Section 145(1) of the Labour Act, 2074 (2017) permits retrenchment where an enterprise faces financial problems, where workers become redundant on a merger, or where the enterprise must close partially or completely. This insight sets out the grounds, the procedure to follow, the compensation due, and how the courts have approached retrenchment in practice.
01When retrenchment is possible
Under Section 145(1), retrenchment is permitted in three cases: where the enterprise faces financial difficulties; where workers become redundant due to a merger of enterprises; or where the enterprise must be partially or completely closed.
Read with other statutes: “financial difficulties” takes its meaning from the Insolvency Act, 2063 (2006) — a company that is or may become insolvent unless restructured; “merger” (Section 176, Company Act 2063) is the combination of companies into a new entity where the individual companies cease to exist; and “partial or complete closure”, though not defined, covers suspending specific departments, branches or services, or shutting down all activity.
02The do’s
- Give the Labour Office and the authorised trade union (or labour relation committee) at least thirty days’ notice before retrenchment.
- State the reason, the likely date, and the estimated number of employees affected.
- Discuss alternatives and the selection criteria with the union or committee, and retrench based on the agreement reached.
- If the union refuses to engage or no agreement is reached, inform the Labour Office.
- Follow the prescribed order — generally foreign employees, those with a history of misconduct, weak performers, and those appointed last in the same type of work — giving reasons for any deviation.
- Retrench office-bearers of the collective-bargaining committee or authorised union last, unless otherwise agreed.
03The don’ts and compensation
- Do not retrench without the required notice to the Labour Office and union.
- Do not neglect discussions on alternatives and selection criteria.
- Do not retrench without an agreement, or without informing the Labour Office where none is reached.
- Do not deviate from the order of retrenchment without a valid reason or agreement.
- Do not retrench union office-bearers before others, unless agreed.
Compensation: retrenched employees receive a lump sum equal to one month’s basic remuneration for each completed year of service (proportionate for part-years). An employee entitled to an unemployment allowance under the social security laws does not receive this compensation.
04Unionised employees and industry practice
Retrenching unionised employees can be highly contentious and must be handled with care; retrenchment is distinct from termination by agreement and is governed by specific rules — the grounds in section 1 must exist and the procedure in section 2 must be followed.
In practice, courts require strict adherence to procedure: procedural errors have led to the reinstatement of retrenched employees, and rulings in labour-oriented industries have often favoured employees. During COVID-19, stakeholders agreed rotating schemes (retaining roughly 50% while retrenching the rest), and in financial-institution mergers, Voluntary Retirement Schemes (VRS) have been offered as an alternative to retrenchment.