Supreme Court grants continuity of services and back wages to retrenched employees as retrenchment was not bona fide

The court reaffirmed the principle that retrenchment does not entitle employees to continuity of services, but such a claim shall be followed by a bona fide retrenchment. The lack of bona fide intention by the employer allowed the court to grant these benefits to the aggrieved parties.


ON August 11, a division bench of the Supreme Court, comprising Justices B.R. Gavai and P.S. Narasimha, held that if the retrenchment of employees followed by an offer of re-employment on new terms and conditions is not bona fide, the orders of retrenchment may be set aside, and the employees will naturally be entitled to continuity of service along with back wages.

Background of the case

The case pertained to a cooperative society named Armed Forces Ex Officers Multi Services Cooperative Society Ltd, which provides support services such as transportation, house-keeping and security services to companies and government establishments, which was the appellant in the case. The respondent, the Rashtriya Mazdoor Sangh, is a labour union representing 55 drivers formerly employed by the appellant. The appellant had appealed against the order of the Bombay High Court.

The 55 drivers were employed by the appellants from 1998, and their contract expired on June 6, 2004. While the terms of the fresh contract were deliberated, they demanded a pay hike and permanency of casual labour. The impasse was referred to conciliatory proceedings on January 22, 2007. But the drivers resorted to a strike to advance their demands the next day.

The appellant reached the doors of the Industrial Tribunal, contending that the strike was illegal. The tribunal initially granted relief to the appellant in an interim order by asking the 55 drivers to refrain from conducting violent demonstrations within 200 meters of the appellant’s premises. It also held the strikes to be illegal under Section 24(1)(a) of the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971. Section 24(1)(a) defines a strike as illegal if it is carried out without giving notice to the employer in a prescribed form or if the strikes are conducted within 14 days of such notice. Further, on the direction of the tribunal, the drivers joined the services of the appellant from March 16, 2007.

However, just after the employees resumed their work, the appellant retrenched their services on March 22, 2007, by claiming that it had closed its business. The employees were granted compensation under Section 25F of the Industrial Dispute Act, 1947 which requires the workman to be paid at the time of retrenchment.

The respondent approached the Conciliation Officer arguing that there was no closure of transport services as claimed by the appellant, and claiming that this was illegal conduct. Meanwhile, the appellant again offered reinstatement to the employees; however, it was deemed as fresh employment. The Supreme Court considered that this event had a direct bearing on the decision of the Industrial Tribunal.

The Government referred the dispute to the Industrial Tribunal, Pune which gave its award on September 7, 2017, directing the appellant to reinstate the drivers. The tribunal reasoned that there was no complete shutdown of the company as claimed by the appellant while retrenching the employees, and that the act of retrenchment was carried out to punish the employees for organising strikes. The reasoning is strengthened by the fact that employees were offered reinstatement soon after the retrenchment, which displays the ‘lack of bona fide intention’.

Section 2(oo) of the Industrial Dispute Act defines retrenchment as “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…” It excludes voluntary retirement, and termination due to non-renewal of contract, among other things. In the present case, as the tribunal intelligibly noted, the act of terminating the services of drivers was meted out as punishment, thereby raising questions over the legality of the retrenchment by the appellant.

The drivers were reinstated by the tribunal with continuity of wages and 75 per cent back wages. Eight of them were denied these benefits as they acknowledged gainful employment post retrenchment.

The appellant filed a writ petition in the Bombay high court against the award of the tribunal. The respondent also approached the high court for the denial of back wages to the eight drivers. But the high court reasserted the findings of the tribunal. The appellant appealed against the order of the high court in the Supreme Court.

Supreme Court’s rationale for its judgment

The counsels for the appellant argued on four grounds which were subsequently rebutted by the division bench’s judgment, authored by Justice Narasimha.

Firstly, they submitted that the illegal strikes of the drivers led to the termination of their contract with the appellant. Thus arose the situation of surplus labour which had to be fixed through retrenchment, which became necessary. Further, the drivers saw this as retrenchment and not as a closure, as observed by the tribunal and the high court.

The Supreme Court, however, endorsed the findings of the previous orders that the terms of the retrenchment seemed like a virtual closure. Even the letter of the appellant which retrenched the services of the drivers claimed that the business of the appellant was shutting down. The terms of re-employment lacked bona fide intention on the part of the appellant as it would amount to fresh employment of the drivers, where they would have to forgo the previous benefits of the long-standing services, the court affirmed.

Secondly, the appellant claimed that they were reorganising their business by temporarily shutting down their transport services. They relied on the principle laid down by the Supreme Court in the case of Parry & Co. Ltd. versus P.C. Pal & Ors. (1968), which pronounced, as per the appellant that “a bona fide policy decision for reorganising the business based on economic considerations is within an enterprise’s proprietary decision and retrenchment in this context must be accepted as an inevitable consequence”. But the Supreme Court refused to apply the principle in the present case, as retrenchment was meted out as a punishment and retribution against the strikes of the drivers. Moreover, the strikes did not call for the closure of the entire business, it ruled.

Thirdly, the appellant argued that the Industrial Tribunal was wrong in terming the re-employment of drivers as illegal, as the appellant complied with the directions of the Section 25H of the Industrial Dispute Act by granting a preference of re-employment to the drivers post retrenchment. The appellant relied on the Supreme Court’s judgments in Cement Corpn. of India Ltd. versus Presiding Officer Industrial Tribunal-cum-Labour Court & Anr. (2010) and Maruti Udyog Ltd. versus Ram Lal and Ors. (2005) to contend that the retrenchment of services does not entitle the employees to continuity of services.

The Supreme Court countered these findings by observing that this principle is only applicable to cases involving bona fide retrenchment, which lacked in the present case.

Fourthly, the appellant contended that the order of the high court and the tribunal to pay 75 per cent back wages does not comply with the principle laid down by the courts. The appellant asked the court that the drivers must plead an oath that they were not gainfully employed post the retrenchment. The Supreme Court remarked that this matter was extensively reviewed by the tribunal. Further, it is a question of fact, and the Supreme Court does not have the power under Article 136 of the Constitution to interfere with it. The tribunal had noted that 27 drivers had affirmed that they were unemployed post-termination.

The Supreme Court had observed in Deepali Gundu Surwase versus Kranti Junior Adhyapak Mahavidyalaya (D.Ed.) & Ors. (2013) that in case the employer wishes to avoid the payment of back wages, it must demonstrate cogent evidence to prove that the employee was gainfully employed and received the same wages as the pre-termination period. But the tribunal stated that the appellant could not produce evidence to display that employees were gainfully employed elsewhere.

On the basis of the above reasons, the Supreme Court dismissed the appeal.

Significance of the judgment

Recently, the Indian economy has seen various multi-national companies as well as start-ups laying off and retrenching employees in large numbers without following the due process of law at their whims. This judgement would have strong legal ramifications for the same, and would serve as a reminder to employers to be cautious of their approach.

While at the same time, the judgement balances the employee-employer relationship by affirming the long-held principle that the right to resort to strikes is not absolute, and the administration and judiciary can put reasonable restrictions on it.

Click here to view the Supreme Court’s full judgment.