Hire and fire

Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT

Meaning

Hire and fire means the freedom of an employer to take on workers and to remove them (through lay-off, retrenchment or closure) without first asking the government. In India, this freedom depends on firm size. Above a set number of workers, the firm needs prior government permission. Under the Industrial Relations (IR) Code, 2020, that number is 300 workers. Under the old law it was 100 [3].

• Why it matters: hire and fire is at the centre of India's debate on labour market flexibility. On one side is the firm's freedom to grow and change its staff. On the other is the worker's job security.

Explanation

How the permission threshold works

• Old rule (Chapter V-B, Industrial Disputes Act, 1947):

• Firms with 100 or more workers needed prior government permission before any lay-off, retrenchment or closure.

• New rule (IR Code, 2020):

• The limit is now 300 workers [3].
• Non-seasonal industrial establishments with at least 300 workers must get prior permission from the Centre or the state [3]. Non-seasonal means the work runs all year, not only in certain seasons.

• States may raise the limit further.

• Effect: firms with up to 299 workers can now cut staff without government permission.

• Example:
• A factory has 299 workers and wants to cut jobs.
• Before the Code: it was above 100, so it needed government permission.
• After the Code: it is below 300, so it does not need permission. It must still give notice and pay compensation.

The three ways of "firing" that the law controls

• Lay-off: the employer cannot give work for a while because of a shortage of power or raw materials, a machine breakdown, piled-up stock or similar reasons. The worker stays on the rolls (the list of the firm's employees).
• Retrenchment: the employer ends a worker's service for any reason except punishment (disciplinary action), retirement or ill-health. It needs notice and compensation.

• Under the IR Code, the employer must give three months' notice, or pay wages for those three months instead [3].

• Closure: the workplace shuts down permanently.

Related rules that make hiring and firing easier

• Standing orders (a firm's written service rules): these now apply only to firms with 300 or more workers. The old limit was 100 [3].

• They must cover worker classification, hours, holidays, paydays, wage rates, termination of employment, suspension for misconduct and how workers' complaints are handled [3].

• Fixed-term employment (FTE): a worker hired on a written contract for a fixed period.

• Wages, hours and benefits must be equal to those of permanent workers doing the same work.
• Gratuity (a lump sum paid for years of service) is due after one year. Earlier, a worker needed five years [2].
• When the contract ends, this is not retrenchment, so no retrenchment compensation is due.

• So firms can hire for a project without being tied to permanent staff.

• Contract labour rules now apply only where 50 or more contract workers are engaged. The old limit was 20.

A safety net for retrenched workers: the Worker Re-skilling Fund

• The employer pays 15 days' last-drawn wages for each retrenched worker, or another amount the Centre sets [3].
• The money must be used within 45 days of the retrenchment [3].
• Worked example:
• Last-drawn wage = ₹600 a day, and 100 workers are retrenched.
• Per worker: 15 × ₹600 = ₹9,000.
• Total paid into the fund: ₹9,000 × 100 = ₹9 lakh.

In India

• Constitutional basis: labour is on the Concurrent List (List III). Entry 22 covers trade unions and industrial and labour disputes.

• So both Parliament and the states can make these laws. This is why states can raise the 300-worker limit further.

• The law: the IR Code, 2020 replaced the Industrial Disputes Act, 1947, the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946.

• It is one of four labour codes that merged 29 central labour laws [1].

• All four codes came into force on 21 November 2025 [1].

• Who gives permission: the Central or state government, depending on the establishment [3].

• The problem it tries to fix:
• The old 100-worker rule made firms afraid to grow past 100 workers.
  • So India ended up with too many small firms and too few mid-sized ones. This is called the "missing middle".
• Firms used contract labour to avoid the rules for permanent staff.

• Firms chose machines over workers (capital intensity), even though India has plenty of labour.

• Criticism:

• The IR Code was passed in September 2020 with little debate in Parliament.
• The Indian Labour Conference (ILC) did not meet before the codes were passed. The ILC is India's top tripartite forum, where government, employers and trade unions meet.

Don't confuse with

• Lay-off vs retrenchment: in a lay-off, the stop is temporary and the worker stays on the rolls. In retrenchment, the worker's service ends, and notice and compensation are required.
• Retrenchment vs dismissal: retrenchment is ending service for any reason other than punishment, retirement or ill-health. A worker removed as disciplinary action is not retrenched.
• End of fixed-term employment: when a fixed-term contract ends, it is not retrenchment, so no retrenchment compensation is due. Gratuity is still paid after 1 year [2].
• Labour market flexibility: this is the wider idea. It covers how easily firms can change the number of workers, working hours and wages. Hire and fire is only its job-security part.

Prelims Hooks

• The limit for prior government permission for lay-off, retrenchment or closure rose from 100 to 300 workers under the IR Code, 2020. States may raise it further [3].
• The old 100-worker rule was in Chapter V-B of the Industrial Disputes Act, 1947.
• Standing orders now apply at 300 workers (up from 100) [3]. Retrenchment needs three months' notice or wages for that period [3].
• Re-skilling fund: 15 days' wages per retrenched worker, to be used within 45 days [3].
• Trap: when a fixed-term contract ends, it is not retrenchment. Fixed-term workers get gratuity after 1 year, not 5 [2].
• Trap: labour is on the Concurrent List (Entry 22: industrial and labour disputes), not the Union List. All four codes came into force on 21 November 2025 [1].

Mains Points

• Flexibility vs security (GS-III):
• For: the 300-worker limit and fixed-term employment may help firms grow past the "missing middle". They may also shift firms from contract labour to formal jobs and support labour-intensive manufacturing.
• Against: workers have weaker job security. Unions also have less bargaining power, because strike notice is now needed in all industrial establishments: within 60 days before a strike, and no strike within 14 days of the notice [3].

• Balance: the Worker Re-skilling Fund and fixed-term workers' equal pay and gratuity try to soften the blow [2][3].

• Cooperative federalism and "race to the bottom" (GS-II):

• Because labour is a Concurrent subject, states can raise the limit above 300.
  • This allows states to try out their own rules.
  • But states may also compete by offering weaker protection to attract investment.

• The lack of ILC consultation before the codes were passed shows a gap in tripartite social dialogue (talks between government, employers and unions).

• Limited reach: the old permission rules covered only a small regular workforce in the formal sector. So relaxing them helps few workers directly and takes protection away from some. Most informal workers need registration, portable benefits and enforcement by states more than changes in hire-and-fire rules.

Related concepts

• Labour laws
• Tripartism
• Floor wage
• Fair wage
• Living wage
• Need-based minimum wage
• Lay-off
• Retrenchment
• Standing orders
• Fixed-term employment

Read more

• Labour laws and the four labour codes