Sometimes people leave a job. And sometimes, the job leaves them. In India, job losses can happen for all sorts of reasons a company downsizes, shuts down a department, loses funding, or just decides they no longer need a role. In those moments, what’s owed to the employee goes beyond courtesy. It goes into legal and ethical territory. That’s where severance pay comes in. 

The trouble is, most people don’t know what the law actually says. Some employers think severance is just a “nice gesture.” Many employees don’t realize they’re entitled to something and they walk away empty-handed. 

Let’s clear that up. 
 

WHAT SEVERANCE PAY ACTUALLY MEANS 

Severance pay is a one-time compensation given to an employee when the company ends the employment, especially for reasons that are not the employee’s fault like retrenchment, restructuring, or closure of business. It's not a performance bonus. It’s not a reward. It’s not a parting gift. It’s what the law and basic decency says should be paid to someone who’s being asked to leave. Think of it as a financial cushion. When someone suddenly loses a job, they still have rent to pay, mouths to feed, EMIs running. Severance helps cover that gap, even if for a short while. 

WHAT THE LAW SAYS PLAIN AND SIMPLE 

There are three main things to know. 

1. Industrial Disputes Act, 1947 
If you’re a “workman” under this Act meaning you’re doing non-supervisory work (think factory staff, technicians, clerks, delivery workers, etc.) and you’ve worked for at least one year, then you’re legally entitled to retrenchment compensation if you’re let go. 

What does the law say you must get? 

∙One month’s notice or salary in lieu 
∙15 days’ average pay for each completed year of service 

This is not optional. It’s a legal right. And if a company skips it, it can be dragged to the Labour Court. 

2. State Shops & Establishments Acts 

If you’re working in a company that doesn’t come under factories like a startup, office, or commercial establishment your rights depend on the state law. Most states have rules about giving notice and settling dues on termination. Some talk about compensation. Some don’t. It’s uneven. 

But the principle stays the same if someone is terminated without fault, compensation is expected. 

3. Gratuity 

If you’ve completed 5 years of continuous service, you’re eligible for gratuity, even if you’re terminated unless it’s for proven misconduct. This is governed by the Payment of Gratuity Act, 1972. It’s separate from severance, but both are often paid during a final settlement. 

WHEN SEVERANCE IS ACTUALLY PAYABLE 

Let’s be real. Severance doesn’t apply every time someone walks out. Here’s when it does and doesn’t. 

Severance applies when: 

∙The company retrenches the employee (role becomes redundant) 
∙The company shuts down operations 
∙The employee is terminated without any misconduct 
∙The employee signs a mutual separation deal, initiated by the employer 
∙The contract specifically says severance will be paid 

Severance does not apply when: 

∙The employee resigns voluntarily (unless the contract says otherwise) 
∙The employee is terminated for proven misconduct 
∙The job was for a fixed term and it ends naturally 
∙The employee was still on probation and not confirmed 

HOW IT’S CALCULATED NO COMPLICATED MATH 

Here’s what the Industrial Disputes Act says: 

5 days’ average pay × completed years of service 

So, if someone was earning ₹40,000 per month and worked for 6 full years, the severance would be: 

∙Half a month’s pay = ₹20,000 

∙₹20,000 × 6 = ₹1,20,000 

Only completed years count. Six years and four months still counts as 6 years unless the employer is kind enough to round up. 

Now, in many companies especially in white-collar jobs the employment contract may offer something better, like: 

∙1 month’s salary per year of service 

∙A fixed lump-sum payout (3 months’ pay, for example) 

∙Or a negotiated settlement at the time of separation 

That’s all valid as long as it’s at least as much as the legal minimum. 

CONTRACTS, CLAUSES, AND THE FINE PRINT 

Many senior-level employees don’t come under the Industrial Disputes Act. For them, everything depends on what’s in the contract. 

Some clauses are simple: “If terminated without cause, the company will pay 3 months’ gross salary.” 

Some clauses are tricky they talk about non-compete terms, gag clauses, or conditional payments. Be careful with those. 

Once you sign a severance agreement, it’s binding. So read everything, ask questions, and never sign in a rush especially if it waives your right to go to court or make future claims. 

RIGHTS OF EMPLOYEES, DUTIES OF EMPLOYERS 

Here’s what every employee has a right to, and what every employer must do. 

Employees have the right to: 

∙Be paid notice period or salary in lieu 

∙Get severance if retrenched (and eligible) 

∙Receive gratuity (if completed 5 years) 

∙A proper full and final settlement 

∙Raise a complaint if these aren’t honoured 

Employers must: 

∙Follow proper process before termination 

∙Provide a termination letter 

∙Clear dues without delay 

∙Avoid arbitrary or unfair dismissals 

∙Draft fair contracts, especially for senior employees 

A clean exit matters. Messy exits invite litigation, bad reviews, and loss of goodwill. 
 

FOR HR AND LEGAL TEAMS WHAT YOU SHOULD ALWAYS DO 

This part is not from law books. This is from experience. 

1.Don’t rush terminations: Think it through. Have paperwork ready. Give people clarity. Be human. 

2.Pay what’s due on time: Final settlement delayed by weeks? That’s how court cases begin. 

3.Document everything: From emails to approvals, make sure you have written records. If a matter goes legal, memory isn’t enough. 

4.Don’t copy-paste contracts: Draft contracts that reflect real terms. Don't insert vague clauses you don’t intend to honour. 

5.Speak to people: A quick call with the employee explaining their severance clears 90% of confusion. 

CLOSING THOUGHT RESPECT BEGINS AT EXIT 

It’s easy to talk about company culture when everything’s going well. But the real test of culture is how a company treats people when they leave. 

Severance pay isn’t generosity. It’s responsibility. 

If you’re an employer don’t cut corners. If you’re an employee don’t settle for less than what the law says is yours. 

An exit done the right way builds trust. One done wrong builds lawsuits.