Decoding Employee Termination During Covid 19 Crisis

During this unfortunate situation caused by Covid-19, the world economy is struggling with organizations’ cash-flows drying up fast & fixed costs to be paid to employees.  Organizations are trying to keep themselves afloat by cutting costs and deferring payments hoping that they can bounce back once the lockdown is over.

In the race to cut costs and remain cash-flow positive, organisations have taken steps at trimming salaries of their personnel and letting go employees in certain roles.

The April to September half is likely to be extremely tough for businesses, with marginal sales across segments. While non-discretionary spending (such as food, grocery, education, healthcare etc.) is likely to see a faster turnaround, discretionary spending such as apparel, electronics, jewellery, furniture, and so on will likely take six to nine months for a full rebound.

In this scenario, it is prudent to remember that the central government and various state governments have issued various instructions/orders that “advised” employers not to cut salaries or lay off employees.

> What are the various regulations relating to workers and employees?

Wages and other labour related issues are governed by various labour laws prevailing,

  • Industrial Disputes Act, 1947 (“ID Act”)
  • The Shops and Commercial Establishments Act, 1961 (‘SCE Act’).
  • The Payment of Wages Act, 1936 (“POW Act”) defines what is ‘wages’
  • The Code on Wages, 2019
  • Factories Act, 1948


As far as other employees are concerned, they are governed by the contract of employment with the employer.

So, the Employers should take cognizance of all prevailing labour laws, but more importantly, the notification issued by the Central Government under the Disaster Management Act, 2005 or under the State-specific regulations under the Epidemic Diseases Act, 1897 read with the Disaster Management Act, 2005.

Disaster Management Act, 2005 is an all empowering act which is a power given to the central & the state government to take control of situations in case of disasters & this act overrides any other law in force. Using the powers conferred upon them as per the above, the government has issued various directions under the Disaster Management Act, 2005.

> What are the Govt’s telling?

Central Govt:

On 29th March, 2020 – the MHA issued an Order under the powers granted to it by the Disaster Management Act, 2005, among other things, clearly spells out the responsibility of the employer towards its workers during the lockdown caused by COVID-19 crisis and is produced verbatim herein below for your ready reference:

All the employers, be it in the Industry or in the shops and commercial establishments, shall make payment of wages of their workers, at their workplaces, on the due date, without any deduction, for the period their establishments are under closure during the lockdown;

State Govt: –

  • Taking a cue from the central government, Delhi, Telangana, Haryana and Puducherry have issued mandatory directions to private companies to pay wages or salaries in full to all workers and employees during the lockdown period.
  • Others, such as Karnataka and Maharashtra, have issued only advisories to employers to not terminate or deduct wages/salaries of workers or employees.
  • Gujarat government has asked the district collectors to ensure that workers and labourers are paid timely wages by private sector employers even as the state remains in lockdown following the outbreak of coronavirus pandemic.


On 16th May, 2020 –SC Quashed MHA order mandating Wages Payment during Lockdown.’

The Supreme Court restrained the government from taking coercive action for now against employers who don’t pay workers their entire salary during the lockdown in violation of a ministry of home affairs notification of March 29 that directed them to pay full wages.

On 18th May, 2020 –Govt withdraws order on compulsory wage payment by firms during lockdown.’

The trade union leaders have criticised the government’s step to withdraw the order, but employers have welcome the step, saying it was absolutely necessary especially in absence of grants from the government to the industry towards wage payment.

Although the MHA order has been withdrawn but it is not clear as to whether it is withdrawn retrospectively, it remains to be seen about the finer points that will emerge as the order has been withdrawn.

There will be oppositions/representations made by the trade/labour unions etc. regarding the same & we expect that they will again take it up with the Supreme Court, the outcome of which we will have to see in the coming days.

It is worth noting that employees (who are not workers) are not governed by the labour laws & hence they are purely governed by the contract of employment.

Who is a worker or not is again a matter of interpretation, so organizations need to be very careful regarding the same.

> Let us now understand what the order originally meant along with the interpretation of labour law means & what we should do.

a) What are the categories of employees in an ‘Industry’ or ‘Shops and Commercial Establishment’ to which the MHA Order (defined hereinafter) applies?

  • Based on the above extract from the MHA Order, it is abundantly clear that the same applies to workers, drawing wages, at their workplace. It also states that this is applicable only to those establishments that are closed during the lockdown.

  • It is clear from the preamble and definition of terms under the various legislations as well as the MHA order that the employers are mandated to pay only wages to eligible employees. Based on the above definitions and meanings under the various statutes, it is clear that wages are required to be paid only to the following class of employees, namely, a) employees of an industrial establishment that are workmen; and b) employees of shops and establishment that are non-exempted by the Shops and Commercial Establishments Act, 1961 (‘SCE Act’) of the respective State.


b) Can an employer terminate workers/employees during lockdown?

  • Under the MHA order – No. Prior to the withdrawal, employers cannot terminate the workers as per the notification issued, which are of binding in nature.
  • Post withdrawal of the MHA order – Again the answer will depend upon the interpretations of various labour laws which strictly prohibits termination without following due procedure of notice etc. because termination results in loss of wages.
  • For employees – (with or without MHA order) reference have to be made to the contract of employment, the employer can terminate provided they comply with the contract of employment.


c) Can an employer reduce the wages of workers & employees salary, say 30 per cent, as a short-term measure for three months?

  • Under the MHA order – No. Prior to the withdrawal, employers cannot reduce the wages of workers.
  • Post withdrawal of the MHA order Again the answer is No. Specifically, any reduction will go against the spirit of Section 7 of the Payment of Wages Act, 1936, that prohibit such reductions & also other labour laws govern the same.
  • For employees – (with or without MHA order) reference have to be made to the contract of employment, the employer can reduce employees salary provided they comply with the contract of employment.


d) Can an employer allow voluntary reduction of wages with the consent of the employee?

  • Under the MHA order – No. The notification under the Disaster Management Act, 2005 would cover the reduction of wages as well. Therefore, the employer cannot reduce wages as long as the Disaster Management Act notification is in force, either on its own or even voluntarily, when the workers provides consent to such an Act.
  • Post withdrawal of the MHA order The employers can allow a voluntary reduction of wages with mutual consent of the workers (except in case of minimum wages).
  • For employees – The structure of compensation is derived from the contract of service or employment as the case may be. It is, therefore, a private contract between the employer and the employee and thus this should be fine.


e) Can a fixed-term employee be relieved at the end of the contract time? Or does this warrant the direction of termination?

  • Fixed-term employment ends on the expiry of the period of contract and does not attract provisions of these notifications. An employee can be relieved at the end of the contract period.


f) Can an employee under probation be relieved at the end of the probation period?

  • Similar to the fixed-term contract, if the letter of appointment is clear about exercising a right of not continuing employment or engagement in the event of non-extension of probation, that should operate without warranting the lockdown provisions announced.


g) Can a person on notice period, who has resigned voluntarily, be relieved?

  • When a voluntary separation is in process prior to the commencement of the lockdown or even after the commencement of lockdown, a voluntary resignation should not have any challenges and employees can separate voluntarily.


h) Can an employee who is put under a PIP be relieved after due process of PIP?

  • A performance improvement plan (PIP) is a process initiated as part of the disciplinary action proceedings and will amount to involuntary separation warranting termination, and therefore, should not be carried out. One can keep the process in abeyance until the provisions are revoked and continue immediately, post such period.


i) Can management refuse to pay annual bonus and variable pay, which is not part of gross salary?

  • Agreed remuneration as per the contract of service or employment should be paid and this is generally referred to as gross salary and applicable regulatory benefits. Any benefits or other payments, which are over and above the regulatory ones, will need to be observed in line with the terms and conditions imposed as per the policy governing those benefits or payments. However, anything that accrues to an employee, even if outside such purview, would be payable even at a later date.


j) Can employers force employees to take annual leave or other leave during period of lockdown?

  • No. Employers cannot ask employees to go on leave for the period of lockdown nor can they debit their leave account without intimation but this is subject interpretations & business decisions with an underlying risk of facing the legal consequences (if any) that many arise.


k) As an extension to point j – If there is no leave balance, can employers force the employees to be on loss of pay (LOP)?

  • No debit is possible either as leave or as LOP as mentioned above subject interpretations & business decisions accepting to face the legal consequences (if any) that many arise.


l) Can employees be forced to work during lockdown?

  • No. employers cannot force employees to work during lockdown. States have permitted certain categories of workers or industries to operate during this period and that shall be the only exception.


> What are the peers doing?

  • Deduction of accumulated leaves – Eg. Capgemini
  • Compulsory leaves with loss of pay (LOP) – Eg. Capgemini, Wipro
  • Salary cut – Eg. OYO, Zomato, McDonald’s, The Indian Express, Business Standard, Reliance
  • Squash Bonus, Increments or any other perks – Eg. Zoho, Big 4’s, tech Mahindra, TCS, Wipro, Infosys, HCL
  • Layoff – Eg. OYO, Zomato, Swiggy, SpiceJet
  • Furlough


> What are the governments doing themselves?

  • Uttar Pradesh has in effect decided to suspend 35 of the 38 labour laws for three years including laws related to industrial disputes, trade unions and contract workers.
  • Madhya Pradesh has gazetted amendments to relieve employers of the responsibility of virtually all provisions of the Factories Act
  • Maharashtra had announced payment of salaries in instalments. Also it announced 60 per cent cut in the March salaries of the chief minister, all other ministers, MLAs, MLCs and representatives of local governing bodies. The salaries of Class I and II will be cut by 50 per cent while that of Class III employees will be cut by 25 per cent
  • The Telangana government announced 10% to 75% salary cut for MLAs, MLCs, govt staff, depending on the ranks.
  • Andhra Pradesh, Odisha and Rajasthan also announced a cut in salaries, from 10% to 100%, again depending on the ranks.
  • Taking cues from others, the Kerala government on Wednesday decided to cut a month’s salary of all its staffers to raise ₹2,000 crore for the state disaster relief fund to fight the covid-19 crisis.


Conclusion: –

The recommended philosophy, on people-related cost reduction, in this scenario will be to have an open discussion with employees about the economic state of the business so as to arrive at salary cuts with consensus from them in order to ensure legal protection for the company.

Before making a decision to terminate, reduce salary or adjust leave – shall at all times ensure that they are in compliance with the provisions under the employment contract and the SCE Act of the State where the employee is located and engaged in services, as the case may be.

When the employee is terminated, it is also highly likely that the employee may disagree to the interpretation that he is not a ‘wages’ earner and hence cannot be terminated. Hence, it is very important to issue a carefully worded termination letter.

The Employee may approach the COVID-19 employee helpline and use the helpline as a forum to register a complaint and seek relief against the employer for non-payment of wages from the Government. During the epidemic situation, there is high probability of the administration taking a very conservative view and not go by legal interpretation/ opinion of whether an employee is eligible to be terminated or not. There is a strong possibility of the labour department, overstepping its jurisdiction, and to entertain complaints from employees sympathetically (and also recommend to the police to register a complaint) and directing the employer to pay wages to the complainant employee on compassionate grounds.

In such an eventuality, we advise, that the employer pays the employee salary ‘under protest’ with a disclaimer that the company reserves the right to recover the same from the employee after the COVID-19 crisis. It is recommended that companies adopting these measures create appropriate termination letters and incidental documentation as evidence for future purposes, if the matter ends up in Courts.