What are the termination and retrenchment rules in India under the Labour Codes?
Termination and retrenchment rules in India now sit largely in the Industrial Relations Code, 2020, in force since 21 November 2025. Retrenchment needs one month's notice (50 to 299 workers) or three months' (300 or more), compensation of 15 days' average pay per completed year of continuous service, and a Re-Skilling Fund contribution. Larger sites need government permission.
Indian central rules as of 31 October 2026. This is general information, not legal advice. Check state rules and your contract.
At a glance
- The four Labour Codes came into force on 21 November 2025, per PIB.
- Retrenchment compensation: 15 days' average pay for each completed year of continuous service.
- Re-Skilling Fund: an amount equal to 15 days' wages for each retrenched worker.
- Establishments with 300 or more workers need prior permission for layoff, retrenchment or closure.
- Everyone leaving must be paid all due wages within two working days.
Termination is not one thing
"Termination" covers different exits, and each follows different rules:
| Exit | Main source of rules |
|---|---|
| Resignation | Your appointment letter and notice clause |
| End of a fixed-term contract | The contract, with gratuity after one year of service |
| Dismissal for misconduct | Standing orders, service rules and your contract |
| Retrenchment | Industrial Relations Code, Chapters IX and X |
| Closure | Industrial Relations Code, with notice or permission |
The Codes do not set a single statutory notice for every ordinary termination. Notice for most exits comes from the appointment letter or standing orders, as the Ministry's handbook describes. See probation period in India and fixed-term employment.
Retrenchment rules by establishment size
The Ministry's handbook describes two tiers for industrial establishments such as factories, mines and plantations.
| Item | 50 to 299 workers (Chapter IX) | 300 or more workers (Chapter X) |
|---|---|---|
| Government step | Serve notice before layoff, retrenchment or closure | Obtain prior permission |
| Notice to worker | One month before retrenchment | Three months before retrenchment |
| Compensation | 15 days' average pay per completed year of continuous service | Same |
| Re-Skilling Fund | 15 days' wages per retrenched worker | Same |
| Closure | At least 60 days' notice to the government | Apply at least 90 days ahead |
| Layoff pay | 50 percent of basic wages plus dearness allowance | Same |
The handbook also says workers with at least one year of continuous service are entitled to notice and retrenchment compensation when ownership or management transfers. The existing explainer on the Industrial Relations Code covers strikes, unions and standing orders, so this page does not repeat them.
Worked example (illustrative)
A worker with a monthly average pay of Rs 30,000 and six completed years of continuous service. Fifteen days' pay is half a month, so compensation is 6 x half of Rs 30,000 = Rs 90,000. The employer would also pay the matching 15 days' wages, Rs 15,000, into the Workers' Re-Skilling Fund. This ignores gratuity and other dues, which are separate. Use your own figures and confirm how "average pay" is calculated.
Pay and paperwork on exit
- Pay all due wages within two working days of the employee leaving, whether by resignation, dismissal or termination (Code on Wages, per the Ministry). See full and final settlement.
- Pay gratuity within 30 days of it becoming payable, if the employee qualifies.
- Issue the relieving and experience letters your policy promises.
- Record the reason for the exit and every notice given.
Which employees are covered?
The Industrial Relations Code protects "workers", and managerial or administrative staff fall outside that definition. Supervisors above a notified wage limit are also outside it. For those staff, the contract governs. Treat this as a boundary to check, not a safe harbor.
Mistakes to avoid
- Calling a retrenchment a "performance exit" to avoid notice and compensation.
- Counting only permanent staff when you check the 50 and 300 thresholds.
- Skipping the government step in a larger establishment.
- Forgetting the Re-Skilling Fund contribution.
- Applying old Act procedures without checking current rules. Old rules continue only where consistent with the Codes. See rules status and state variations.
For a plain definition, see the retrenchment glossary entry.
FAQ
What notice must I give to retrench a worker? One month in establishments with 50 to 299 workers and three months in establishments with 300 or more, per the Ministry's handbook.
Is retrenchment compensation the same as gratuity? No. Each is a separate entitlement with its own formula and conditions.
Do I need government permission to lay off staff? In industrial establishments with 300 or more workers, yes, before layoff, retrenchment or closure.
Does this apply to IT or office employers? The Chapter IX and X thresholds are for industrial establishments. Whether your business is one depends on the Code's definition and your state. Ask a labour lawyer.
Do state rules change this? They can. Labour is a concurrent subject, so check your state's notified rules.
Sources
See front matter. Accessed 31 October 2026.
This is general information, not legal, tax or immigration advice. Rules change and your situation may differ. Consult a licensed attorney or qualified adviser.