Introduction
In the ever-evolving business environment, companies increasingly rely on business strategies such as Corporate Restructuring and Mergers and Acquisitions (“M&A”) to drive into growth and expansion of their businesses. Meanwhile, during these transactions, employee transfers, redundancies and restructuring of payroll and other social benefits often act as deal breakers, subjecting to hefty negotiations. Further, it ends up dragging Trade Unions and Employee Associations to act proactively to negotiate such deals for the benefit of the employees and their employment.
Till date in India, the legal landscape regarding the Transfer of Employees and the protection of Employee rights are the subject matter of ongoing judicial debates and conflicting precedents, unlike clear and defined guidelines in other countries such as the USA, UK and across Europe. To cope with this part of the M&A Transaction, some specific provisions are crafted under the Industrial Disputes Act 1947 (‘ID Act’) to address the employees’ rights. The financial implications associated with employee transfers and compliance with relevant laws assume a pivotal role in structuring such commercial and financial transactions.
This article aims to analyze the existing provisions governing employees’ transfer through the lenses of conflicting judicial decisions to exemplify the two-edged sword effect on the employer-employee relationship and on employee-employer rights. Further, the authors also address the gaps present in the Indian Laws for the employees’ transfers in M&A Transactions. The authors also compare the Indian provisions with the independent statutes of the UK, US and Europe to highlight the lack of clarity on issues such as consent and payment of retrenchment compensation or loss of employment to the transferred employees. Lastly, the authors concluded with recommendations for proactive measures to ensure fair treatment of employees during M&A Transactions.
Understanding the Industrial Disputes Act in the context of Business Transfers
The definition of workmen is defined under the Section 2(s) of the ID Act. According to this Section, “Any person (including an apprentice) employed in any industry to perform manual, unskilled, skilled, technical, operational, clerical or supervisory work for pay, whether officially hired or not, is considered for any case related to any industrial dispute including persons who have been dismissed, discharged, or retrenched.”
Further, this provision does not apply to persons who are predominantly employed in managerial or administrative roles, or who served as a supervisor and earn over Rs 10,000/- per month. However, the ambiguity and determining the specific kind of work that falls under the definition of ‘workman’ lead to judicial scrutiny of this provision. Amongst which, the Hon’ble Supreme Court in the Ananda Bazar Patrika (Private) Ltd. v. Its Workmen, ruled that in order to ascertain the treatment of employees as a ‘workman’, there is a need to look into the nature of work being performed by them. Specifically, to determine whether a person employed is working in their supervisory or clerical capacity is totally based on the nature of substantial duties they carried upon. For instance, if the primary role is overseeing responsibilities, then individuals fall under the supervisory category, even if they occasionally perform clerical tasks as a minor aspect of their overall duties. Similarly, if clerical work is the primary role, then occasional performance of the supervisory tasks does not classify the position as a supervisory role.
In the present context, Section 25FF of the ID Act deals with the transfer of employees during the M&A Transactions, where there is a transfer of undertaking either via agreement or operation of law. The goal of this Section is to safeguard the interests of the employees relating to retrenchment compensation, and all other social security benefits during such transfers. As provided in this Section, “any workman who has served the undertaking for at least one year prior to the transfer is eligible for notice and compensation as it has been dismissed under Section 25 of the ID Act.” Nevertheless, the Section itself carved out the exceptions where the applicability of Section 25FF on workmen is excluded in the event that their employers change due to the transfer. The following are the circumstances:
· There is no change in the terms and conditions of service of the workman post the transfer of employees, ensuring their working conditions remain unaffected by such transfer. For instance, the technicians engaged in one company are transferred to another company without any change in pay structure and benefits previously provided.
· The new employer is obligated under the terms of such transfer or otherwise, to compensate the workman for their continuous service in case of retrenchment, based on that their service has been continuous and not been interrupted by such transfer. For instance, if employees transferred from Company A to B, then they are entitled to severance-based pay on the total years of work done including their work at Company A from Company B.
These exceptions play a pivotal role in situations where the typical rules regarding prompt notifications and compensation may not apply. This also shows the unaddressed issues of workman interests in terms of social security benefits as guaranteed by various labour and employment legislations during the time of such mergers and transfers of undertakings.
Subsequently, in light of the above-mentioned provision, if all the elements mentioned thereunder in the proviso are satisfied, there is still an ongoing growing legal concern over the requirement of consent of ‘workman’ level employees to be transferred in making such business transactions. Some Court rulings suggest that there are specific situations where the transfers are valid without obtaining the consent of the transferred employees. But recently, the various such transfers have been challenged in the light of the absence of clear guidelines related to the situations and ascertainment criteria of the requirement of consent in the transfer of businesses despite the conditions mentioned in the Proviso to Section 25FF of the ID Act being fulfilled. Notably, the provisions of the ID Act only pertain to employees who are referred to as ‘workmen’ and this has created scope for flexibility in the various judgments.
Uncertainty in the ‘Requirement of Consent’ of Employees in Business Transfers
Section 25FF ID Act is the sole provision that deals with employee transfers when a business or undertaking changes ownership. This includes transfer via agreements, such as lease or sale, or transfers by law. This Section serves as a safeguard for employees’ rights during these transfers. According to this Section, during the transfer of undertaking workmen employed in continuous service not less than one year are subject to compensation and notice of such transfer, considering it as a retrenchment u/s 25F of the ID Act. Further, it is provided that no such compensation and notice is required when the three abovementioned conditions are successfully met by the successor employer.
As a result, after reading down the provisions of Section 25FF, a business transfer is deemed to be an ‘automatic transfer’ when all the three conditions given in the proviso to Section 25FF are met. In such cases, there is no need to obtain consent or pay retrenchment compensation to any workman if they do not wish to continue working under the new management. However, this position has always undergone legal conflict and remains a subject of judicial scrutiny.
Recently, in 2011, the Supreme Court, in the case of Sunil Kr. Ghosh v. K. Ram Chandra and Ors has reinterpreted the proviso to Section 25FF and held that ‘no workman can be transferred or forced to work under the new management if they do not wish to, and must be provided with retrenchment compensation in terms of this Act.’ This interpretation is per incurium to the express provisions of Section 25FF, which states that prior notice and compensation are required only when any of the three conditions given in the proviso are not fulfilled.
In fact, this judgement also contradicts the previous Supreme Court rulings and comprehensive interpretations of this Section. For instance, in Maruti Udyog Ltd. v. Ram Lal & Ors,the Supreme Court has settled the position of law that the expression ‘as if’ used in proviso to Section 25FF shall be interpreted narrowly to calculate the compensation, not for the other consequences flowing therefrom. Similarly, in Management of R.S. Madhoram and Sons Agencies (P) Ltd. v. Its Workmen, the Supreme Court has clearly held that when no changes are made in employee’s terms and conditions, service length or compensation, if retrenchment were made, then Section 25FF does not apply and no consent is required while making transfers. This position was reinforced in the Management, Mattur Beardsell Ltd. v. Workmen of Mattur Beardsell Ltd. where the Court clarified that consent is only required in the master-servant relationships, not in statutory transfers. Additionally, there is nothing in the wording of Section 25FF even remotely to imply that consent is a necessary pre-requisite for transfer.
Yet, this position is unsettled, as different High Courts interpret transfer documents in multiple ways. For instance, in the recent ruling, Pappu Giri Son of Sewa Giri v. Presiding Officer, Industrial Tribunal cum Labour Court, Panipat and Anrs, the Punjab & Haryana Court held that transferring an employee without prior agreement in the appointment letter or certified standing orders violates the provisions of the ID Act. Conversely, the Himachal Pradesh High Court, in Reckitt Benckiser Healthcare India Pvt. Ltd. v. State of Himachal Pradesh, decided that the consent of employees is not a pre-requisite while making transfers of undertakings under Section 25FF of the ID Act.
In State of Karnataka v. Umadevi (3), the Supreme Court highlighted the importance of consent and stated that the ‘Right to Consent’ forms a cornerstone part of individual freedom. Additionally, the US Supreme Court in Nokes v. Doncaster Amalgamated Collieries Ltd also elucidates that ‘Employees should have the freedom to choose their employer whom they wish and commit to serving so that their services cannot be transferred from one employer to another without their consent.’ Altogether it is considered as good corporate practice in the realm of pro-employee labour laws, where parties to the agreement have consensus-ad-idem while making such kinds of transfers and avoid any scrutiny by court derivates. Furthermore, clear guidelines are required in this regard that specify the situations and differentiate among the financial and commercial deals where the consent of employees is a prerequisite condition.
Obligations of Employer in Business Transfers
The HR laws in India lay down certain legal protocols and standards to safeguard the interests and rights of the employees during the M&A Transactions including the sale or transfer of business. In cases like these, Section 25FF of the ID Act outlines the duties of the transferor (Former Employer) pertaining to requisite notification under Section 9A of the Act and retrenchment compensation to the employees upon serving at least a minimum of 1 year.
Following this, employers are also required to adhere to various labour laws like the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952, the Payment of Gratuity Act of 1972, the Employees State Insurance Act of 1948, and the Payment of Bonus Act of 1965. Additionally, it is a pivotal concern to review and potentially update contracts, policies and procedures of the Company being acquired to comply with these laws and to shield employees’ rights and benefits post-transfers.
Meanwhile, while discharging their duties they must not discriminate against employees based on gender, religion, disability, caste or whatever reason. In addition, there are certain protections for female employees including prevention of dismissal during maternity leave. If a female employee rejects transfer during her maternity leave, she can only be fired after her leave ends and she might still be entitled to certain other privileges. Similarly, the Employees State Insurance Act, 1948 bars the termination of employees on the ground of receiving maternity, sickness or disablement benefits.
Lastly, the employers must also put in place sufficient data security measures and privacy protection requirements as specified under the Digital Personal Data Protection Act 2023 to prevent data losses during the transfers of the businesses. Both acquiring and target companies need to perform adequate data audits to determine the compliance challenges pertaining to personal data and security laws. Furthermore, Individuals’ consent is an important factor during transferring their data to keep them well informed about the impact of such transfers on their data.
Compensation and Benefits to Employees: The Judiciary Perspective
As per Section 25FF of the ID Act, every employee falling under Section 2(s), employed for not less than one year is entitled to notice and compensation as if their employment is retrenched while making transfers. Previously, in Indian laws, no compensation was granted to the employees when there was a break in service of the employee during the transfers, however, for the first time in Hariprasad Shivshankar Shukla v. A.D. Divikar, the Supreme Court decided that compensation must be granted to employees when there is change in conditions of the employment services. Subsequently, the provision for compensation was added in Section 25FF from the amendment done in 1957.
Furthermore, there are specific criteria that employers must ensure while granting compensation:
Firstly, the payment of compensation is based on the form of employment. The provision in the ID Act itself does not differentiate between the forms of employment. However, the court via its contrasting view in two of its judgments decided that the granting of compensation is contingent on the form of employment -whether ‘regular or irregular’ or ‘continuous service’ has been rendered in terms of Section 25F read with Section 25B of the ID Act. The Court exemplifies that doing this will prevent employers from avoiding their duties by resorting to limited forms of employment.
Secondly, the minimum time period mentioned in Section 25FF is ‘one year,’ but for calculation purposes, a minimum of 240 days are taken to determine the time period. Additionally, the specific duration of work in terms of hours, is also a pertinent consideration, although it is not specified in the provision. It is also pertinent to note that, the duration of ‘one year’ is completely opposite to the objective of the provision itself. There is no justification why employees working for periods shorter than one year are not to be affected by such unforeseen transfers.
Thirdly, an employer must ensure that the formula given in Section 25F for the payment of compensation must be followed i.e. @ of 15 days’ average pay for every year of continuous service that the workman has completed. Further, in specific cases, the court can also enlarge the scope of the quantum of compensation by considering the facts like non-gainful of employment, time spent in litigation, paying capacity of the management and financial condition of the workman etc.
Lastly, the employer must also ensure that the payment of compensation must be done at the time of retrenchment, to the extent it is considered as ‘condition precedent’. Additionally, the amount of compensation must be tendered as specified in the provision and in the form of a bona fide offer as part of the same transaction of retrenchment.
It is also pertinent to note that, Section 25FF of the ID Act is drafted in such a manner that does not allow employees to claim compensation and continuity of service after the transfers at the same time. Various petitions have been filed in this regard, but the Punjab & Haryana High Court in Gurmail Singh and Ors. v. State of Punjab and Ors, has clarified this position by stating that the ‘Right to Compensation’ under Section 25FF is available only against the former employer based on notional retrenchment except in cases, where the successor or acquirer employer, guarantees them the continuity of service and of employment terms and conditions. As a result, employees either can claim compensation or continuity of service not both.
Apart from the compliance requirements, the transferee company is also obligated to provide statutory benefits to the employees at the time of transfer. Statutory benefits may include employment welfare schemes, benefits of provident fund, gratuity, minimum wages and other social security benefits specified by applicable labour laws in India. The issue is due to a lack of specific guidelines or legislation governing the transfer of statutory benefits, which rendered employers with questions with respect to the calculation of the gratuity, continuity of maternity benefits provided to the female employees, employee state insurance etc. which burdens the courts with several litigations.
For instance, recently, in Mercedes Benz India Private Limited v. Noshir Nadir Desai, the Bombay High Court has decided that employees are entitled to the same gratuity benefit as before when transfers of management take place. The amount will be calculated as the Payment of Gratuity Act 1972. Moreover, in Indian Hume Pipe Co. Ltd v. Its Workmen, the Court decided that the retrenchment compensation should not be confused with gratuity benefits as compensation only provides partial protection to the employees whereas, they are still entitled to gratuity benefits under the gratuity scheme in the successor continuity of their employment, resulting into an entitlement of double benefit. Henceforth, exhibiting the requirement of instant guidelines on such benefits transfers.
This article is authored by Mansi Gupta, 4th-year law student at Dharmashastra National Law University, Jabalpur, Madhya Pradesh and Ujjuval Garg, 4th-year law student at Lloyd Law College, Greater Noida, Uttar Pradesh.
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