# Termination of Employee in India and Retrenchment Rules in 2026

> Source: https://krystal7.com/insights/termination-retrenchment-industrial-relations-code
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 20 Feb 2026; updated 24 Oct 2026
> Summary: Retrenching a worker in India needs one month's notice, 15 days' average pay for each year of service and a Form XIII intimation to government.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- Ending a worker's service for any reason other than discipline or a listed exception is retrenchment under section 2(zh) of the Industrial Relations Code, 2020, in force since 21 Nov 2025.
- Section 70 requires one month's written notice or pay in lieu, compensation of 15 days' average pay for each completed year of service, and notice to government, filed as Form XIII under the central rules.
- Prior government permission and three months' notice apply only to factories, mines and plantations with 300 or more workers, or a higher number notified. An IT office or shared service centre needs no permission at any size.
- The employer must also pay 15 days' last drawn wages per retrenched worker into the worker reskilling fund, within ten days of retrenchment under rule 37 of the central rules of 8 May 2026.
- Final wages are due within two working days of any exit under section 17(2) of the Code on Wages, and gratuity, where payable, within 30 days under the Code on Social Security.

**To terminate an employee in India, first test whether the person is a "worker" under section 2(zr) of the Industrial Relations Code, 2020, in force since 21 Nov 2025. Ending a worker's service for any reason other than discipline or a listed exception is retrenchment. Section 70 then requires one month's notice or pay in lieu, 15 days' average pay for each year of service, and notice to the government. Managers follow their contract and state law.**

This page covers who is a worker, retrenchment, the 300 worker rule, fixed term staff, standing orders, the reskilling fund, misconduct, managers and final dues. It ends with two worked exits and a checklist.

## How do you terminate an employee in India under the Industrial Relations Code?

Pick the exit route before anything else. For a worker, any termination by the employer is retrenchment unless it is disciplinary punishment or one of five listed exceptions. Retrenchment follows section 70, or section 79 in large factories, mines and plantations. Dismissal for misconduct needs a fair inquiry. A manager's exit follows the contract and the state shops law.

The Industrial Relations Code, 2020 (the IR Code) came into force on 21 Nov 2025 under S.O. 5320(E). It replaced the Industrial Disputes Act, 1947, the Industrial Employment (Standing Orders) Act, 1946 and the Trade Unions Act, 1926. The [ministry's release of 21 Nov 2025](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463) kept the relevant provisions of the old labour Acts in force during the transition.

The Industrial Relations (Central) Rules, 2026 followed as G.S.R. 342(E) on 8 May 2026. They apply where the Central Government is the appropriate government. For a private company's office, the state government is usually the appropriate government, so the state's rules under the Code set the forms. We use the central rules here as the benchmark.

| Exit route | Who it applies to | Main provision | What the employer must do |
|---|---|---|---|
| Retrenchment | Worker with one year of continuous service | IR Code, section 70 (section 79 for Chapter X) | Notice or pay in lieu, compensation, Form XIII intimation, reskilling fund deposit |
| Dismissal for misconduct | Worker | Section 2(zh) main words; standing orders | Charge sheet, inquiry, reasoned order |
| End of a fixed term contract | Fixed term worker | Section 2(zh)(iv) | Pay final dues; gratuity after one year |
| Termination under a contract clause | Any employee | Section 2(zh)(iii) | Use with care for permanent workers |
| Exit of a manager or senior supervisor | Not a worker | Contract; state shops and establishments Act | Contract notice; final wages in two working days |
| Resignation | Any employee | Contract; Code on Wages, section 17(2) | Final wages in two working days |
| Closure of the establishment | All workers | IR Code, sections 74 and 75 (section 80 for Chapter X) | Notice to government where 50 or more workers; compensation |

Our overview of the [new labour codes for foreign owned companies](/insights/new-labour-codes-foreign-owned-companies-india) covers the wider changes.

## Who is a worker under the Industrial Relations Code?

Section 2(zr) defines a worker as a person employed to do manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. It excludes people employed mainly in a managerial or administrative capacity. It also excludes supervisors drawing wages above INR 18,000 a month. Sales promotion employees and working journalists are included by name.

Two points decide most cases in a foreign owned subsidiary:

- **No salary cap for technical and clerical staff.** The INR 18,000 limit applies only to supervisors. A software engineer paid INR 2,00,000 a month with no team to manage is a worker. Our reading of the definition is that duties decide the question, not the job title.
- **Wages use the Code definition.** The supervisor test uses wages under the 50 percent rule, which our guide to [the Code on Wages salary structure](/insights/code-on-wages-50-percent-wage-rule-salary-structure) explains. A team lead's basic pay plus any add back is the number to test.

The Central Government can raise the INR 18,000 figure by notification. We found none by 23 Oct 2026. The old definition of "workman" in section 2(s) of the Industrial Disputes Act, 1947 used INR 10,000.

| Role in a typical subsidiary | Worker under section 2(zr)? | Reason |
|---|---|---|
| Software engineer, tester or data analyst with no reports | Yes | Technical work; no wage limit applies |
| Customer support or back office associate | Yes | Clerical or operational work |
| Team lead who allocates work, wages INR 16,000 a month | Yes | Supervisor at or below INR 18,000 |
| Supervisor with wages above INR 18,000 a month | No, if the duties are mainly supervisory | Clause (iv) exclusion |
| Engineering manager who hires, appraises and approves leave | No | Employed mainly in a managerial capacity |
| Finance controller, HR head or country manager | No | Managerial or administrative |
| Sales promotion employee | Yes | Included by name |

## What counts as retrenchment, and what does not?

Section 2(zh) defines retrenchment as the termination by the employer of a worker's service "for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action". Five exits are then excluded. So a performance exit, a role redundancy or a team closure is retrenchment when the person is a worker.

| Clause of section 2(zh) | Exit | Retrenchment? | Practical note |
|---|---|---|---|
| Main words | Termination as disciplinary punishment | No | Needs a fair inquiry |
| (i) | Voluntary retirement | No | Use a written scheme and free consent |
| (ii) | Retirement at the superannuation age | No | The age must be in the contract or standing orders |
| (iii) | Non renewal of a contract on expiry, or termination under a stipulation in it | No | Risky for permanent workers |
| (iv) | Completion of a fixed term | No | Ending the term early is a different case |
| (v) | Continued ill health | No | Keep medical evidence |
| Not excluded | Performance, redundancy, cost cutting, closure of a team | Yes | Section 70 or section 79 applies |

Clause (iii) tempts parent HR teams. A permanent appointment letter with a 30 day notice clause looks like "a stipulation in that behalf". The same words sat in section 2(oo)(bb) of the Industrial Disputes Act, 1947, and many disputes turned on them. We do not rely on clause (iii) for a permanent worker. We treat the exit as retrenchment unless another exclusion clearly fits.

## What notice and compensation does retrenchment need?

Section 70 applies to a worker with at least one year of continuous service. The employer must give one month's written notice stating the reasons, or wages for that month in lieu. It must pay compensation of 15 days' average pay for each completed year of service, or any part above six months. It must also notify the appropriate government.

The definitions behind those words matter:

- **Continuous service.** Section 66 counts 240 days of work in the preceding 12 months as one year. Paid leave, lay off and maternity leave count as days worked.
- **Average pay.** Section 2 defines it as average wages over the three complete calendar months before the date, for a monthly paid worker.
- **The divisor.** The Code gives no divisor to turn monthly pay into days. Common practice divides by 30, so 15 days is half a month's average pay. Some employers divide by 26, following the gratuity formula. We show both in the worked example below.
- **Order of selection.** Section 71 requires the last person employed in the category to go first, unless the employer records reasons for another choice.
- **Rehiring.** Section 72 gives retrenched workers preference if the employer hires for the same work within one year.

The central rules add the paperwork. Rule 27 requires an intimation in Form XIII to the Central Government and the Deputy Chief Labour Commissioner (Central). It is due within three days of serving notice on the worker, or within three days of paying wages in lieu. Rule 28 requires a seniority list on the notice board at least seven days before retrenchment.

The note on Form XIII also refers to service 30 days before retrenchment. We file Form XIII on the day we serve the worker's notice, which satisfies both readings.

| Requirement | Section 70 (any industrial establishment outside Chapter X) | Section 79 (Chapter X factory, mine or plantation) |
|---|---|---|
| Worker covered | One year of continuous service | One year of continuous service |
| Notice to the worker | One month in writing with reasons, or pay in lieu | Three months in writing with reasons, or pay in lieu |
| Role of government | Intimation in Form XIII (rule 27) | Prior permission on an application in Form XIV (rule 33) |
| Timing with government | Within 3 days of the notice or payment | At least 60 days before the intended date (note to Form XIV) |
| Deemed approval | Not applicable | Permission deemed granted if no order within 60 days (section 79(4)) |
| Compensation | 15 days' average pay per completed year, or part above six months | Same (section 79(9)) |
| Reskilling fund | 15 days' last drawn wages per worker | 15 days' last drawn wages per worker |
| If the steps are missed | Retrenchment open to challenge, plus a fine | Retrenchment illegal from the notice date (section 79(7)) |

Section 65 switches off only the lay off sections (67 to 69) for establishments with fewer than 50 workers. Section 70 has no headcount floor, so a 15 person subsidiary follows it too. The ministry's [Compliance Handbook for Employers](https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf) of February 2026 describes Chapter IX for "50 to 299 workers". We read the Code's text, not the summary.

## When does an employer need government permission to retrench?

Only under Chapter X. Section 77 applies it to a factory, mine or plantation that averaged at least 300 workers per working day over the preceding 12 months. Such an establishment needs prior permission and three months' notice. An IT office, shared service centre or sales office is none of these, so it needs no permission at any size.

Section 77(3) borrows the meanings in the Factories Act, 1948, the Mines Act, 1952 and the Plantations Labour Act, 1951. The old threshold under Chapter VB of the Industrial Disputes Act, 1947 was 100 workers. The appropriate government may notify a higher number than 300, so check your state's notifications.

Where Chapter X applies, section 79 sets the process:

1. Serve three months' written notice with reasons, or pay wages for that period.
2. Apply for permission with reasons and serve a copy on the workers at the same time (section 79(2)). The central rules use Form XIV, displayed at the main entrance (rule 33).
3. The government holds an inquiry, hears the employer and the workers, and passes a reasoned order (section 79(3)).
4. If no order arrives within 60 days, permission is deemed granted (section 79(4)).
5. The order lasts one year (section 79(5)). A review application lies within 30 days of the order (rule 34).
6. Without an application, or after a refusal, the retrenchment is illegal from the notice date (section 79(7)).

Lay off (section 78) and closure (section 80) follow the same pattern. Under rule 35, a closure application goes in at least 90 days before the intended closure.

Outside Chapter X, closure needs 60 days' notice to the government under section 74. Establishments with fewer than 50 workers in the preceding 12 months are exempt. Section 75 gives closure compensation on the section 70 scale. Where closure follows unavoidable circumstances, it is capped at three months' average pay, and financial difficulty does not count as unavoidable. Our note on [winding up an Indian subsidiary](/insights/close-indian-subsidiary-strike-off-or-winding-up) covers the company law side.

## How does the worker reskilling fund work?

Section 83 makes the employer pay 15 days' last drawn wages for each retrenched worker into a fund that the appropriate government sets up. The fund credits the amount to the worker within 45 days of retrenchment. Rule 37 of the central rules gives the employer ten days from retrenchment to transfer the money electronically.

The employer also sends the office of the Chief Labour Commissioner (Central) a list of workers, amounts and bank details.

The Central Government set up the fund for its sphere under section 83(1) in May 2026, and under rule 37 the offices of the Chief Labour Commissioner (Central) maintain it. Check the ministry's website for the account details before the first deposit. In the state sphere, the state government sets up its own fund under section 83(1) and its rules give the mechanics.

Two points trip up payroll teams:

- **It is extra money.** The contribution comes from the employer on top of retrenchment compensation. It is not deducted from the worker's dues.
- **Only retrenchment.** Section 83(2)(a) applies "in case of retrenchment only". Dismissal, resignation and the end of a fixed term do not trigger it. The Code does not say whether workers who lose jobs on a closure count, so we ask the labour office before the closing date.

## How does termination work for fixed term employees?

A fixed term worker's contract can simply end on its date. Section 2(zh)(iv) excludes completion of a fixed term from retrenchment, so no notice pay, retrenchment compensation or reskilling contribution is due. Ending the contract early is different. Treat an early exit as retrenchment unless misconduct or another exclusion applies.

Section 2(o) defines fixed term employment as engagement on a written contract for a fixed period, with three conditions:

- Hours, wages, allowances and other benefits must be no less than a permanent worker doing the same or similar work.
- The worker gets every statutory benefit a permanent worker gets, in proportion to service, even below the qualifying period.
- Gratuity is due after one year of service under the contract.

The ministry's Additional FAQ 10 of 16 Mar 2026 limits fixed term employment to staff the employer engages directly. Additional FAQ 19 confirms an 11 month contract does not earn gratuity. The [PIB backgrounder on the IR Code](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/nov/doc20251123703701.pdf) of 23 Nov 2025 says the Code places no limit on tenure or the nature of work.

Our guide to [gratuity for fixed term employees](/insights/gratuity-fixed-term-employees-code-on-social-security) covers the one year rule and pro rata pay.

## When do standing orders apply, and what must they cover?

Chapter IV applies to an industrial establishment with 300 or more workers on any day in the preceding 12 months (section 28). The threshold was 100 under the 1946 Act. Unlike Chapter X, it is not limited to factories, so a large IT or shared service office is covered. The employer may adopt the government's model standing orders or certify its own.

The process runs on these steps:

- **Model standing orders.** Rule 10 of the central rules names the Model Standing Orders, 2026 for mining, manufacturing and service sector establishments. An employer that adopts them informs the certifying officer, and they are deemed certified after 30 days without an observation.
- **Own standing orders.** Section 30 required a draft within six months of the Code's start, after consulting the unions. The certifying officer decides within 60 days, or the draft is deemed certified.
- **Subjects.** The First Schedule covers classification of workers, termination and the notice for it, suspension or dismissal for misconduct, the acts that count as misconduct, and grievance redressal.

Below 300 workers, no statutory standing orders apply. We still write service rules with a misconduct list, an inquiry procedure and notice periods. A tribunal judging a dismissal asks what rules the worker was told about.

| Headcount of workers | Obligation | Provision |
|---|---|---|
| Any number | Retrenchment conditions; final wages within two working days | IR Code, section 70; Code on Wages, section 17(2) |
| 20 or more | Grievance Redressal Committee | IR Code, section 4 |
| 50 or more | Lay off compensation; 60 days' closure notice to government | Sections 65, 67 and 74 |
| 100 or more | Works Committee, when the government orders one | Section 3 |
| 300 or more | Standing orders; subsistence allowance rules | Sections 28 and 38 |
| 300 or more in a factory, mine or plantation | Prior permission for lay off, retrenchment and closure | Sections 77 to 80 |

The Grievance Redressal Committee matters at exit. A worker may apply to it within one year of the cause of action (rule 7(3)). Section 4(6) lets the committee complete proceedings within 30 days.

## How do you dismiss a worker for misconduct?

Dismissal as disciplinary punishment is outside retrenchment. No notice pay, retrenchment compensation or reskilling contribution is due. The worker can still challenge it as an industrial dispute under section 2(q), and the tribunal will test the inquiry. Follow the standing orders where they apply, and the principles of a fair hearing in every case.

We run a misconduct case in this order:

1. Record the complaint and preserve the evidence, such as access logs and attendance records.
2. Suspend pending inquiry only if needed. Section 38 expects the inquiry to finish within 90 days and sets subsistence allowance at 50 percent of wages, rising to 75 percent after 90 days unless the worker caused the delay.
3. Issue a charge sheet that lists each act of misconduct, the rule breached and the evidence. We give at least five working days to reply.
4. Appoint an inquiry officer with no part in the complaint, and hold the inquiry with notice, cross examination, defence witnesses and signed minutes.
5. Share the inquiry report and invite a representation on the findings and the proposed punishment.
6. Pass a reasoned order with a punishment that fits the misconduct and the worker's record.
7. Pay final wages within two working days of dismissal, under section 17(2) of the Code on Wages.

Section 38 sits in Chapter IV, so the statutory allowance applies where standing orders apply. We follow the same rates in smaller offices, because a tribunal looks for fairness.

Gratuity survives most dismissals. The Code on Social Security, 2020 allows forfeiture only for the misconduct section 53 names, such as violence or wilful damage. Sexual harassment complaints run through the Internal Committee first, as our [POSH compliance guide](/insights/posh-compliance-foreign-owned-company-india) explains.

## How are managers and other non workers terminated?

People employed mainly in managerial or administrative roles, and supervisors above INR 18,000, are not workers. Sections 70 and 79 do not apply to them, and the IR Code's dispute machinery is for workers. Their exit follows the employment contract, the state shops and establishments Act where it covers them, and the payment rules that reach every employee.

Four sets of rules still apply to a manager:

- **The contract.** It sets notice, pay in lieu and garden leave. In our experience, a manager's claim turns on notice pay, unpaid dues and equity terms.
- **Code on Wages.** Final wages are due within two working days of exit under section 17(2). The Code on Wages covers every employee, including managers, and the ministry's Additional FAQ 2 of 16 Mar 2026 says its wage payment provisions apply to all employees.
- **Code on Social Security.** Gratuity is due after five years of continuous service, within 30 days.
- **State shops and establishments law.** Offices register under the state Act, such as the Delhi Shops and Establishments Act, 1954, the Karnataka Shops and Commercial Establishments Act, 1961 or the Telangana Shops and Establishments Act, 1988.

Each state Act sets its own rules on notice or pay in lieu and on the minimum service before that protection starts. It also decides which senior roles it leaves out and whether an appeal lies to a labour authority. Read the Act and rules of the state where the office is registered before you act. Our shops and establishments team checks the Act for your state.

## What are the full and final settlement timelines?

Final wages are due within two working days of removal, dismissal, retrenchment, resignation or closure, under section 17(2) of the Code on Wages, 2019. Leave encashment for a worker follows the same two day clock. Gratuity is due within 30 days. Retrenchment compensation and notice pay must be paid before the retrenchment takes effect.

| Payment or filing | Deadline | Provision |
|---|---|---|
| Final wages, including HRA, conveyance and overtime | Within two working days of exit | Code on Wages, section 17(2) |
| Leave wages for a worker | Before the end of the second working day after discharge, dismissal or resignation | OSH Code, section 32(1)(vi) |
| Notice pay in lieu (retrenchment) | Before the retrenchment takes effect | IR Code, section 70(a) |
| Retrenchment compensation | A condition before retrenchment | IR Code, section 70(b) |
| Form XIII intimation | Within 3 days of the notice or payment | Central rules, rule 27 |
| Reskilling fund deposit | Within 10 days of retrenchment | Rule 37(1) |
| Credit of the fund amount to the worker | Within 45 days of retrenchment | Section 83(3); rule 37(2) |
| Gratuity | Within 30 days of becoming payable | Code on Social Security, section 56 |

A 45 day settlement policy copied from a parent breaches section 17(2) on every exit. Section 45(2) of the Code on Wages lets the authority award compensation of up to ten times the claim it determines. Our guides to [working hours, overtime and leave](/insights/working-hours-overtime-leave-osh-code) and [PF and ESI](/insights/pf-esi-foreign-owned-company-international-workers) cover the leave wages and PF exit steps.

## What happens if the employer gets termination wrong?

A worker can raise an industrial dispute about discharge, dismissal, retrenchment or termination under section 2(q). Conciliation cannot start more than two years after the dispute arose. If conciliation fails, either party can apply to the Industrial Tribunal within 90 days of the report (section 53(6)). The tribunal can order reinstatement with back wages.

The route and the risks look like this:

- **Before the tribunal.** The worker may start with the Grievance Redressal Committee within one year. The conciliation officer then reports within 45 days of starting (section 53(5)).
- **Tribunal.** The worker applies in Form II within 90 days of the failure report (rule 23(9)), with no government reference.
- **Wages during a challenge.** Section 56 requires full wages to a worker during a High Court or Supreme Court challenge to a reinstatement award, subject to its conditions.
- **Illegal retrenchment under Chapter X.** Section 79(7) treats the worker as never retrenched.
- **Fines.** Section 86 sets the penalties. For a first offence, breach of the section 70 retrenchment conditions carries a fine of INR 50,000 to INR 2,00,000. Retrenchment or closure without Chapter X permission carries INR 1,00,000 to INR 10,00,000. Repeat offences attract higher fines and, in some cases, imprisonment.
- **Compounding.** A first offence can be compounded under section 89. The PIB backgrounder gives 50 percent of the maximum fine for fine only offences, and 75 percent where imprisonment of up to one year is possible. Under rule 38, the employer pays within 15 days of the Form XV notice.

## What should a foreign owned employer change in its exit process?

Replace the parent's global exit template with an India route map. Classify every person as worker or non worker. Treat performance and redundancy exits of workers as retrenchment. Run final pay within two working days. Keep the reskilling deposit, Form XIII and the seniority list in the exit file.

The gaps we see in parent templates are these:

- **"At will" or "notice plus severance" language.** India has no at will employment for workers. Severance by negotiation does not replace section 70 compensation.
- **Performance improvement plans (PIPs) as the exit route.** A PIP that ends in termination of a worker is retrenchment unless you run a misconduct inquiry. Pay the section 70 dues or run a proper inquiry.
- **Release agreements.** In our view, a release does not stop a worker raising a dispute over short paid statutory dues. Pay them in full and show the working.
- **Expatriate staff.** A foreign national's exit also needs Foreign Regional Registration Office (FRRO) and visa steps, which our guide to the [employment visa for foreign employees](/insights/employment-visa-india-for-foreign-employees) covers.

## What changed in 2026

The Code started on 21 Nov 2025, and the central rules arrived on 8 May 2026. The table lists each change by date and instrument.

| Date | Old rule | New rule | Instrument |
|---|---|---|---|
| 21 Nov 2025 | Industrial Disputes Act, 1947; Standing Orders Act, 1946; Trade Unions Act, 1926 | One Industrial Relations Code | S.O. 5320(E) |
| 21 Nov 2025 | Supervisors outside "workman" above INR 10,000 a month | Supervisors outside "worker" above INR 18,000 a month | IR Code, section 2(zr) |
| 21 Nov 2025 | Permission for lay off, retrenchment and closure at 100 workers | At 300 workers, in factories, mines and plantations | IR Code, section 77 |
| 21 Nov 2025 | Standing orders at 100 workers | At 300 workers | IR Code, section 28 |
| 21 Nov 2025 | No statutory definition of fixed term employment | Fixed term employment with parity and gratuity after one year | IR Code, section 2(o) |
| 21 Nov 2025 | No reskilling contribution | 15 days' last drawn wages per retrenched worker | IR Code, section 83 |
| 8 May 2026 | Industrial Disputes (Central) Rules, 1957 | Form XIII intimation, Form XIV permission, 10 day reskilling deposit, Model Standing Orders, 2026 | G.S.R. 342(E) |

## Worked example

**Scenario 1. Retrenchment in an IT subsidiary.** A US company's Pune subsidiary has 180 staff in a software office. It closes a testing team of 12 workers. The office is not a factory, so Chapter X does not apply and no permission is needed. Section 71 sets the order within the testing category.

Take one tester. She joined on 14 Jan 2019. Her Code wages were INR 60,000 a month in April, May and June 2026, so average pay is INR 60,000. She has 12 days of leave to her credit.

The subsidiary serves notice on Wednesday 1 Jul 2026, with Friday 31 Jul 2026 as the last day. Her service runs 7 years, 6 months and 17 days. The part year exceeds six months, so it counts as a full year, giving 8 years.

| Item | Working | Amount (INR) | Deadline |
|---|---|---|---|
| Notice to the worker | One month served from 1 Jul 2026 | Nil extra | Served 1 Jul 2026 |
| Form XIII intimation | Filed with the notice | Nil | By Saturday 4 Jul 2026 |
| Seniority list on the notice board | Testing category, by date of joining | Nil | By Friday 24 Jul 2026 |
| July wages | One month | 60,000 | By Tuesday 4 Aug 2026 |
| Leave wages | 60,000 ÷ 26 × 12 | 27,692 | By Tuesday 4 Aug 2026 |
| Retrenchment compensation, 30 day divisor | 60,000 ÷ 30 × 15 × 8 | 2,40,000 | On or before 31 Jul 2026 |
| Retrenchment compensation, 26 day divisor | 60,000 ÷ 26 × 15 × 8 | 2,76,923 | On or before 31 Jul 2026 |
| Gratuity | 60,000 × 15 ÷ 26 × 8 | 2,76,923 | By Sunday 30 Aug 2026 |
| Reskilling fund deposit, 30 day divisor | 60,000 ÷ 30 × 15 | 30,000 | By Monday 10 Aug 2026 |

The two working day dates assume the office closes on Saturdays and Sundays. On the 30 day divisor, the tester receives INR 6,04,615 directly (60,000 + 27,692 + 2,40,000 + 2,76,923). The fund receives INR 30,000 more and credits it to her within 45 days. For 12 testers on the same pay, the deposits total INR 3,60,000.

Gratuity counts the same 8 years, because the Code on Social Security also rounds a part year above six months up. This team is in Maharashtra, so Maharashtra's rules under the Code govern the forms. Where they differ from the central rules used here, follow the state rules.

**Scenario 2. Misconduct dismissal in a shared service centre.** A UK company's Chennai shared service centre has 420 workers. Standing orders apply because it crosses 300, but Chapter X does not, because it is not a factory. A process associate with wages of INR 45,000 a month joined on 1 Apr 2020.

The centre suspends him on Monday 1 Jun 2026 for repeated unauthorised absence and refusing shift rosters. The inquiry runs longer than planned, for reasons not due to him. The centre dismisses him on Friday 18 Sep 2026, after 110 days of suspension.

Subsistence allowance on a daily rate of INR 1,500 (45,000 ÷ 30) works out as follows:

- First 90 days at 50 percent: 1,500 × 90 × 50% = INR 67,500.
- Remaining 20 days at 75 percent: 1,500 × 20 × 75% = INR 22,500.
- Total subsistence allowance: INR 90,000.

The allowance for September is part of his final wages, due by Tuesday 22 Sep 2026. Leave wages for 9 days, INR 15,577 (45,000 ÷ 26 × 9), fall due on the same date. His service is 6 years, 5 months and 17 days, so gratuity counts 6 years. Gratuity is 45,000 × 15 ÷ 26 × 6 = INR 1,55,769, due by 18 Oct 2026. Absence is not a forfeiture ground, so gratuity is paid in full. No notice pay, retrenchment compensation or reskilling deposit arises.

## Common mistakes

1. **Treating senior engineers as managers.** Technical staff are workers at any salary unless their duties are mainly managerial. Fix: classify by duties and record the reasons.
2. **Using a notice clause to avoid retrenchment.** Clause (iii) of section 2(zh) is a weak shield for permanent workers. Fix: pay section 70 dues on every non disciplinary exit of a worker.
3. **Assuming the 300 worker rule covers offices.** Chapter X applies only to factories, mines and plantations. Fix: check the establishment type before you budget three months' notice and a permission wait.
4. **Missing the Form XIII window.** The central rules allow three days from the notice. Fix: file Form XIII on the day you serve notice.
5. **Forgetting the reskilling deposit.** It is separate from compensation and due within ten days. Fix: add it to the exit payroll run.
6. **Firing first and investigating later.** A dismissal without an inquiry invites reinstatement with back wages. Fix: charge sheet, inquiry, report, then the order.
7. **Paying the full and final after 45 days.** Section 17(2) of the Code on Wages allows two working days. Fix: prepare the settlement before the last working day.
8. **Ending a fixed term contract early without dues.** Only expiry is excluded from retrenchment. Fix: pay section 70 dues for an early end unless misconduct is proved.

## Checklist

1. Classify each affected person as a worker or a non worker under section 2(zr), with the reason.
2. Identify the exit route: retrenchment, misconduct, fixed term expiry, resignation or closure.
3. Check the establishment type and headcount against section 77 and section 28.
4. Draft the notice with reasons, and the seniority list for the category.
5. Serve one month's notice, or three months under Chapter X, or pay wages in lieu.
6. File Form XIII, or the state form, within three days of the notice.
7. Apply for permission in Form XIV at least 60 days ahead where Chapter X applies.
8. Compute compensation, leave wages, gratuity and the reskilling amount, and record the divisor used.
9. Pay compensation and notice pay before the retrenchment takes effect.
10. Pay final wages and leave wages within two working days of the last day.
11. Deposit 15 days' wages in the reskilling fund within ten days, and pay gratuity within 30 days.
12. Keep the exit file with notices, forms, workings and proof of payment.

Our [payroll management team](/services/payroll-management.html) can run the exit computations and filings for your Indian subsidiary.

## Key terms

- **Worker (Industrial Relations Code)**: A person employed to do manual, skilled, unskilled, technical, operational, clerical or supervisory work, under section 2(zr) of the Industrial Relations Code, 2020. It excludes people employed mainly in a managerial or administrative capacity and supervisors drawing wages above INR 18,000 a month. (https://krystal7.com/glossary#worker-industrial-relations-code)
- **Retrenchment**: Termination of a worker's service by the employer for any reason, other than as disciplinary punishment, under section 2(zh) of the Industrial Relations Code, 2020. Voluntary retirement, superannuation, contract expiry or a contract stipulation, end of a fixed term and continued ill health are excluded. (https://krystal7.com/glossary#retrenchment)
- **Retrenchment compensation**: The payment section 70(b) of the Industrial Relations Code, 2020 requires before retrenching a worker with one year of continuous service. It equals 15 days' average pay for each completed year of continuous service, or any part above six months. (https://krystal7.com/glossary#retrenchment-compensation)
- **Worker reskilling fund**: A fund the appropriate government sets up under section 83 of the Industrial Relations Code, 2020. The employer pays 15 days' last drawn wages for each retrenched worker, and the fund credits that amount to the worker within 45 days of retrenchment for reskilling. (https://krystal7.com/glossary#worker-reskilling-fund)
- **Standing orders**: Written conditions of employment covering classification, hours, leave, termination notice, misconduct and discipline. Chapter IV of the Industrial Relations Code, 2020 requires them for an industrial establishment with 300 or more workers, using the government's model standing orders as the base. (https://krystal7.com/glossary#standing-orders)
- **Fixed term employment**: Engagement on a written contract for a fixed period, defined in section 2(o) of the Industrial Relations Code, 2020 and section 2(34) of the Code on Social Security, 2020. Pay and benefits must match a permanent comparator. Section 2(o) makes a fixed term worker eligible for gratuity after one year of service under the contract. (https://krystal7.com/glossary#fixed-term-employment)
- **Subsistence allowance**: Pay due to a worker suspended pending a disciplinary inquiry, under section 38 of the Industrial Relations Code, 2020. It is 50 percent of wages for the first 90 days and 75 percent after that, unless the delay is due to the worker. (https://krystal7.com/glossary#subsistence-allowance)

## Frequently Asked Questions

### How much notice is required to terminate an employee in India?

Section 70 of the Industrial Relations Code, 2020 requires one month's written notice with reasons, or a month's wages in lieu. It covers a worker with one year of continuous service. Under Chapter X, in factories, mines and plantations with 300 or more workers, it is three months. Managers get the notice in their contract and any state law.

### What is retrenchment compensation under the Industrial Relations Code?

Section 70(b) requires 15 days' average pay for each completed year of continuous service, or any part above six months. Average pay is the average over the three complete calendar months before retrenchment. The Code gives no divisor, so employers divide monthly pay by 30 or by 26 and should record the choice.

### Does an IT company with more than 300 employees need government permission to retrench?

No. Section 77(3) limits Chapter X to factories, mines and plantations. An IT office or shared service centre is none of these, so it retrenches under section 70 with notice, compensation and a Form XIII intimation. It still needs standing orders once it has 300 or more workers under section 28.

### Is a software engineer a worker under the Industrial Relations Code?

Usually yes. Section 2(zr) covers technical work with no wage limit. Only supervisors earning above INR 18,000 a month and people employed mainly in managerial or administrative roles are excluded. An engineer who manages a team, hires and approves leave may fall outside, depending on actual duties.

### What is the worker reskilling fund?

A fund under section 83 of the Industrial Relations Code, 2020. The employer pays 15 days' last drawn wages for each retrenched worker, and the fund credits that amount to the worker within 45 days. Rule 37 of the Industrial Relations (Central) Rules, 2026 gives the employer ten days from retrenchment to pay.

### Is ending a fixed term contract retrenchment?

Not when the contract simply ends. Section 2(zh)(iv) excludes completion of a fixed term, so no retrenchment compensation is due. Ending it early is not excluded, so we pay section 70 dues unless misconduct is proved. Gratuity is due if the worker served one year under the contract.

### When do standing orders apply under the Industrial Relations Code?

Section 28 applies Chapter IV to an industrial establishment with 300 or more workers on any day in the preceding 12 months. The employer may adopt the Model Standing Orders, 2026 named in rule 10 of the central rules, or certify its own. The threshold was 100 under the Standing Orders Act, 1946.

### Can an employee be dismissed for misconduct without notice?

Yes, if the misconduct is proved in a fair inquiry. Dismissal as disciplinary punishment is outside retrenchment under section 2(zh), so no notice pay or retrenchment compensation is due. Issue a charge sheet, hold an inquiry and pass a reasoned order. Final wages are still due within two working days.

### What subsistence allowance is payable during suspension?

Section 38 of the Industrial Relations Code, 2020 sets 50 percent of wages for the first 90 days of suspension. After 90 days it rises to 75 percent, unless the delay is due to the worker. The inquiry should ordinarily finish within 90 days. Section 38 applies where standing orders apply.

### How are managers terminated in India?

Managers are not workers under section 2(zr), so section 70 does not apply. The employment contract sets notice and severance, and the state shops and establishments Act may add notice rules. Final wages are still due within two working days under section 17(2) of the Code on Wages, and gratuity within 30 days.

### What is the deadline for full and final settlement in India?

Section 17(2) of the Code on Wages, 2019 requires final wages within two working days of removal, dismissal, retrenchment, resignation or closure. Leave wages for a worker follow the same clock under section 32 of the OSH Code. Gratuity is due within 30 days under section 56 of the Code on Social Security.

### Can a dismissed or retrenched worker challenge the termination?

Yes. Section 2(q) makes discharge, dismissal, retrenchment or termination of an individual worker an industrial dispute. After failed conciliation, the worker can apply to the Industrial Tribunal within 90 days of the report under section 53(6). Conciliation cannot start more than two years after the dispute arose.

## Sources

- Ministry of Labour and Employment, The Industrial Relations Code, 2020 (Act 35 of 2020), https://www.labour.gov.in/static/uploads/2025/07/682a44b5426bff2c1f4943ee1b2fd566.pdf
- India Code, The Industrial Relations Code, 2020, https://www.indiacode.nic.in/bitstream/123456789/22040/1/aa202035.pdf
- Gazette of India, Industrial Relations (Central) Rules, 2026, G.S.R. 342(E), 8 May 2026, https://egazette.gov.in/WriteReadData/2026/272336.pdf
- Ministry of Labour and Employment, Industrial Relations (Central) Rules, 2026 (Hindi gazette copy), 8 May 2026, https://www.labour.gov.in/static/uploads/2026/05/f05a2c220dcdec0ea9c55e84d9ff791f.pdf
- Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes (Central Government Sphere), February 2026, https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf
- Ministry of Labour and Employment, FAQ on Myths and Realities of Industrial Relation (IR) Code 2020, https://www.labour.gov.in/static/uploads/2026/01/b9f5b3916c042a5597f9cb4f3cc9f0fd.pdf
- Ministry of Labour and Employment, Additional FAQs on Labour Codes (as on 16 Mar 2026), https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf
- Ministry of Labour and Employment, The Code on Wages, 2019 (Act 29 of 2019), https://www.labour.gov.in/static/uploads/2025/06/c328da14bbb15fc4ad571dc33e7a4ab3.pdf
- Ministry of Labour and Employment, The Code on Social Security, 2020 (Act 36 of 2020), https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf
- Ministry of Labour and Employment, The Occupational Safety, Health and Working Conditions Code, 2020 (Act 37 of 2020), https://www.labour.gov.in/static/uploads/2025/07/36fcfa5d8e6b9145e282bf7b950d6c47.pdf
- Press Information Bureau, Government Makes the Four Labour Codes effective to Simplify and Streamline Labour Laws, 21 Nov 2025, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463
- Press Information Bureau, Industrial Relations Code, 2020 (backgrounder), 23 Nov 2025, https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/nov/doc20251123703701.pdf

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