Layoff versus Retrenchment

1. What is Layoff? [(Section 15 of Labour Act, 2074 (2017)]

A layoff, also referred to as holding a worker in reserve, is a temporary suspension of work due to special circumstances that are beyond the employer’s control. Such circumstances may include shortages of electricity, water, or raw materials; financial constraints; or physical inaccessibility to the workplace.

A layoff does not terminate the employment relationship. Instead, it suspends the employee’s active duties while maintaining their employment status.

Duration and Conditions

Employers with 10 (ten) or more employees can hold workers in reserve for up to 15 (fifteen) days. If the layoff period needs to be extended beyond this limit, the employer must consult with the authorized trade union or the labour relation committee.

Notice Requirements [(Rule 5 of Labour Regulations, 2075 (2018)]

Before placing any employee on reserve, the employer is required to serve a notice to the concerned employee. The notice must include:

a) The reason for the layoff,

b) The intended duration of the layoff,

c) Name, position, and job description of the affected worker,

d) A statement confirming the worker will receive 50% of their remuneration during the layoff period,

e) Any other relevant information the employer deems necessary.

Where only some employees are placed on reserve, the employer must, as far as possible, implement a rotational system among workers performing similar types of work and indicate this clearly in the notice.

Remuneration and Employee Rights

During the layoff period, affected employees are entitled to half of their basic remuneration. Since the employment relationship remains intact, laid-off workers retain all legal entitlements related to continuity of service, benefits, and recall rights.

2. What is Retrenchment? [(Section 145 of Labour Act, 2074 (2017)]

Retrenchment refers to the permanent reduction of the workforce due to structural, operational, or financial reasons. It is typically invoked in the following circumstances:

1. If an enterprise faces financial problems in its operation;
2. If the labours become redundant because of the merger of more than one enterprises;
3. If the enterprise needs to be closed down partially or completely because of any other reason.

Unlike a layoff, retrenchment ends the employment relationship.

Pre-Conditions and Procedure

Before carrying out retrenchment, the employer must provide at least 30 (thirty) days’ advance written notice to:

a) The Labour and Employment Office,

b) The authorized trade union of the enterprise, or if absent,

c) Any active trade union or the labour relation committee.

The notice must state the reasons, timeline, and number of employees likely to be affected. The employer must also engage in consultations with the trade union or labour relation committee to explore alternatives and determine fair criteria for selection.

If no agreement is reached, the employer may proceed by notifying the Labour and Employment Office.

Order of Retrenchment

Retrenchment must generally follow this order of priority:

a) Foreign workers,

b) Workers with a record of disciplinary action,

c) Workers with consistently weak performance, and

d) Workers most recently hired in the same role.

However, deviations from this order are permitted with justified reasons. Also, office-bearers of trade unions are to be retrenched last, unless otherwise agreed.

Compensation

Employees who have completed at least 1 (one) year of service are entitled to severance pay equal to 1 (one) month’s basic remuneration for each year of service, calculated proportionately for service less than 1 (one) year.

This does not apply to employees covered under unemployment allowance from the Social Security Fund.

Exemptions

The retrenchment provisions under Section 145 do not apply to:

a) Enterprises with 10 (ten)or fewer employees,

b) Retrenchments made under a court or government order, or

c) Enterprises within a Special Economic Zone, where separate retrenchment provisions apply.

Right to Re-employment

If the enterprise resumes operations within 2 (two) years or requires new employees, it must give preference to retrenched workers. This includes:

a) Publishing a 15-day notice in national newspapers, electronic media, the Ministry Of Labour, Employment and Social Security’s job portal, and the enterprise’s website;

b) Selecting retrenched employees based on their qualifications, experience, and capacity;

c) If new technology or production processes make former employees unsuitable for the role, or if their age or physical condition is a limiting factor, the employer may hire new employees.

Failure to follow this recall procedure allows retrenched workers to file a complaint with the Labour Court within 35 (thirty) days.

3, Layoff vs Retrenchment