Comparative Analysis: An International Perspective
In today’s global business world, M&As, outsourcing, and other form of business restriction are common. These strategic moves not only bring benefits but also come along with complex issues including human resource structuring. Globally, various states including the United States, the United Kingdom and Europe have framed specific laws to tackle these issues of transfers of employees and safeguarding their rights in M&A Transactions, unlike India.
In Europe and the United Kingdom, the Transfer of Undertaking (Protection of Employees) Regulations 2006, (“TUPE Regulations”) or Acquiring Rights Directives (“ARD”) governs the smooth transition of business and continuity of the workforce. The Act is specifically crafted to define the compliances that a transferor and transferee company must comply with while making transfers of their human resources. The Act, further mandates, the retention of all employees during an amalgamation, prior notice to all the employees before amalgamation to ensure transparency, and to give the option to the employees to terminate their employment in situations where they do not wish to continue employment under the new management of transferee company. Therefore, it is considered to be an employee-friendly regulation aiming to safeguard their interests and to curb illegitimate transfers.
Likewise in the United States, the Federal Act, Worker Adjustment and Retraining Notification Act, (‘WARN Act’) set rules for notifying employees about large lay-offs or business shutdowns. According to the Act, the employer is obligated to send 60 days prior notice to all employees if they are laying off more than 50 employees or shutting down their facility. However, this significant transition puts the employees in a disadvantageous position where the employer sometimes asks employees to discontinue their employment during the notice period without gaining any commission or cutting their wages substantially. Thereafter, the Federal District Court of California in Simonyan v. Countrywide Financial Corp. resolved this issue and ruled that employees can be asked to discontinue their employment during the notice period, but they must still receive their full wages and benefits as assured. The court also held that any substantial reduction of wages during this period can attract WARN violations and constitute an ‘employment loss’.
Conversely, in India, employee rights during business transfers are only covered under Section 25FF of the ID Act, which lacks clear unified notice requirements like those in the US, UK and Europe. Recently, in Caparo Engineering India Ltd v. Ummed Singh Lodhi And Anr., the Supreme Court has decided that prior notice under Section 9A of the ID Act is required when transfers involve few transfers of employees or changes in the conditions of service of those employees. Conclusively, the notice under Section 9A is only required when there is an outsourcing deal but not in all cases, thereby it is still a judiciary’s prerogative to decide whether notices to employees are required. Additionally, this also highlights the lacunas in the current labour jurisprudence with respect to the requirement of notices in the transfers. The existing provision also falls short of explaining the calculation of employee benefits for continuous employment after smooth transitions. Therefore, specific guidelines are required to better safeguard the interests of employees during such complex transactions.
Recommendations and Conclusion
In India, Section 25FF governs the rights of Employees during the transfer of Undertakings or ‘slum sale’ of businesses. Business Transfer Agreements (“BTA”) executed in these transactions specifically outline not only the particulars of the transfer of the assets but also the rights of the employees being transferred. However, due to a lack of standard legal requirements concerning employee transfer in such agreements, the enforceability and clarity of these provisions may be called into question. Here are some general recommendations that should be considered to make such transfers in the best interest of the businesses and employees of the concerned parties.
Firstly, Section 25FF does not cover the rights of the ‘non-workmen’, leaving their terms subject to hefty contractual negotiations. Unlike workmen, non-workmen are not entitled to continuity of service with the same or better terms after such transfers. Contrarily, regulations like the WARN Act and TUPE Regulations specifically laid down the obligations and rights of the employers-employees (including non-workmen) to ensure relevant compliance with the provided legal requirements. Therefore, this necessitates the review of such employment contracts to ensure non-workmen rights are at par with those of workmen.
Secondly, reviewing the ‘one-year service requirement’ in Section 25FF is of paramount concern due to its apparent discrepancy with the basic legislative aim. The present one-year service requirement should be carefully considered and maybe revoked. Instead, a more sophisticated regulatory strategy is advocated, comprising the purposeful deployment of selected exclusions that accommodate specialised job categories possibly less sensitive to arbitrary termination concerns. This would make the regulation more flexible and relevant, focusing on actually protecting
workers who need it most.
Thirdly, there is a requirement for substantial alteration of the current compensation computation procedure which is mostly based on years of service. The new technique should include a more comprehensive assessment of compensation, including aspects such as the economic impact of unemployment on workers, the duration of future judicial processes, the worker’s most recent wage level, the employer’s financial capability at the time of compensation, worker’s overall financial situation and the specific type and complexity of the worker’s employment obligations.
Lastly, given the huge increase in M&A Transactions in India and the lack of law addressing the rights and obligations of employers and employees during such restructuring methods, the Indian Parliament should consider framing certain rules under the newly notified Industrial Relations Code 2020 for the effective implementation and understanding of the certain legal requirements to be complied with during such transfers.
In conclusion, employee transfers during mergers, acquisitions, and corporate restructurings in India provide significant legal and practical challenges. While Section 25FF of the ID Act, 1947 offers certain employee protections, its ambiguous language and lack of clarity on consent requirements have resulted in a variety of court interpretations, causing concern for both employers and employees. To address these concerns, a more comprehensive and explicit legislative framework is required like the USA and the European Union. By implementing the above-mentioned suggestions and supporting a more transparent and equitable approach to employee transfers, India may create a business climate that balances the interests of employers and employees, fostering economic success and social justice.
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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