Retrenchment and Lay-Off Under the Labour Codes: Notice and Compensation (2026)
What retrenchment and lay-off mean under the Industrial Relations Code, 2020, the notice and compensation due to workers, and the raised 300-worker threshold for prior government permission. Last verified October 2026.
Explainer · Labour Law · Industrial Relations Code
Retrenchment is ending a worker service for a reason other than punishment, usually because the business no longer needs the role. Lay-off is a temporary inability to give work, for example due to shortage of material or power. Under the Industrial Relations Code, 2020, a retrenched worker with one year of continuous service gets one month notice (or pay in lieu) and 15 days average pay for each completed year of service. The labour codes came into force on 21 November 2025, and the threshold for needing prior government permission rose from 100 to 300 workers. This guide sets out the rules, the compensation, and the forum for disputes. Last verified October 2026.
- Retrenchment: employer ends the job for a business reason, not punishment. Needs one month notice (or pay in lieu) plus 15 days average pay per completed year.
- Lay-off: temporary, worker stays on rolls, compensated at 50 percent of basic wages and dearness allowance.
- Eligibility: notice and compensation apply to a worker with at least one year of continuous service.
- Permission: establishments with 300 or more workers need prior government permission to lay off, retrench or close. The old threshold was 100.
01Retrenchment and lay-off are different
People often use the words loosely, but in law they mean different things. Retrenchment is a permanent end to a worker job for a business reason, not as punishment. Lay-off is temporary. The worker stays on the rolls, but the employer cannot give work for a while, for example because raw material or power ran out.
The difference matters because the money and the process are different. Retrenchment triggers notice and a per-year compensation. Lay-off triggers a daily compensation while the worker waits. Getting the label wrong is a common cause of industrial disputes.
02What counts as retrenchment
Retrenchment is defined in the Industrial Relations Code, 2020 as the termination of a worker by the employer for any reason other than as a punishment by way of disciplinary action. It leaves out some endings that are not retrenchment:
- voluntary retirement of the worker;
- retirement on reaching the age of superannuation;
- end of a contract on its own terms, including the normal expiry of fixed-term employment;
- termination on continued ill health.
Why the definition is wide
Because retrenchment covers any employer-driven ending that is not punishment, the protections apply to most business-reason exits. That is deliberate. It stops an employer dressing up a lay-off or dismissal to avoid paying compensation.
03Notice and compensation
A worker who has been in continuous service for at least one year cannot be retrenched unless three conditions are met under Section 70 of the Code.
| Condition | Requirement |
|---|---|
| Notice | One month written notice stating reasons, or wages in lieu of the notice period |
| Compensation | 15 days average pay for every completed year of continuous service, or any part over six months |
| Notice to government | Notice served on the appropriate government in the prescribed manner |
The order of retrenchment normally follows "last in, first out" for the category of worker, unless there is a good reason to depart from it. The employer must also contribute to a worker re-skilling fund, an amount equal to 15 days wages last drawn, for each retrenched worker.
04Lay-off compensation
A laid-off worker with at least one year of continuous service is entitled to lay-off compensation. Under the Code, this is 50 percent of the basic wages and dearness allowance that would have been payable had the worker not been laid off.
There are limits and exceptions. Compensation is not payable in some situations, such as where the worker refuses alternative employment offered nearby at the same wage, or does not present for work. The detailed conditions are set out in the lay-off provisions of the Code and the rules.
05The 300-worker permission rule
The biggest change under the Code is the threshold for prior government permission. An industrial establishment that employs 300 or more workers (a seasonal or intermittent establishment apart) must get prior permission from the appropriate government before lay-off, retrenchment or closure. The old figure under the Industrial Disputes Act was 100.
The threshold for needing prior government permission to retrench or close rose from 100 workers to 300 workers under the Industrial Relations Code, 2020.
Below 300 workers, the employer does not need prior permission, but still owes the notice and compensation set out above, and must notify the government. The appropriate government may also notify a higher number than 300 for a class of establishments.
06Forum and disputes
A worker who believes a retrenchment was illegal, for example without notice, compensation or permission, can raise an industrial dispute. The matter first goes to conciliation before the conciliation officer. If it is not settled, it goes to the industrial tribunal.
Relief can include reinstatement, back wages, or compensation. The conditions of service for larger establishments are also governed by their certified standing orders. Workers whose service ends should separately check their gratuity entitlement, which is a different payment from retrenchment compensation.
07Where Claw fits
Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.
A retrenchment or lay-off dispute usually travels from conciliation to the industrial tribunal, and often on to a writ petition in the High Court, where the result turns on older rulings about notice, "last in first out" and the validity of a permission. Claw puts that case law within reach: more than 30 crore judgments, High Court decisions reaching back to 1990, searchable and answered in under 5 seconds, so you can see how a tribunal handled a defective retrenchment. It also keeps the live matter in view, tracking the cases, orders and hearings by party or advocate name across 9,102 courts, benches and forums. What you upload is not fed into Claw AI model training.
Create your free Claw account to follow a labour matter by party or advocate name. To search the wider body of law, see case search across Indian courts.
08Sources and further reading
- India Code (official text of the Industrial Relations Code, 2020): indiacode.nic.in
- Ministry of Labour and Employment: labour.gov.in
- PRS Legislative Research (IR Code overview): prsindia.org
- Claw: clawlaw.in
This explainer is general information, not legal advice. The labour codes and their rules are still settling, so check the current text and your state rules and take advice from counsel before you act.
09Frequently asked questions
What is the retrenchment compensation under the labour codes?
A retrenched worker with at least one year of continuous service gets 15 days average pay for every completed year of service, plus one month written notice or wages in lieu. The employer must also notify the appropriate government.
What is the difference between retrenchment and lay-off?
Retrenchment is a permanent end to the job for a business reason. Lay-off is temporary, where the worker stays on the rolls but the employer cannot give work for a time. Lay-off compensation is 50 percent of basic wages and dearness allowance.
What is the 300-worker threshold?
Under the Industrial Relations Code, 2020, an establishment with 300 or more workers must obtain prior government permission before lay-off, retrenchment or closure. The earlier threshold under the Industrial Disputes Act was 100 workers.
Do the labour codes apply now?
Yes. The four labour codes, including the Industrial Relations Code, 2020, came into force on 21 November 2025. Some rules were notified later, so check the current state rules before acting.
Where do I challenge an illegal retrenchment?
You raise an industrial dispute, which first goes to the conciliation officer and, if not settled, to the industrial tribunal. Relief can include reinstatement, back wages or compensation.
Can I track a retrenchment dispute in Claw?
Yes. Claw searches more than 30 crore judgments and follows the cases, orders and hearings for a labour dispute by party or advocate name across 9,102 courts, benches and forums, answering in under 5 seconds. It tracks and researches the matter but does not give legal advice.