India: 'Dismissal Of Employees On The Grounds Of Non-Performance' – Whether Legally Sanctioned?

Last Updated: 12 May 2017
Article by Raunak Singh

Many IT professionals in India seem to be facing a tough time on account of tightening of the visa regime in the United States of America. Amongst other drastic measures being adopted by the Indian IT giants on account of the said factor, they are being witnessed to cut their staff strength substantially. The challenge for both employers and employees in the IT sector (in India) may escalate further if the recent McKinsey report is to be believed, according to which almost half of the IT services workforce in India will become redundant in the next three to four years. However, the issues and challenges concerning dismissal of employees is not limited to IT industry, as the legal complexities surrounding termination appears to be prevalent across all industries.

Though the existing legislative framework in India specifically deals with several situations under which an employee may be terminated, however, employers are till date seen to be struggling with certain situations / events not specifically captured under the applicable enactments. Dismissal of employees on grounds of non-performance may qualify as one of the said situations. This article makes an attempt to analyze the the legal obligations and pre-conditions which an employer should take into consideration while terminating an employee on the grounds of non-performance.

Termination of Workman

Indian labour laws make a distinction between an employee who is categorized as a 'workman' and the 'non-workman'. Employees that primarily discharge (i) administrative or managerial functions or (ii) those rendering supervisory functions and earning more than the prescribed threshold are not considered to be workmen. The Industrial Disputes Act, 1947 ("IDA") is the key federal statute that governs industrial relations in India and grants certain special protections to workmen (as compared to the non-workmen category of employees) in case of termination of their employment including their retrenchment. 'Retrenchment' as defined in the IDA means termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action and specifically excludes the events of voluntary retirement of workman, retirement on reaching the age of superannuation, termination as a result of non- renewal of contract of employment or termination on the ground of continued ill- health.

In view of the aforesaid and considering that the applicable laws do not specifically deal with the said subject matter, it may be imperative to examine whether termination of a workman on the grounds of non-performance attracts the statutory provisions of 'retrenchment' (as defined under the IDA) or would fall within ambit of the said exception of misconduct (i.e. the case of punishment being inflicted by way of disciplinary action).

Whether a case of 'misconduct' or 'retrenchment'?

The Supreme Court of India in State of Punjab and Ors. v. Ram Singh Ex. Constable, partially examined the said question and observed that the word misconduct though not capable of precise definition, its reflection receives its connotation from the context, the delinquency in its performance and its effect on the discipline and the nature of the duty. It may involve moral turpitude, it must be improper or wrong behaviour, unlawful behaviour, wilful in character, forbidden act, a transgression of established and definite rule of action or code of conduct but not mere error of judgment carelessness or negligence in performance of the duty. In yet another case of Rajasthan State Road Transport Corporation v. Jagdish Ram and Anr., the Rajasthan High Court, clearly laid down that termination on the basis of unsatisfactory service does not invite an inquiry (for misconduct). Thus, the aforesaid judicial pronouncements clearly suggest that termination of a workman on the grounds of unsatisfactory performance do not invite the statutory provisions and procedures relating to misconduct.

The Supreme Court of India, while dealing with similar subjects prior to notification of the term 'retrenchment' in the IDA (in the year 1953), narrowly interpreted the term retrenchment in Pipraich Sugar Mills Ltd. v. Pipraich Sugar Mills Mazdoor Union, to mean discharge of surplus labour force. However, even after incorporation of the said definition by the law makers, the Indian courts continued to interpret the said term to mean merely the discharge of surplus staffs or labour force in a running or continuing business or industry for reasons such as economy, rationalization in industry, installation of new labour saving machinery, etc. The words 'for any reason whatsoever' (as incorporated in the definition of the term 'retrenchment') were not interpreted in their literal sense to include reasons arising out of any act of commission or omission on the part of the workman (like loss of confidence, performance issues, etc.).

However, the Indian courts took a contrary view in later part of the century thereby removing the cobwebs with respect to definition of the said terminology. In the year 1983, the question again came before the Supreme Court in the matter of Management of Karnataka State Road Transport Corporation v. M. Boraiah and another, wherein it was held that termination on the ground of services not being found satisfactorily falls within the ambit of retrenchment. Further, in a landmark case of Punjab Land Development and Reclamation Corporation v. The Presiding Officer, Labour Court, Chandigarh, the Full Bench of the Supreme Court confirmed that the words 'for any reason whatsoever' needs to be interpreted and understood in a much wider and literal sense. Accordingly, the term 'retrenchment' was finally held to mean the termination by the employer of the services of a workman for any reason whatsoever (without limiting the criterion for retrenchment to the extent of superfluity of labour or staff) except those specifically excluded from the definition.

The aforesaid judicial observations reflect the existing legal position and outlines the roadmap with respect to termination of a workman on the grounds of unsatisfactory performance.

Termination of Non-Workman

In India, every state has its independent Shops and Commercial Establishments Act ("S&EA") which regulates employment conditions in shops and commercial establishments. Termination of non-workmen category of employees (working in a shop or commercial establishment) are broadly governed by the provisions of S&EA being applicable to the respective employee, read with terms and conditions of the employment contract executed between the parties.

Under most of the S&EA, an employee is entitled to notice of one month or wages in lieu of notice if the employer wishes to dispense with the services of that employee except in case of misconduct. Where an employee's services are terminated on account of misconduct, an employee is not entitled to any notice or payment in lieu thereof. Generally, the said enactments define misconduct to include acts of theft, fraud, misappropriation or dishonesty in connection with the employer's business or property. The scope of the said definition has however not been extended to capture the circumstance of inefficiency or unsatisfactory performance by the employee. In view of the aforesaid, it may be concluded that the said notice period is a pre-condition for terminating an employee, including the case of termination on the grounds of inefficiency or unsatisfactory performance. The Madras High Court while dealing with the question that 'whether or not the notice period requirement (referred under the Tamil Nadu Shops and Establishments Act, 1947) gets attracted in the event of termination on the grounds of inefficiency', in the case of Miss T.N. Chandra v. South India Corp (Agencies) Ltd. and another, held that an employee cannot be thrown out of job on the ground of 'extremely unsatisfactory conduct' without following the procedure established by law and putting the employee to notice.

Pre-condition for initiating the termination procedure

An employee may challenge / dispute the case of his or her termination by the employer (on account of non-performance) mainly on two grounds, namely by questioning the procedural aspect (of the termination) and by denying existence of the element of non-performance. Therefore, despite complying with the aforesaid legal requirements, a termination may construe to be bad in law if the employer fails to prove (in the respective forum) the existence of the alleged grounds amounting to termination. In this regard, for the purpose of analyzing the genuinity of employer's allegation (i.e. non-performance), the Indian courts have generally been witnessed to take into consideration the warnings / communications made by the employer to the employee concerning the deficiency in the services. In the case of M. Visvesvarya Industrial Research and Development Centre v. Mr. Dilip Madhavrao Vaidya, the Bombay High Court, has observed that the cases where communication is found to be insufficient in this regard, the same may be construed to be arbitrary exercise of employer's power. In fact, the Supreme Court on the said issue observed that an informal, if not formal, give-and-take, on the assessment of work of the employee should be there. The employee should be made aware of the defection in his work and deficiency in his performance. The Supreme Court of India has also observed in the case of Dr. Mrs. Sumati P. Shere v. Union of India, that timely communication of the assessment of work in such cases may put the employee on the right track. Without any such communication, it would be arbitrary to give a movement order to the employee on the ground of unsuitability. Thus, it is advisable for the employers to establish and record a formal line of communication with the employees with respect to their performance evaluation.


In the absence of any defined set of rules specially designed for the cases of non-performance, the Indian courts have walked an extra mile to unfold the complicated legislative framework and demarcating the intent of the law makers in relation to termination of employees on account of performance issues. However, with the growing number of cases concerning such terminations, it may be prudent for the legislators to notify a simplified procedure and requirements for the said purposes.

Further, the complex labour regulations in India have constrained the growth of the formal manufacturing sector where these laws have their widest application, clearly indicating a need for modification of the same, in light of the economic objectives of the nation. Though the government of India has been taking various initiatives to simplify the labour law regime in India with an intent to promote the country as an investor friendly destination, however, a sigh of relief has yet not been offered to the employers on issues such as discussed in this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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