Termination & Exit-India FAQs

1. What is the difference between termination for cause and retrenchment?

Termination for cause is dismissal based on the employee’s conduct– misconduct, poor performance, or policy violation– and requires a domestic inquiry process for workmen. Retrenchment is termination for business reasons unrelated to conduct– surplus roles, restructuring, or closure. Retrenchment carries a statutory compensation obligation of 15 days’ wages per completed year of service and, for establishments above 300 workers, prior government approval.

2. What is the domestic inquiry process, and when is it required?

The domestic inquiry is the process by which an employer investigates a misconduct allegation before taking a termination decision. It is mandatory for workmen under the Industrial Relations Code 2020 and requires: a charge sheet setting out the allegations; an opportunity for the employee to respond; a formal inquiry by an inquiry officer; and a reasoned finding.

3. What retrenchment compensation is payable under the Labour Codes?

Retrenchment compensation under the Industrial Relations Code 2020 is 15 days’ wages for every completed year of continuous service, calculated on the basis of the last drawn wages. A Reskilling Fund contribution of 15 days’ last drawn wages per retrenched workman is also payable. One month’s notice or pay in lieu is required. For establishments employing 300 or more workmen, prior government approval must be obtained before the retrenchment takes effect. See the Labour Codes of India

4. When should a separation agreement be used instead of formal termination?

A separation agreement is appropriate where the employer and employee can reach a consensual exit, typically for management employees where the domestic inquiry process does not apply. A well-drafted separation agreement provides a mutual release of claims, documents all financial terms, and includes confidentiality and non-disparagement obligations where commercially important.

5. What is a full and final settlement, and what should it cover?

Full and final settlement covers: salary through the last working day; leave encashment; gratuity where qualifying service is complete; pro-rated bonus; earned benefits; and agreed severance. It should be accompanied by a written receipt and release from the employee. An FnF without a proper calculation or release leaves the employer exposed to subsequent claims.

6. What are the gratuity requirements on termination?

Gratuity is payable on termination, resignation, or retirement after five or more years of continuous service. The formula is 15/26 × last drawn monthly salary × completed years. Under the Code on Social Security 2020, fixed-term employees may be entitled to proportionate gratuity after one year. Gratuity is a statutory obligation and cannot be waived by contract.