How is retrenchment compensation calculated?

What the Law Says

The Industrial Disputes Act, 1947 governs retrenchment compensation for workers in industrial establishments across India.

Retrenchment compensation is payable to a workman who has been in continuous service for not less than one year and is retrenched by the employer. Continuous service means working for at least 240 days in the preceding 12 months.

The compensation is calculated at the rate of fifteen days’ average pay for every completed year of continuous service. 'Average pay' includes basic wages and dearness allowance, but excludes bonuses, overtime, and other allowances — and is capped at ₹20,000 per month for calculation purposes (as amended and notified).

Employers must give one month’s written notice (or three months’ notice for establishments with 100+ workers, unless otherwise agreed), or pay wages in lieu of notice. Failure to comply may render the retrenchment illegal.

Statutory Text

retrenchment compensation at the rate of fifteen days’ average pay for every completed year of continuous service

— Industrial Disputes Act, 1947, s. 25F(b) — Conditions precedent to retrenchment of workmen

Statutory Text

no workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer… unless he has been given one month’s notice… or wages in lieu thereof

— Industrial Disputes Act, 1947, s. 25F(a)

What Courts Have Said

Indian courts have consistently upheld the statutory formula and clarified key terms like 'continuous service', 'average pay', and procedural compliance.

What to Do

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