6. Cost-Reduction Strategies

To what extent can employers implement the following cost-reduction strategies as a result of COVID, and what are the primary limitations on each? 

The below-mentioned cost reductions strategies are commonly followed by employers in India. However, each of them has certain limitations and must be undertaken in accordance with due process established under law. At the outset, it is important to state that Indian labour and employment legislations categorise employees into ‘workmen’ and ‘non-workmen’ with service conditions of workmen employees being subject to far greater statutory protection. The service conditions of non-workmen/managerial employees are governed mainly by their employment contract and the internal policies of an organization.

• Furloughs

Furloughs (or as commonly known as ‘lay off’ under per Indian laws) are a frequently used cost-reduction strategy adopted. Under law, the term ‘lay off’ is inter alia defined as the failure, refusal or inability of an employer, on account of a natural calamity or for any other connected reason, to give employment to a workman on its rolls. With respect to workmen employees, the law prescribes processes and compliances/payments for lay off with respect to certain categories of establishments such as factories, mines and plantations. A non-workman employee can be placed in this process by way of a mutual agreement.

• Salary reductions.

Salary reduction is one of the most commonly implemented cost-reduction strategies as it has the least impact on the employees from a financial perspective, in comparison to the other cost reduction strategies. For a workman employee, a salary reduction amounts to a change in service condition of the workmen and before implementing the same; the employer is required to give them a notice of change, the time period of which is 21 days (but may vary for certain States). Further for non-workmen/managerial employees, the employer will be required to execute individual mutual agreements with the concerned employees to amend the terms of their employment contract to record the reduction in their salaries. That being said, certain Government notifications have specifically discouraged salary reductions during the crisis. Given that, specific legal advice should be taken for a nuanced analysis.

• Redundancy.

The laws with respect to termination of services of employees due to redundancy are far more stringent for workmen employees as compared to non-workmen/managerial employees. In order to terminate the services of a workman employee, certain requirements under law need to be fulfilled (retrenchment compensation, notice pay etc.) along with provisions of the employee’s employment contract, organization’s internal policies, certified standing orders (if applicable). A non-workmen/managerial employee can be dismissed as per his/her employment contract (i.e. as per the notice period requirements specified therein) and in accordance with the organizations’ internal polices (to the extent applicable).

• Facility closure.

Closure of a facility/industrial establishment is usually the last resort for an employer for reducing its operational cost. Depending upon the market conditions and the business requirements, the employer may also choose to shut down a particular section of the establishment. For both permanent and partial closure of an establishment, various compliances and filings under the Indian employment laws and company law need to be undertaken by the employer. Further, the nature of compliances also differs depending upon the type of establishment and geographical location. In certain cases, prior approval of the government authorities is also required.