Difference Between Lay Off and Retrenchment

Edited by Diffzy | Updated on: April 30, 2023


Difference Between Lay Off and Retrenchment

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Termination of employees in a company often follows several sets of regulations which both the company and employees should abide by. There exist also different types of termination- voluntary and involuntary termination. Under involuntary termination, occurs both these terms lay off and retrenchment. Hence these are two possible ways of an involuntary termination that can be offered to an employee. Even though both need to be paid compensation according to the regulations explained in the act, however, gratuity aspect only exists in retrenchment and lacks in lay off.

Lay off is provisional or temporary termination which means the employee s job is not completely lost, instead the person remains jobless until the lay off period remains. Retrenchment refers to a complete termination that is not reversible. This means that an employee terminated using this type shall not have this job again. All the employer-employee relations are severed in case of retrenchment. Also, these differ in their aspects of why they perform this termination, the latter is especially a business strategy that can increase a company’s profit margins and minimize the losses caused.

Lay Off vs. Retrenchment 

Layoff and retrenchment are talked about in the Industrial Disputes Act of 1947. Layoff refers to the removal of employees by an employer for reasons other than the employee’s fault. A layoff is often temporary. It indicates the incapability of an employer to continue the employment of the workers for a short period. On the other hand, Retrenchment refers to situations where the employer removes his employees to increase profits and decrease losses. The common factor that exists between both layoffs and retrenchment is that there is no fault of the employee that results in the termination of the employment. Both these crucial terms layoff and retrenchment were put forth under the Industrial Dispute Act of 1947.

Layoff often stops after the declaration, whereas retrenchment last even after the declaration is over. The different aspects in which the layoff and retrenchment differ from one another can be observed in detail in this following article.

Difference Between Lay Off and Retrenchment in Tabular Form

Main parameters of comparison  Lay Off Retrenchment 
Definition Lay-off is an action step that refers to the provisional termination of the employee from his job, at the instance of the employer. Retrenchment is usually a business strategy used in companies that causes an involuntary separation of an employee due to the replacement of labor by machines or the close of the department. The similarity that exists between the two is that both are involuntary terminations caused by the employer.
Termination type Termination ends as soon as the layoff period is over. The company maintains constant relations with its employees. The termination is not strategically based, it is purely based on the inability or capability failure of a company to provide all its employers with wages in a difficult situation or facing liabilities. Termination is complete and all relations between the company and employees are severed at the beginning itself. The termination caused here is purely strategical one and is considered for the better progress of the company. It is believed to improve the profit margins and decrease the loss rates caused by the company.
Cause of sudden termination  The provisional termination may be due to, one of the following reasons:

Shortage of raw materials and stocks

Economic recession.

Breakdown of machinery necessary.

Accumulation of stocks

The idea here is to cut off some products, and services, or shut down offices that are presently working unnecessarily thereby reducing the sources and resources relieved and reducing the total expenditure of the company.
Action type Involuntary termination is just the action performed.


However here this action or decision occurs as a part of a business strategy. This can decide the increment or decrement of the company’s profit margins.

What is Layoff?

Understanding the concept of lay-off under the Industrial Disputes Act, 1947 can be defined as the inability, failure, or refusal of the employer to employ a workman whose name is mentioned in the muster roll of his industrial establishment and who is not retrenched due to the lack of power, coal, raw materials, accumulation of stocks, breakdown of machinery or natural calamity for any other relevant reason.  

There are Conditions considered essential to accept it is a lay-off:

  • There exist an inability or failure from the employer’s side to employ the workmen. These inabilities are often materialistic. For example, failure or refusal must be due to lack of power, coal, raw materials, accumulation of stocks, breakdown of machinery, or natural calamity for any other relevant reason.
  • The name of the employee must be mentioned in the muster roll of the employer’s industrial establishment. The workman must not have been subjected to retrenchment previously.

A layoff is a measure that is used only in continuing businesses. If the employer decides to permanently shut down his industrial establishment then layoff doesn’t mean a specific purpose or use. Layoff usually adheres to the conditions provided in Section 2 of the Industrial Disputes Act, 1947, or else it will not be considered right as per the law. 

Layoff cause an immediate removal of the employees, however, such unemployment is temporary so it does not result in the termination of the already existing employer-employee relationship and leads to no alteration of the terms of such employment.

A company layoff involves the cessation of an employee from their benefits such as salary or wages. The laid-off employees are paid the laid-off compensation. All of the laid-off employees should be taken back in their usual posts, as soon as the layoff is lifted out, which is the main rule under which it is posted. The provisional termination may be due to, one of the following reasons:

1. Shortage of raw materials and stocks

2. Economic recession.

3. Breakdown of machinery necessary.

4. Accumulation of stocks.

What is Retrenchment?

When a company/firm implements retrenchment, the sole aim behind it is to cuts off or minimizes all the unnecessary expenditures caused by the company. 

It can be done usually by cutting back either 

1. With the diversity of products or services it offers.

2. Or by reducing the size of its company by closing down some of its offices that are not currently in use. However, these don’t necessarily mean a reduction in a company’s workforce.

Retrenchment can be defined as a form of dismissal due to no fault of the employee; it is a process whereby the employer reviews its business needs to increase profits or limit losses, which leads to reducing its employees.

The employer must have enough fair reasons for deciding to retrench and follow a fair procedure when making such a decision or the retrenchment may be considered unfair. An employer often retrenches employees for “operational requirements”. Operational requirements include the requirements based on the economic, technological, structural, or similar needs of an employer, in other words, the “business needs” of the employer:

  • An example of economic needs would include a decrement in sales or services of the employer, or closure of business.
  • An example of the technological side would include new technology developed that can replace some employees.
  • An example of a structural requirement would include restructuring the business.

There are some criteria with which the court looks if the employer’s decision to retrench was fair enough.

  1. Whether there was a real reason; and an unavoidable cause. 
  2. The employer must consult with the employees who are likely to be affected by the retrenchment at their forum, with the registered trade union or elected representatives, or any person elected in terms of a collective agreement (“consulting employees”).
  • The employer must have an issued notice inviting the consulting employees to consult and disclose all the necessary information for such consultation.
  • The employer and consulting employees must engage in a consensus-seeking process on certain matters contained in the notice and must reach a decision together discussing its terms and conditions applied.
  • The employer responds to the consulting employees’ representations, and if the employer disagrees with the consulting employees, it must state the reasons for disagreeing with them.
  • There should be a selection criterion on which the dismissal based on agreement with the consulting employees or selection criteria that is fair and objective.
  • Once, the consultation process has been exhausted, the employer may make its decision to retrench, and then issue a notice of retrenchment to the affected employees.

Main Difference Between Lay Off and Retrenchment in Points

1. Definition of the terms 

Both the terms were first implemented under the act of 1947, the former means a provisional or volatile termination of its employee from his job due to various reasons that give its employee assurance about taking them back in the job once the lay off period is relieved.

Whereas in retrenchment, the employee-employee relationship is cut off completely after the termination. 

Here the termination is voluntary for some causes that the company thinks to improve its profits and minimize its losses.

2. Termination type

Former or the lay-off termination as we have seen before is temporary and last only for some time. It usually disappears after the declaration. No strategies exist behind this decision and are usually observed due to the inability or capability failure of the company to provide the employees with their salaries and wages. On the other hand, the termination in retrenchment is permanent and there is nothing that can be done with it in a later phase.

3. Main aspects of each entity 

Former is a voluntary decision that the company takes for one of the following reasons that are listed. These may include Shortage of raw materials and stocks, Economic recession, Breakdown of machinery necessary, Accumulation of stocks, etc.

However, it lasts only until the layoff period remains. It is assumed that the employee is given back his job once this term is over.

On the other hand, the voluntary decision of complete irreversible termination of employees occurs in case of retrenchment. These may include several aspects like reducing the products or services it offers, shutting down some of its offices, etc. Hence, it refers to a strategy that is used in the business to reduce its expenditures.

4. Main causes of termination

In lay-off:

  1. Shortage of raw materials and stocks
  2. Economic recession.
  3. Breakdown of machinery necessary.
  4. Accumulation of stocks

All the above causes show the company's inability or capability failure to provide all the employees with their wages in a crisis.

In retrenchment:

The main cause is to reduce the total company expenditure. It is mainly a business strategy used to increment their total profits earned. This is done by cutting off some supplies or products and services that may be considered for fewer returns from the investment. Avoiding such unnecessary losses can surely increase the profit margins of a company.


Hence, involuntary terminations in different companies occur due to various reasons. The major reasons include 

1. If the organization is going through the lean period

2. If it was a initial faulty hiring,

3. The employee shows deviant behavior, which affects the whole working environment.

Some methods used in such kinds of involuntary separation of an employee from a job are layoffs, VRS, Retrenchment, discharges, etc.

Both the terms lay-off and retrenchment came into existence from the act of 1947, which agrees two different types of involuntary termination however abiding to set of rules and regulations applied. For example, in the case of lay off, the employer is responsible to provide the employee presently unemployed for the lay off period to be taken back in the job. Compensation and reemployment are essential under the law. Whereas in a retrenchment which the company does for its possible benefits, the termination is complete and can’t be reemployed again. The latter especially belongs to a business strategy. According to this business strategy, cutting down some products or services offered without enough returns in investments or shutting down some offices that may not be essential is considered a part of this strategy. 




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"Difference Between Lay Off and Retrenchment." Diffzy.com, 2024. Fri. 01 Mar. 2024. <https://www.diffzy.com/article/difference-between-lay-off-and-retrenchment-305>.

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