Part 2: Possibility of Reduction in Workforce and Wage Bills

In Part 1 of this series, we discussed Force Majeure and Suspension/Termination of Contracts. You can contact to get a copy of Part 1 of this series. 

In this Part 2, we have attempted to answer some of the questions which businesses are asking concerning their ability to reduce workforce and wage bills.


Can businesses reduce their wage bill under force majeure clause? 


Simple answer is – Yes. Under Indian laws, answer to this question needs understanding from two perspectives: 

For management/supervisory category employees: In India, protection under most of the labour laws is not available to the employees in management/supervisory category. The employment of such senior executives is therefore governed by their contracts. [We have discussed in Part 1 of this series, the possibility of suspension/frustration of contracts due to the prevailing Coronavirus situation, and the same principles would apply to temporary suspension/termination of employment of management/supervisory category employees also.

You can suspend the employment contracts of the management category employees, in accordance with the force majeure clauses, if any, in their employment contracts. A better approach would however be to discuss, explain, agree and resolve the situation, and chances are that many, if not all, of the senior executives would agree to cooperate in the efforts of the employer to reduce the wage bill and to stay afloat during the current and near future times. Furthermore, in larger organisations, you would need cooperation of senior executives to even discuss and implement the options for other employees, as discussed below. 

For "workman" category employees: Workmen (as defined primarily under the (Indian) Industrial Disputes Act, 1947 – "ID Act" for short) are protected in terms of most of the Indian labour laws. 

The ID Act in cases of temporary unavailability of work provides an option to the employer to reduce its wage bill by laying off the workmen. For the first 45 days of such lay-off, the workmen need to be paid half of the basic wages and dearness allowance. If the lay-off continues after 45 days, the payment to the workmen can be as agreed between the employer and the workmen. The employer also can retrench the workmen (i.e. terminate them in compliance with the procedure prescribed under the ID Act) if the lay-off continues beyond 45 days. 

The provisions of "lay-off" under the ID Act are prescribed both in its Chapter-VA and Chapter VB. Chapter-VA is applicable to industrial establishments (covering establishments such as office premises, showrooms, etc.) where 50 or more workmen are employed. Chapter-VB primarily applies to factories, mines and plantations where 100 or more workmen are employed. 

The definition of 'lay-off' under the ID Act includes 'natural calamity or for any other connected reason', and we feel that COVID-19 would qualify within this expression as a reason for lay-off. The term 'natural calamity' is not defined under the ID Act or other major Indian labour laws. However, the Ministry of Finance, Department of Expenditure Procurement Policy Division vide Office Memorandum No. F.18/4/2020-PPD dated February 19, 2020 clarified that COVID-19 should be considered as a case of 'natural calamity' under force majeure clauses appearing in the Manual for Procurement of Goods, 2017 of the Government of India. While such notification does not apply to ID Act and its interpretation, it would have a persuasive value supporting the classification of COVID-19, in absence of the definition of 'natural calamity' under the ID Act. 

Also, no prior permission from the appropriate Government is required for laying off workmen under Chapter-VA. Chapter-VB on the other hand exempts the employers from the requirement of prior Government permission in cases of laying off of workmen due to a natural calamity. Therefore, under both chapters, no prior permission of the Government may be required for a lay-off. The ID Act is a central legislation, and each State has its own set of legislations with regard to workmen. The ID Act however has an overriding effect over the State legislations governing lay-off. Therefore, a strategy developed comprehensively in view of the provisions of the ID Act has a good likelihood of nationwide acceptance.


Can employees be asked to avail paid leave or work from home considering the current situation?


Paid leaves, or work from home as per the advisories issued by certain State governments are similar in effect with respect to containing spread of the disease. 

They are however different from the work perspective. During paid leaves, the employer pays while the employee is on a leave. During work from home, the employer pays and is in return entitled to demand performance and defined output from the employee. Also, it is not practicable for every employee (for example a courier delivery boy) to work from home. 

Paid leave (including earned or accumulated leave) being an employee's right, cannot be unilaterally enforced by the employer. The businesses can however, considering these difficult times, discuss and arrive at an understanding with their employees, for them to avail paid/earned/accumulated leaves during the next few weeks in rotation, so that only such number of employees, as are required to keep the business in motion at the present operational level, are present on a daily basis. Of course, this option may require further co-operation from the employees/trade unions and an assurance that the company would be open to consider exceptional cases for additional paid leaves during the remaining period of the year. 

Work from home, on the other hand can be enforced by the employers, especially when the objective is "employee health and safety", and it is backed by Government advisories. 

Neither paid leaves nor work from home reduce the wage bill for the businesses. Paid leaves are nevertheless advantageous in aggregate, once implemented with employee consent, as larger employee presence would be ensured once the business returns to normalcy as many employees would have wholly or partially exhausted their paid leaves.


With the costs and efforts associated with employee rehiring and training, the employers can consider the option of "lay-off" as an interim measure to reduce their wage bills. Each business may however, depending on its own set of facts and circumstances decide on its preferred course of action.  

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