Termination of Worker For ‘Loss of Confidence’ Does Not Amount To Retrenchment

[Madhusudan Bose and Nayantara Chauhan are Advocates at PRA Law Offices, Delhi]

Indian law grants strong protection to certain types of employees (statutorily referred to as ‘workmen’, but for convenience herein as ‘workers’) against termination of their employment by employers (or ‘retrenchment’). A worker is entitled to retrenchment compensation at the rate of 15 days average pay for every year of service in case of termination of employment (section 25F, Industrial Disputes Act, 1947).  Further, a worker is entitled to obtain preference in any recruitments made by the employer in future (section 25H, Industrial Disputes Act, 1947).  In addition, in case of a factory employing more than 100 workers, prior permission of the appropriate Government must be obtained for retrenchment. Of course, the above rules do not apply if the worker is terminated on grounds of misconduct or other specified instances under law.  The Industrial Disputes Act, 1947 (‘ID Act’) excludes termination on account of ‘misconduct’ from the purview of ‘retrenchment’.

Now, what happens in case an employer is not able to prove a charge of misconduct against a worker? It may happen either because clear evidence is not available against the worker or because the charges cannot be established due to the sensitivities involved in the matter (such as in cases involving sexual harassment).  These cases often involve situations where an employer is said to have ‘lost confidence’ in the worker, that is to say, the employer no longer has the confidence to retain the worker in employment.  Can an employer terminate the worker in such situations?  What are the consequences for the employer in such a case?  Would the employer have to pay retrenchment compensation and offer re-employment to the worker under the ID Act?  These are some questions are discussed in this post.

Note that this post is limited in its scope to employees who work in private undertakings and constitute ‘workmen’ under ID Act.  Dismissal of employees in government undertakings may be subject to additional issues in accordance with the rules of their services and which have not been discussed here.  Rules of service of non-workers are dealt under the law relating to shops and establishments of each state.

Tests for Establishing ‘Loss of Confidence’

The Supreme Court of India in Kanhaiyalal Agrawal v. Factory Manager, (2001) 9 SCC 609, has in paragraph 12 listed three conditions or ‘tests’ to be satisfied for concluding that the employer has validly ‘lost confidence’ in his worker:

(i) whether the worker is holding a position of trust and confidence;

(ii) whether, by abusing such position, the worker commits an act which results in forfeiting the employment; and

(iii) whether, to continue the worker in service would be embarrassing and inconvenient to the employer, or it would be detrimental to the discipline or security of the establishment.
The above three tests are further qualified by one overarching condition.  The fact of ‘loss of confidence’ cannot be established based on the subjective opinion of the management.  The management should be in a position to prove objective facts that led to a definite inference of apprehension in the mind of the management regarding trustworthiness or reliability of the employee. 

Whether Disciplinary Enquiry Necessary

In these circumstances, how is an employer required to prove loss of confidence in an employee?  Is disciplinary enquiry mandatory to establish ‘loss of confidence’ in an employee?

An examination of various cases shows that the institution of a disciplinary inquiry against the worker greatly helps employers in establishing their bona fide before a court of law and assists them in proving the charges relating to ‘loss of confidence’ made against the worker. However, there have also been cases where no disciplinary inquiry was carried out, yet the employers have been permitted to present facts before the court of law to help them prove that their decision to terminate the worker for loss of confidence was just and necessary. 

For instance, in Air India Corporation, Bombay v. V.A. Rebellow, AIR 1972 SC 1343,the employer terminated an employee with immediate effect by paying him salary in lieu of notice.  When the matter reached courts, the employer submitted that the employer had lost confidence in the employee due to a grave suspicion regarding the complainant’s private conduct and behaviour with an airhostesses employed by the employer. It is pertinent to note that the employer had not carried out any disciplinary inquiry against the employee in question. The Supreme Court noted in this case:

‘… once bona fide loss of confidence is affirmed the impugned order must be considered to be immune from challenge. The opinion formed by the employer about the suitability of his employee for the job assigned to him even though erroneous, if bona fide, is in our opinion final and not subject to review by the industrial adjudication. Such opinion may legitimately induce the employer to terminate the employee’s services; but such termination can on no rational grounds be considered to be for misconduct and must, therefore be held to be permissible and immune from challenge.’ [emphasis added]

In Kamal Kishore Lakshmanan v. Management of Pan American World Airways Inc.,AIR 1987 SC 229, the Supreme Court held that termination on account of loss of confidence cannot necessarily be held to be ‘stigmatic’. A stigmatic dismissal means that the worker is being charged with misconduct and disciplinary proceedings are required to be carried out in such cases. The Supreme Court ruled that if no disciplinary inquiry has been held, the employer would be entitled to present evidence to justify the order of dismissal during the process of adjudication also. Reference may also be made in this connection to Sudhir Vishnu Panvalkar v. Bank of India, (1997) 6 SCC 271, Kamleshkumar Rajanikant Mehta v. Presiding Officer, Central Government Industrial Tribunal No. 1, 1979(39) FLR 329,  Torrent Power Ltd. v. Chelabhai Nathabhai Luhar,[(2018) 1 GLR 392], and State Bank of Travancore v. Prem Singh [(2019) IIILLJ 123 Del]. Of course, if no disciplinary inquiry is held, and the management is unable to justify to the court that their loss in confidence in the worker was based on objective grounds, the dismissal of the worker can be set aside. See Chandu Lal v. The Management of M/s. Pan American World Airways Inc., AIR 1985 SC 1128; Kamal Kishore Lakshman v. Management of Pan American World Airways Inc., AIR 1987 SC 229.

Here, it is important to note that not all cases of ‘loss of confidence’ involve charges of misconduct against a worker.  Sometimes, ‘loss of confidence’ may occur simply because of failure of a worker to carry out duties properly.  It may occur due to sheer incompetence or failure to properly abide by instructions given by superiors (for instance, The Tata Oil Mills Co., Ltd. v. Workmen, AIR 1966 SC 1672.  Disciplinary inquiry is ordinarily required to be carried out in cases involving charges of misconduct against the worker.  In cases other than misconduct, no disciplinary inquiry would be necessary; though the management may be required to adduce evidence to justify the basis of their loss in confidence in the worker. 

Illustrative Circumstances when Employer may Lose Confidence in Workers

An examination of cases reveals a variety of circumstances under which employers have been held to have validly lost confidence in their workers.  These include:

1. When the worker is suspected of sexual harassment (see Air India);
   
   
2. Breach of confidentiality (see Ruby General Insurance Co. v. Chopra, (1969) 3 SCC 653);
   
   
3. Incompetence or unsatisfactory work (see Tata Oils Mills; Sunil Kumar Azmi v. M.P. Road Transport Corporation, 1980 MPLJ 471);
   
   
4. Theft or misappropriation of property though worker is acquitted by criminal courts (see The Divisional Controller, KSRTC v. M.G. Vittal Rao, (2012) 1 SCC 442; Sudhir Vishnu Panvalkar v. Bank of India, AIR 1997 SC 2249);
   
   
5. Failure to discharge duty properly (Francis Klein & Co. (P) Ltd. v. Their Workmen, AIR 1971 SC 2414); and
   
   
6. Misconduct generally – to illustrate, if the worker took leave for false reasons (see The Binny Limited v. Their Workmen, AIR 1973 SC 1403), or if the worker released mortgage documents without permission (see Bharat Heavy Electricals Ltd. v. M. Chandrasekhar Reddy, (2005) 2 SCC 481).
   

It is pertinent to note that, when a worker is discharged for misconduct, whether the misconduct results in ‘loss of confidence’ or not is an important consideration for courts to determine if the worker could possibly be reinstated.  Even if a worker is cleared of charges relating to misconduct, if the matter involved loss of confidence, the courts would be disinclined to order reinstatement.

Whether Termination Due to Loss of Confidence Amounts to ‘Retrenchment’

The ID Act defines the term ‘retrenchment’ in an expansive manner to mean termination by the employer of the service of a worker ‘for any reason whatsoever’. The Supreme Court had in Hariprasad Shivshankar Shukla v. A.D. Divikar, [1957] 1 SCR 121] ruled that the words ‘for any reason whatsoever’ covers only instances involving discharge of surplus labour or staff by the employer. Termination of employment of workers for any other reason (such as on closure of undertaking) would not constitute ‘retrenchment’ and consequently the provisions of section 25G and 25H of the ID Act do not apply to such dismissals.

Based on the decision of Supreme Court in Hariprasad, several High Courts have held that termination of a worker on account of loss of confidence would not amount to ‘retrenchment’ (see Kamleshkumar and Torrent Power Ltd).  Accordingly, a worker dismissed for loss of confidence would not be able to claim retrenchment compensation or right of re-employment under the employer in accordance with ID Act.  It makes logical sense because once the management has decided to let go of a worker for want of confidence, it would be illogical to argue that such person should have right of re-employment with the same employer under section 25H of the ID Act. 

Conclusion

The gist of all judicial precedents on the matter is that a worker may be terminated for loss of confidence by the management, if such loss of confidence is based on objective reasons, even if the actions of the employee did not amount to a misconduct.  Termination of such an employee would ordinarily be carried out by discharge simpliciter without attributing any stigma on the employee.The basis for loss of confidence may be established by the management by disciplinary proceedings.  Even if no disciplinary proceedings are conducted, the management may be afforded an opportunity to present their case during adjudication proceedings.  The provisions of the ID Act relating to ‘retrenchment’ will not apply to such a worker. 
– Madhusudhan Bose & Nayantara Chauhan