In short: Under retrenchment severance pay India law, any worker with at least one year of continuous service is entitled to 15 days’ average pay for every completed year of service, one month’s written notice (or three months’ for large establishments), and certain employer contributions to a re-skilling fund — all now governed by the Industrial Relations Code, 2020.
Key points
- On 21 November 2025, the Industrial Relations Code, 2020 became fully enforceable, replacing the Industrial Disputes Act, 1947 and 28 other central labour laws as part of India’s most significant labour law overhaul since Independence.
- The threshold for requiring prior government permission before retrenchment, layoffs, or closures has risen from 100 to 300 workers, giving mid-sized employers significantly more flexibility.
- Retrenchment compensation is calculated at 15 days’ average pay for each completed year of continuous service, where “average pay” means the average wages drawn in the three months immediately before retrenchment.
- Employers must also contribute an amount equal to 15 days’ wages per retrenched worker to the Workers’ Re-Skilling Fund, to be transferred within 10 days of retrenchment.
- The “last in, first out” (LIFO) rule still applies — employers who deviate from it must record reasons in writing.
- The Industrial Relations (Central) Rules, 2026, notified on 8 May 2026, provide the detailed procedural framework that operationalises these protections.
What changed on 21 November 2025?
India restructured its entire labour law architecture on 21 November 2025. Four labour codes — the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020 — came into force, absorbing and repealing 29 central labour laws.
For retrenchment and layoffs, the key instrument is the Industrial Relations Code, 2020 (IR Code). It consolidated three older laws: the Trade Unions Act, 1926; the Industrial Employment (Standing Orders) Act, 1946; and the Industrial Disputes Act, 1947.
Most of the procedural detail is now found in the Industrial Relations (Central) Rules, 2026, notified on 8 May 2026. If you want to understand how these rules interact with other employee rights, our Law for You guides cover related topics in plain language.
What is retrenchment under the IR Code?
Retrenchment is the termination of a worker’s employment by the employer for any reason other than punishment (disciplinary action), retirement, or the worker’s own resignation or death.
A worker is eligible for retrenchment protections once they have completed at least one year of continuous service. Under the older Industrial Disputes Act standard, this meant working at least 240 days in a year — the IR Code preserves the substance of this requirement.
What must an employer do before retrenching a worker?
The IR Code sets out three mandatory conditions before a retrenchment can lawfully proceed for any eligible worker:
1. Written notice: The worker must receive one month’s written notice clearly stating the reasons for retrenchment. Alternatively, the employer can pay wages in lieu of this notice period.
2. Retrenchment compensation: The employer must pay compensation at 15 days’ average pay for every completed year of continuous service (see calculation details below).
3. Government intimation: The employer must inform the appropriate government about the retrenchment in the prescribed manner.
How do the rules differ by establishment size?
The IR Code draws a clear line at 300 workers. The table below summarises how obligations differ based on the number of workers in an industrial establishment such as a factory, mine, or plantation.
| Requirement | 50–299 Workers | 300 or More Workers |
|---|---|---|
| Prior government approval for retrenchment/layoff/closure | No — notice to government required, not approval | Yes — prior permission from appropriate government required |
| Notice period before retrenchment | 1 month | 3 months (increased from 1 month) |
| Retrenchment compensation rate | 15 days’ average pay per completed year of service | 15 days’ average pay per completed year of service |
| Lay-off compensation | 50% of basic wages plus dearness allowance | 50% of basic wages plus dearness allowance |
| Workers’ Re-Skilling Fund contribution | 15 days’ wages per retrenched worker | 15 days’ wages per retrenched worker |
| Transfer deadline for Re-Skilling Fund | Within 10 days of retrenchment | Within 10 days of retrenchment |
How is retrenchment severance pay calculated?
Retrenchment compensation is paid at the rate of 15 days’ average pay for each completed year of continuous service, or any part of a year that exceeds six months.
For example, if a worker has served 4 years and 8 months, they are entitled to compensation for 5 completed units (since 8 months exceeds 6 months and counts as a full year).
“Average pay” means the average of the wages the worker actually drew in the three calendar months immediately before the date of retrenchment. This figure forms the basis of the entire severance calculation.
What is the Workers’ Re-Skilling Fund?
This is a new obligation introduced under the IR Code regime. Every employer who retrenches a worker must contribute an amount equal to 15 days’ wages last drawn by that worker to the Workers’ Re-Skilling Fund.
Under the IR Rules, this contribution must be transferred to the account specified by the Central Government within 10 days of the retrenchment taking effect. This is a separate payment from the severance compensation paid directly to the worker.
What is the LIFO rule and when does it apply?
The “last in, first out” principle requires that, where an employer is selecting workers for retrenchment, the most recently hired workers should generally be retrenched first.
All establishments covered by the IR Code must follow this rule. If an employer departs from LIFO, they must record the specific reasons for doing so. This creates an important paper-trail protection for longer-serving workers.
What about layoff compensation?
A layoff is different from retrenchment — it is a temporary inability by the employer to provide work due to circumstances such as shortage of materials, power failure, or natural calamity, without permanently ending the employment relationship.
Where a worker is laid off, the employer must pay lay-off compensation equal to 50% of the worker’s basic wages plus dearness allowance. This applies to establishments with 50 or more workers.
Frequently asked questions
Do I qualify for retrenchment severance pay if I have worked for less than one year?
No. Under the Industrial Relations Code, 2020, you must have completed at least one year of continuous service to be entitled to retrenchment compensation and the mandatory notice period. Workers with less than one year of service do not qualify for severance pay under these provisions, though other contractual or statutory entitlements may apply depending on your employment terms.
Does my employer need government permission to retrench me?
It depends on the size of the establishment. If your employer has 300 or more workers, they must obtain prior permission from the appropriate government before any retrenchment, layoff, or closure. If the establishment has between 50 and 299 workers, the employer only needs to serve notice on the government — permission is not required. Below 50 workers, the notice requirement does not apply in the same way.
Is the Workers’ Re-Skilling Fund contribution paid to me directly?
No. The Re-Skilling Fund contribution — equal to 15 days’ wages last drawn — is paid by the employer to an account specified by the Central Government, not directly to the retrenched worker. It is a separate statutory obligation on the employer and is distinct from the retrenchment compensation that is paid to you as the employee. The employer must make this transfer within 10 days of the retrenchment.
This article is for general information only and is not legal advice. Laws change; verify against the primary sources cited and consult a qualified advocate for your situation.
