the notice period, and (ii) prior permission has been obtained from the corresponding state government for the reduction (section 25N of the Identification Law).
If permission is not obtained, the reduction will be considered illegal from the date the notice was given and the worker will be entitled to all the benefits of the law as if no notice had been given. From a practical point of view, obtaining approval from the state government for the reduction is considered almost impossible due to the implications of the resulting unemployment. Therefore, companies rarely ask the state government for permission to cut. The penalty for contravening the aforementioned provisions on downsizing is imprisonment for up to one month or a fine, which can be up to 1000 rupees, or both. Assuming approval from the state government is obtained, workers ‘services can be terminated by giving three months’ notice and paying 15 days of average salary for each full year of service in excess of six months.
The term “workers” in the meaning of the Identification Act has not been interpreted by the courts with a specific reference to data processors or software workers. However, the courts have addressed the question whether a company engaged in the development of computer software is an “industrial establishment” within the meaning of the Identification Act. In the case of Cholamandalam Software Ltd. v / s. Madras Additional Labor Court [(1995) (S) LLJ 78 Mad], the honorable sole judge of the Madras High Court examined the question whether Cholamandalam Software, a company that provided computer services related to the collection and maintenance of information and developed computer applications to meet the needs of its customers, was an ‘industrial establishment ‘within the meaning of section 25L of the Identification Act. In order to resolve this issue, the honorable judge addressed the question of whether the company was a “factory” and engaged in some “manufacturing process”. The Honorable Judge stated that Explanation II to section 2 (m) of the Factories Act is clearly intended to exclude facilities in which electronic data processing units or computers are installed and in which it is not being carried out. perform any other manufacturing processes within the scope of the definition of ‘factory’.
The Honorable Judge, therefore, essentially considered that electronic data processing units had been specifically excluded from the definition of “factory” in Explanation II. Therefore, Cholamandalam Software could not be considered a factory under section 2 (m) of the Factories Act and, in turn, could not be considered an “industrial establishment” within the meaning of section 25L of the Identification Act. This ruling was later confirmed by the Division Chamber of the Madras High Court, after which the workers of the company lodged an appeal before the Supreme Court. The Supreme Court, while distancing itself from the interpretation provided by the Madras High Court, recognized that the key question is whether the data processing and software preparation activity would constitute a ‘manufacturing process’ and referred the matter to a further court. of the Supreme Court. Court for consideration, whose decision is still pending.
In view of the pending Supreme Court consideration, the question of whether software companies or other outsourcing service providers would constitute an ‘industrial establishment’ under the Identification Act remains unanswered to date and there is no clarity as to whether a Software company can fire its employees without complying with the Identification Act if it has more than 100 employees.
From a practical point of view, the IT industry is not considered an ‘industrial establishment’ within the meaning of section 25L of the Identification Act and follows the policy of ‘hire and fire’ without complying with the Identification Act of seek prior approval from the state government. , relying on the ruling of the Division Chamber of the Madras High Court, which has held that software companies are not an “industrial establishment” and are therefore not covered by the strict reduction provisions mentioned in Chapter VB of the Identification Act.
Despite the above flexibility, software companies will be required to comply with the staff reduction provisions of section 25F of the Identification Act which applies to all industries (and not just industrial establishments) and requires that “No worker employed in any industry who has been in continuous service for not less than one year under an employer shall be terminated by such employer until:
(a) The worker has been given one month’s written notice stating the reasons for the downsizing and the notice period has expired, or the worker has been paid in lieu of such notice, the corresponding wages the notification period;
(b) the worker has been paid, at the time of the reduction, compensation that will be equivalent to the average salary of fifteen days for each full year of continuous service or any part thereof in excess of six months; Y
(c) the notification is delivered in the prescribed manner to the corresponding government or to the authority that may be specified by the corresponding government through notification in the Official Gazette.
In view of the above, an information technology company can terminate the services of those employees who have not completed a year of employment in terms of their respective employment contract, that is, by providing a minimum notice of one month without complying with the aforementioned reduction provisions. .
For employees who qualify as ‘hardworking’ and have competed in continuous service for one year, in cases other than misconduct, the IT company may terminate their services by providing a minimum of one month’s notice (or said agreed notice) in writing indicating the reasons for dismissal together with a compensation for dismissal equivalent to 15 days of average salary for each full year of continuous service that exceeds six months and the necessary information is provided to the corresponding labor authority.
My next article will deal with situations where termination of services is necessary due to employee misconduct and procedural compliance required by Indian labor laws.
Seema jhingan