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The current pandemic has impacted businesses negatively throughout all sectors. It is being observed that the employers are resorting to shutting down their businesses, downsizing their operations, letting go of employees as measures to combat the persisting economic scenario. Under Indian employment law, there are three modes by which an employer of a commercial establishment can terminate the services of his employees; voluntary resignation by the employee, termination of services by employer on account of misconduct on part of the employee and termination simpliciter.
Companies in India are under an impression that termination simpliciter is a right of the employer and is completely dependent upon employer’s discretion. More often than not, the employer is under an impression that terminating the employment via this mode requires no reasoning. However, as per the provisions on termination of services as laid down under various States’ Shops and Commercial Establishments Act, it is observed that termination can only be accomplished if the employer has a ‘reasonable cause’ for dismissing the employee. This article aims to explore the requirement of a reasonable cause before an employer can terminate the services of the employee, especially under current economic scenario.
Some states in India have mandated that the termination or dismissal of services of an employee, who has worked in an establishment for a prescribed period of time, cannot be done without providing a reasonable cause for such termination or dismissal. The statutory provisions for this reasonable cause requirement are similarly worded in all the State enactments. Some of the States inter-alia that have this provision in their Shops and Commercial Establishments Act are Andhra Pradesh, Tamil Nadu, Kerala, Delhi, Bihar, Madhya Pradesh, Haryana and West Bengal. These provisions also afford the dismissed employee with a right to appeal to the concerned authority in cases where no reasonable cause has been cited by the employer. Meanwhile, Maharashtra, Gujarat, Orissa and Uttar Pradesh are some states that do not have this requirement inscribed in their statutory provisions.
It is now pertinent to understand what the courts in India have held to be a reasonable cause for valid termination of employment and how have the courts ruled in cases where such a cause was absent.
It is necessary to understand the mandatory nature of this provision and assess whether the employer is bound to give reasons to the employees for their dismissal. The Supreme Court in the case of Syed Azam Hussaini vs. Andhra Bank Ltd. [AIR 1995 SC 1352] recognized that a termination order by an employer will not be considered legal, if it is devoid of any reasonable cause. In this case, the employee was a clerk working with the employer bank on probation. The bank terminated the services of the employee without citing any reasons whatsoever. This case identifies that mere termination simpliciter without assigning reasons will not be considered a valid termination of employment.
The Supreme Court further clarified in the case Sri Ganganagar Urban Co-opertive Bank Ltd. vs. Prescribed Authority and Ors. [AIR 1997 SC 2687] that, if the termination is not for misconduct, then the employer was required to give reasonable cause for dispensing with the services of an employee. Moreover, in the case of Cox and Kings India Ltd. vs. Narendra Singh Rathore and Ors. [2012 (3) ILR (Raj) 656], the Court held that if the statutory provisions require that the employer must provide reasonable cause, then the same cannot be contractually subverted by the employment contract. The employment contract in this case had a provision which stipulated that the employer could terminate the services by giving a three months’ notice or salary in lieu thereof. Recently, the same dictate of law has been upheld by Jharkhand High Court in the case of Kansai Nerolac Paints Limited vs. The State of Jharkhand and Ors. [MANU/JH/0684/2019] which states that the burden of proving that the termination was for a reasonable cause is on the employer and the said employer must record it in the termination order.
The Courts have not only recognized the need for providing reasons before termination, but have also examined the scope of the term ‘reasonable cause’. The Patna High Court has recognized what all cases could be considered as reasonable causes in the case of Rajendra Prasad Sah and Ors. vs. State of Bihar and Ors. [1988 PLJR 1065]. In the said judgement, the Court recognized the wide ambit of the term, and emphasised that the scope of reasonable causes will depend on the particular facts of the case. Furthermore, the Court cited that where termination takes place on the basis of factors beyond the control of the employer, as on account of closure of the business, reduction in the extent of the business for bona fide reasons, lockout in the factory, reduction of work, loss in business, financial constraints, in the interest of efficiency and economy, winding up of the company can be considered as reasonable causes.
This case states, that in the interest of economy and efficiency, a termination of an employee due to the business not performing well would be considered a valid reason for termination. This judicial pronouncement clarifies that economic difficulty is a valid reason for termination. This can enable employers to terminate contract of employment owing to increasing hardships in their businesses in the Covid-19 lockdown.
Insufficiency of work and termination on account of downturn in business has also been held to be a reasonable cause in the case of N.M. Mehta vs. Coromandal Fertilizers Ltd. and Ors. [1976(2) APLJ (HC) 279]. In this case the statement of business of the establishment portrayed that there had been a steep fall in the turnover of the business which was considered to be a reasonable cause for termination of employment.
However, an employer cannot dispense with the services of an employee by merely stating that their services are no longer required. The management or the employer will have to demonstrate the reasons why those services are no longer needed. This has been held by the Madras High Court in the case of The Management of Air France v. The Deputy Commissioner of Labour and others [(1996) IILLJ 210 Mad].
Furthermore, it is observed that non-compliance or failure on part of the employer to give reasonable cause for the termination can lead to reinstatement of services of the employees with payment of other consequential benefits. As to the payment of back wages, it depends upon the timeline and facts of the particular case.
Employers should be mindful of the fact that these provisions are applicable to non-managerial employees as most State enactments under Shops and Commercial Establishment Acts, in most States exempt managerial employees from its purview. As was observed in the case Tata Engineering and Locomotive Company Limited vs. The Presiding Officer and Ors. [2013 (3) LLN 653 (Jha)], that when an employee in a managerial post is dismissed, the employer is not required to comply with the provisions set out in the Shops and Commercial Establishment Act of the State in question.
By way of these cases, the Courts have demonstrated what can be construed as reasonable cause and how an employer needs to comply with the statutory requirement of providing a reasonable cause. Business not performing well, economic constraints, closure of establishment, unsatisfactory performance of the employees, non-fulfilment of contractual conditions, can all be construed to be reasonable causes for termination of employment. In light of these cases, it can be inferred that the employer should be mindful of the statutory provisions applicable upon its establishment. As a good governance measure, employers should ensure that they specify sufficient reasons and have requisite proof before they terminate the employment of their employees.
Author: Sana Sarosh from National law Institute University, Bhopal.
Editor: Astha Garg, Junior Editor, Lexlife India.