If you are an HR professional working for a foreign company operating in India, you might encounter a challenging issue: how to lawfully and reasonably downsize your workforce? India’s labor laws are highly complex, involving multiple regulations at both the central and state levels, with different provisions regarding the definition, conditions, procedures, compensations, and consequences of downsizing. Failure to understand or comply with these regulations could lead to protests, lawsuits, or penalties from employees, unions, government authorities, or courts. Therefore, in this article, I will provide you with some basic knowledge and considerations regarding downsizing in India, hoping to assist you in making informed decisions when facing such situations.
Definition of Downsizing: In India, downsizing generally refers to reducing the number of employees who do not meet the company’s performance requirements or are redundant due to economic reasons. According to the Industrial Disputes Act, 1947, downsizing does not include the following scenarios:
Retirement of workers
Retirement due to reaching the retirement age specified in the labor contract
Non-renewal of labor contract upon its expiry
Termination due to prolonged illness of the worker
It is important to note that the Industrial Disputes Act allows termination of employment for any reason through downsizing. In the case of “Delhi Cloth and General Mills Co. Ltd. v. Sambu Nath Mukerji” in the Supreme Court of India, even the dismissal of employees for unauthorized absence from work was defined as “downsizing”. Hence, the reasons for downsizing are not limited to any specific cause, not solely economic reasons such as redundancy.
Conditions for Downsizing: Besides understanding the definition of downsizing, employers must comply with the provisions of Section 25F of the Industrial Disputes Act when downsizing employees (excluding dismissals for misconduct). This section specifies the conditions that employers must fulfill before downsizing workers. It states:
Workers employed continuously for not less than one year in any industry cannot be downsized unless:
A written notice is provided one month in advance, stating the reasons for downsizing, and the notice period has elapsed, or the worker has been paid in lieu of such notice.
Compensation equivalent to fifteen days’ wages for every completed year of service (or part thereof exceeding six months) is paid to the worker.
According to the Industrial Disputes Act, certain “industrial establishments” (such as factories, mines, or plantations employing over 100 workers) are obligated to provide three months’ notice or equivalent compensation wages for dismissal.
Section 25F(c) also requires employers to notify specific government departments. It is crucial that the notification clearly states the reasons for downsizing and is sent to the relevant government departments as per the requirements of the Act.
Additionally, Section 25N mandates that units averaging over 100 daily workers over the past twelve months require prior approval from the state government for their downsizing reasons. The state government has the authority to approve or defer their downsizing application after completing relevant inquiries.
Therefore, if a downsizing application is questioned and not approved by the state government, simply dismissing employees through standard employment contracts could have serious consequences.
Downsizing Procedures: What procedures should employers follow when downsizing employees? According to the Industrial Disputes Act and other relevant laws and regulations, here are some basic steps:
Establish downsizing goals and criteria: Employers should determine the number of employees to be downsized, which departments, positions, or levels are affected based on factors such as the company’s operational status, business needs, cost-effectiveness, etc. They should establish reasonable, fair, transparent, objective, and non-discriminatory downsizing criteria, such as performance, qualifications, skills, experience, etc. Employers should avoid arbitrary, subjective, or discriminatory downsizing based on factors such as age, gender, race, religion, disability, marital status, political affiliation, etc.
Negotiate with unions or employee representatives: Employers should communicate early with unions or employee representatives, explaining the reasons, scope, criteria, timetable, etc., of downsizing, and listening to their opinions and suggestions. Employers should seek agreement or support from unions or employee representatives to reduce resistance and conflicts during downsizing. If necessary, employers can also sign agreements with unions or employee representatives to clarify rights, obligations, and specific arrangements for downsizing.
Notify government departments: Employers should follow the requirements of the Industrial Disputes Act and other relevant laws and regulations to issue written notices to labor departments or other competent authorities at the central or state level, explaining the reasons, scope, criteria, timetable, etc., of downsizing, and obtain their approval or record. Employers should comply with the notification deadlines and formats to avoid being considered unlawfully downsizing.
Notify employees: Employers should provide written notices to affected employees within a reasonable time, explaining the reasons, conditions, procedures, etc., of downsizing, and providing them with sufficient notice periods or corresponding compensation. Employers should respect the dignity and feelings of employees, avoiding notifying them in public or inappropriate ways. Employers should also provide necessary counseling and support to help employees cope with the psychological and economic pressures of downsizing.
Provide counseling and support: Employers should provide necessary counseling and support to help downsized employees cope with the psychological and economic pressures of downsizing. Employers can provide guidance and assistance in career planning, training, re-employment, entrepreneurship, etc., to increase their employment opportunities and income sources. Employers can also offer benefits such as medical insurance, housing subsidies, child education subsidies, etc., for a certain period to alleviate their financial burdens.
Pay compensation: Employers should pay lawful and reasonable compensation to downsized employees in accordance with the Industrial Disputes Act and other relevant laws and regulations, including notice period wages, unused leave wages, severance pay, downsizing compensation, etc. Employers should settle and distribute these payments promptly and provide relevant documents to downsized employees, such as certificates of termination of employment, social security transfer certificates, etc.
Handle subsequent matters: Employers should handle subsequent matters related to downsized employees properly, such as retrieving company assets, closing company accounts, protecting company secrets, etc. Employers should also pay attention to the feedback and demands of downsized employees, promptly resolve disputes or controversies that may arise, and maintain good communication and relations.
These are some definitions, conditions, and procedures to be aware of when downsizing in India. During this process, employers should comply with laws and regulations, negotiate with unions or employee representatives, notify employees, provide counseling and support, pay compensation, handle subsequent matters, etc., to avoid or minimize disputes arising from downsizing.
There are many cases of downsizing in India that you can refer to. Here are some examples:
In November 2022, India’s largest e-commerce platform Flipkart announced the downsizing of about 800 employees, accounting for 3% of its total workforce. The company stated that this was to optimize the organizational structure and improve efficiency while providing more opportunities for promotion to outstanding employees. Flipkart also promised compensation and re-employment support for the downsized employees.
In December 2022, India’s largest ride-hailing platform Ola announced the downsizing of about 1400 employees, accounting for 35% of its total workforce. The company stated that this was due to the severe impact of the COVID-19 pandemic on its business, with a 95% decline in revenue. Ola also mentioned providing three months’ salary, stock options, and medical insurance for the downsized employees.
In January 2023, India’s largest travel platform MakeMyTrip announced the downsizing of about 350 employees, accounting for 10% of its total workforce. The company stated that this was due to the unprecedented blow suffered by the tourism industry due to the COVID-19 pandemic, leading to a significant decline in demand. MakeMyTrip also mentioned providing compensation, medical insurance, and career counseling for the downsized employees.
These are some examples of downsizing in India, where you can learn about different industries, scales, and reasons for downsizing, as well as the legal requirements, social responsibilities, and humanitarian considerations that employers should pay attention to during downsizing.
