The Cold Math of Severance

I remember speaking with a friend sometime back – his company was going through a mass layoff. Employees clocking in for the day found that they could no longer log in to company’s systems. Meeting invites from HR managers appeared in their inbox. They were marched to the conference rooms, where HR explained the two options available to them: they could choose to work their notice period or opt for an immediate exit with severance pay and two months of medical insurance. By the end of the day, entire floors in the building had become empty, and in some cases, entire teams had been disbanded. My friend was not laid off, but what he witnessed left him wondering how many more rounds the year would bring — and whether he'd survive them all.

A senior manager with more than 20 years of experience out of which, 15 of them with this company, was let go – it didn’t matter that he knew the internal systems inside out. So was a technical analyst who had joined barely a year earlier, hired specifically for skills the company didn't have in-house. So was a manager promoted only months before, the promotion an acknowledgement for his contribution to the company. Twenty four hours ago, not one of them would have thought they would be out of a job.

The senior manager had just relocated his parents from their ancestral home to his city home so that they could have access to better medical care and facilities. His eldest had just started college. The recently promoted manager had started construction of his family home in his hometown while simultaneously juggling EMI for his flat and car in the city. The newly joined analyst had just started repaying his fifteen-year education loan. They all went back home that day — no job, no idea about their next salary, and a severance pay just enough to last the next few months, at most.

For all three, what they walked away with that day had a name: the full and final settlement.

The Full and Final Settlement:

Exit comes with one last payment. The full and final settlement. Every employee hears the same explanation — salary, leave encashment, allowances, reimbursements, ticked off one by one. Each employee was being settled his dues.

If an employee has served five or more years at the company, they get gratuity too. Not everyone clears that bar. The newly joined analyst was not eligible for gratuity. Provident Fund is not part of this final payment. Withdrawal and transfer of PF are managed by EPFO, not the company.

A company may also voluntarily pay ex-gratia allowances, purely as a goodwill gesture, at the time of termination. Non-cash benefits, like extended coverage of medical insurance for a few months even after termination, may also be provided. In some cases, like our senior manager's, employees are asked to sign a non-disclosure agreement about the terms of their own exit and are compensated specifically for their silence. While these gestures soften the immediate blow, they are neither uniform nor guaranteed. The question, then, is: what does the law require an employer to pay when it retrenches an employee?

Legally, termination is governed by the Shops and Establishment Act of each state and the Industrial Relations Code, 2020. The Shops and Establishment is generally very limited in its protection; one month’s notice of termination or one month’s salary as compensation for immediate terminations. The IR Code is more beneficial to the employees as it also provides for standard retrenchment compensation and a contribution to a Worker Reskilling Fund. However, the IR Code is not uniform in its applicability and a detailed note on the same in the given at the end of this article.

What the Salary Was Quietly Paying For

The HR meeting gave them a number — one that would hit their account soon. It left each of them with the same question: would it be enough to carry them until the next salary — whenever that next salary came?

Food, rent, groceries, school fees, transport — these are the essentials needed to keep a household running, salary or no salary. Added to these are the EMIs — house, car, phone. The present obligation for past lifestyle decisions - natural decisions taken when job security wasn't even a doubt.

There are social costs too — costs that come with belonging to a community. A relative's wedding, a neighbour's housewarming, the two to three birthday parties a month that your child cannot afford to miss. Avoidable, on paper. But skipping them brings awkward conversations.

Then come costs that arrive with no warning — a sudden hospitalisation, a car accident. Events no one can predict, and no one wants to. Most employees rely on their office health insurance to cover themselves and their family and that cover ends on the last working day of employment. There is no legal requirement for a company to extend it even briefly; any grace period offered is a discretionary courtesy, not an entitlement. This makes the gap between jobs riskier than it looks — a medical emergency during that window can trigger a financial crisis. And buying a new personal policy is rarely the first thing on anyone's mind while they're busy job hunting.

And finally, costs that could have been foreseen but still catch people off guard — the breakdown of a household appliance overdue for replacement, a pipe burst that needs a full plumbing overhaul, a self-assessment tax bill due at filing time.

Only a few costs can be actually controlled –eating out, movies, the annual vacation.

Even though the senior manager walked away with the heftiest final settlement, his financial commitments ran deep too – his eldest's university education coupled with medical expenses and caretaking of his ageing parents. The recently promoted manager couldn't pause the construction of his family home just because his income had, nor could he stop his EMIs on the flat and car. The newly joined analyst had an education loan to pay off, and unlike the other two, he didn't have the comfort of savings to fall back on.

All three lifestyles were designed around a constant pay check. Now that it had stopped, every rupee spent would need to be justified.

Counting Days, Counting Rupees

An abrupt exit, a lump-sum payment, and no plan for what comes next — that is the crux of retrenchment for an employee. The amount that initially appears sufficient looks very different once the household budget is drawn up. Salary stops, but life does not. Rent, school fees, EMIs, groceries: how many cycles can the amount cover? What must be paid, what can wait, and what can be cut? The severance is a finite sum. The period for which it must last is unknown.

The senior manager, the promoted manager, and the newly joined analyst each walked away with a different final-settlement amount, and a different set of financial commitments to meet. What they had in common was the uncertainty of re-employment: none knew when the next offer — or the next salary — would come.

For the senior manager, fifteen years with one company had built a particular kind of expertise — deep knowledge of its systems, its people, the unwritten ways it actually worked. Outside that company, it counted for very little. What he had spent fifteen years building was not always what the market was now asking for. Fifteen years had given him seniority. It had not given him security.

The recently promoted manager was in a relatively better position. His skills were current, and there were likely to be more roles available at his level than at the senior manager's. What a new employer would see was his prior title, not the trust that had earned it — and that trust would have to be built again, from scratch. He was likely to find something before the settlement ran out. Likely was not the same as certain.

The analyst faced a different problem. At the base of the pyramid, there may be more entry-level openings, but there are also far more applicants competing for each one. With barely a year of experience, he had fewer credentials to distinguish himself from the crowd and little professional network to fall back on. He was early enough in his career to start again. Starting again was not the same as starting easily.

None of them could know how long the search would take. And until an offer came through, the settlement was all they had. It is worth asking what your own settlement would look like if the law were the only thing standing behind it — because for many employees, it is.

Legal Note:

Retrenchment Compensation – A Statutory Obligation

Termination of employees is governed by different statutes. The Shops and Establishment Act of each state and the Industrial Relations Code, 2020 (‘IR Code’), based on the erstwhile Industrial Disputes Act, both govern terminations – but they differ sharply in how they treat retrenchment.

The Shops and Establishment Act, which varies from State to State, is generally more limited in the protection it provides at termination, in that it only requires that the employer give one month’s notice of termination or pay one month’s salary as compensation for immediate terminations.

The more recently introduced IR Code has more compliance requirements for retrenchment. It requires that each retrenched employee be paid standard retrenchment compensation of around 15 days' average pay for every completed year of service. Additionally, the company must contribute an amount equal to 15 days' last-drawn wages to the Worker Re-skilling Fund, managed by the government. This amount is credited to the retrenched employee's account within 45 days. The Code also has the same requirement as the Shops and Establishment Act – one month’s notice of termination or pay in lieu of it.

While the Code provides for retrenchment compensation, it comes with its own applicability and conditions. Even where a company falls within the Code's scope, certain classes of employees — managerial and administrative staff, highly paid supervisors — fall outside the definition of "worker," and may not be entitled to the retrenchment compensation described above.

Given that the Code is recent (effective from November 2025) and still evolving, several grey areas remain unresolved. The IR Code defines an industrial establishment as one in which any industry is carried on, and defines industry broadly as any activity involving the production, supply, or distribution of goods or services — a definition wide enough to cover almost any company. However, in the chapter specifically governing retrenchment, the Code narrows the definition of an industrial establishment to mean a factory, or any other category specifically notified by the government, such as mines or plantations. In other words, a company can fall within the Code's general scope and still sit outside the chapter that actually grants retrenchment compensation.

A strict reading of this means employees who fall outside the "worker" definition, and employees of companies that fall outside the retrenchment chapter's narrower scope, are not entitled to retrenchment compensation or the Worker Re-skilling Fund. What remains for them is only the one month's notice pay under the Shops and Establishment Act, and whatever discretionary severance the company chooses to offer.

We must also note that retrenchment compensation does not apply in cases of voluntary resignation, retirement on reaching the age of superannuation, non-renewal or expiry of a fixed-term employment contract, termination on grounds of continued ill-health, or dismissal as punishment following disciplinary action.