Difference Between Lay Off and Retrenchment

Companies and organisations often terminate their relationship with employees as a part of a business exercise. Such termination is different from voluntary termination, that is usually done in cases of unsatisfactory services. Termination that is not a direct result of a worker’s action within the organisation is called involuntary termination. Involuntary terminations are routine procedures in companies.

Lay Off vs Retrenchment

The main difference between layoffs and retrenchment is that layoffs can be temporary in nature, while retrenchment is permanent termination.

Lay Off VS Retrenchment

Involuntary terminations can be further divided into two broad categories namely Layoffs and Retrenchment. Layoffs are a part of business terminations that are volatile in nature. This means that once the lean period for the organization is over, the employed might be called back to work.

Retrenchment is another form of termination, which is not dependent on the actions of the employee. Retrenchment, however, is non-volatile which means once terminated, the employees will never be called back.


Comparison Table Between Lay Off and Retrenchment (in Tabular Form)

Parameter of ComparisonLayoffsRetrenchment
DefinitionLayoffs are involuntary terminations, usually done due to business and expenditure reasons.Retrenchment is the permanent termination of an individual’s employment due to the closing of the department or replacement of labour.
NatureAction stepBusiness Strategy
Effect on operationThe operation usually stood during lay off periodOperation continues.
Re-appointmentReappointed might happen after the lay off periodAll employ contracts and connections with the company are permanently terminated.


What is Lay Off?

Layoffs are a common business practice that companies adopt to deal with economic downturns. During times of recession within the economy or the company, management decides to lay off staff and reduce the workforce to avoid absolute shut down of the business.

Layoffs can be temporary in nature that is employees can be asked to join back once the company has recovered and can afford to hire more work workforce.  A laid-off employ does not provide services to the company or collect wages. However, he/she can be eligible for compensation and retaining support. Companies may state multiple reasons for laying off employs. Some common reasons for lay-offs include;

  1. Cost Reduction- When companies fail to make enough profits, a need to cut costs arise. Downsizing is the simplest way of cutting costs. Companies must follow the due procedure in order to avoid lawsuits.
  2. Staffing Redundancies- Companies often change their management strategies which creates a need for creating new positions or dissolving existing positions.
  3. Relocation- When a company moves its operations to a different location, some workforce needs to be laid off.
  4. Merger or Buyout- Change in ownership will cause a significant shift in corporate leadership strategies. Review of employee profiles and layoffs are common in such cases.

Since layoffs are involuntary termination, they do not impact a person ‘s employability and does not reflect badly on his or her cv. However, it does have an overall socio-economic impact on ex-employees. It also affects the overall environment of the workspace for a brief period. Layoffs can be avoided by encouraging voluntary retirements, cutting on office expenses by opting virtual workspaces etc.


What is Retrenchment?

Retrenchment is another form of an involuntary termination that companies involved in. It is a form of dismissal that is not caused by a faulty behaviour of practice of the employee himself but is a management decision. If a company reviews its business expenses and finds alternatives that are cheaper than the employee, they in question, it is likely to lawfully retrench the individual.

Retrenchments are done due to operational reasons. Companies might cite reasons such as technological, economic, or structural needs for retrenchment. The process of retrenchment must be fair and objective.

The general due process involves consultation with employees who are likely to get affected by the retrenchment. Several sessions of consultations, objective information collection and selection based on a mutually agreed about criteria is done before employees are retrenched. Selection criteria for retrenchment may be based on principles such as LIFO or last in first out or could be based on experience, skills knowledge etc.

Retrenchment involves a severance pay, which could either be one week pay for each completed year, or an amount suggested by the consulting committee. Retrenchments are permanent terminations, and the employee is not likely to be re-employed. Companies engage is mass retrenchments usually when technology or machinery is introduced to the same task.

Main Differences Between Lay Off and Retrenchment

  1. Layoffs are done by an employer to limit the losses in the business by laying off employees whereas Retrenchment is to increase the profit, it is usually done as a business strategy by shutting down the department or when a more competent employee appears for that position.
  2. Layoffs are practically considered the need of the time for a business, as it has to le go of employees to save the existing business whereas Retrenchment is considered as a business tactic to increase the productivity and output of the business.
  3. Layoffs are temporary in their nature, laid-off employees can be called back when the company runs into a more stable state whereas Retrenchment is the permanent step, an employer will not give the job back to the same employee.
  4. During layoffs business operations of the company stop spontaneously, the company cannot afford to run its operations, whereas during Retrenchment business works smoothly as before, no company operation is hampered
  5. Layoffs don’t include the benefits of any kind whereas the Retrenchment includes severance pay.
Difference Between Lay Off and Retrenchment



A business relies on many aspects for its smooth functioning, managing profits and losses and keeping its staff and workers happy and contended at the same time is a difficult task. Businesses must take strong and timely decisions to keep up with the cut-throat market.

Layoffs are involuntary terminations and are temporary in nature and are usually done by the companies when they can’t afford to pay their employees. Re-joining is possible in the case of Layoffs. Retrenchments are a form of permanent termination of employee contracts that are also involuntary in nature. However, in the case of retrenchment a full and final payment, often called the severance amount is paid to the ex-employee.


  1. https://academic.oup.com/jpart/article-abstract/24/4/923/1142321
  2. https://journals.sagepub.com/doi/abs/10.1177/002188638201800204
  3. https://elibrary.worldbank.org/doi/pdf/10.1596/0-8213-3041-1#page=137
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