In this article, Prachetha Nidhi Verma of IIMT & School of Law, G.G.S.I.P.U  discusses Compensation payable under the Industrial Disputes Act, 1947 to employees when an undertaking is transferred.

Introduction

Law has put in some obligations on the employer which are envisaged under the provisions of The Industrial Disputes Act, 1947 (hereinafter referred as ID Act) in order to prevent such disruption among the employees. The ID Act is applicable to all the industries as defined in Bangalore water supply case (see it’s analysis here).

Workman under the Industrial Disputes Act, 1947

In order to have the rights that will be explained below, one needs to be a workman as defined under section 2(s) of the ID Act, 1947. A Workman has been defined as a person who is employed in an industry to which the provisions of the ID Act are applicable. Such worker is employed for any skilled or unskilled, technical, operational, manual, clerical or any supervisory work for wages, irrespective of the fact that the terms and conditions of his service of the employment are implied or expressed.
It excludes workers, who are-

1. Employed in Army/AirForce/Police/Navy.
2. Employed mainly in managerial, supervisory or administrative capacity, having wages of more than Rs 6500 per exercise or per month.

Whether an employee is a workman under the Industrial Disputes Act, 1947?

The next important question before us is whether an employee is a workman as defined under the ID Act. Primarily the provisions of Industrial Disputes Act, 1947 deals with the conflicts and resolution between the employer and the workmen. In order to answer this question, the Hon’ble Supreme Court of India has laid down a dominant nature test in the famous BANGALORE WATER SUPPLY case. According to the dominant nature test, one has to determine the status of the employee through the main nature of his/her work. That means if an employee’s main work is clerical but he also works in supervisory capacity which is incidental to the main work done by him, then the work of such an employee cannot be said to be of supervisory nature since his main work is only clerical.

Therefore, the employees, whose main work is not supervisory or managerial, fall within the category of the workman as defined in the Industrial Disputes Act, 1947. All the other employees not covered under this Act will be governed by their respective employment contracts.

Notice and compensation payable to employees

According to section 9A of the ID Act, 1947, it is mandatory for the employer to issue a notice to his employees in case of the change in conditions of service of such employees with respect to the following matters (Fourth Schedule):

In the above-mentioned cases, the employer is bound by the law to:

1. Give a notice to the worker who is likely to be affected by such changes,
2. The notice should contain all the details of the changes proposed to be made,
3. No such changes as proposed should be implemented within 21 days of serving the above-mentioned notice.

Right to compensation and notice in case of a change in the management of the Industry

Every employee has a right to get compensation in case of a transfer of ownership of industrial unit i.e. a change in the employer as per section 25FF of the ID Act, 1947.

It is not necessary that your employer will get changed in all the cases of Merger and Acquisitions. For instance, when one company acquires the shares of another company and workers continue working for the latter on the same terms, there is no change of the employer. But in cases wherein the whole company and its management are acquired, the employer changes.

Therefore, in cases where the employer has changed because of the reason of the transfer of ownership of the management of an industrial unit or an undertaking (eg: by Merger or by Acquisition), the previous employer is liable to give:

• Notice – 1-month notice in writing stating the reasons for a change in the management;
  ● Compensation – An amount equal to the 15 days of wages for every completed year of continuous service or any part of service in excess of 6 months,

to every employee who has been in continuous service of 1 year in that undertaking before such transfer.

For example:

1. If you have worked for 6 years and 7 months for Rs.1000 per day wage, and your employer gets changed, you will be given Rs.15,000 (15 x 1000) for every completed year. Now you have completed 6 years and 7 months, which will be counted as 7 years since any month exceeding 6 months is counted as a fully completed year of service. Therefore, you will be given Rs.1,05,000(Rs.15,000 x 7).
2. If you have worked for 7 years and 4 months for Rs.100 a day, and your employer gets changed, you will be given Rs.1500 (15 x 100) for every completed year of service. Since you have completed only 4 months, which is less than 6 months, therefore this period of time will not be counted as a full year of continuous service, and you will be only entitled to compensation for 7 years which will be Rs.10,500 (1500 x 7).
3. If you have worked for wages which are of variable nature i.e. which keeps on changing daily. Then for calculating your 15 days of wages, an average is to be taken.

Cases in which the employer is not liable to give any notice or compensation

Your employer will not be liable to give you any compensation or notice, when:

1. No interruption in your service has occurred due to such transfer;
2. Equally or more favourable terms and conditions of the employment are applicable to you (transferred employees) in comparison to the ones that were applicable to you before the transfer of undertaking.
3. Your new employer has become legally liable to pay you (transferred workers) compensation in the event of retrenchment, in a manner similar to the one in which the old employer was liable. Also, such period of transfer will be counted in the period of continuous service.

Right to resign

It is your constitutional right that no one can force you to work in the conditions and on terms which you as an employee do not consent to. This will not only a be a form of slavery but it will severely deteriorate your performance thereby affecting the performance of the industry.

Therefore, you as an employee has an option to resign from the work and get compensation as mentioned above under section 25FF of the Industrial Disputes Act, 1947 even if the terms and conditions of service under new employer are more favourable to you than the ones you were getting before.

Consent of an employee is mandatory

It was observed by the Hon’ble Supreme Court of India, in the case of Sunil Kr. Ghosh v. K. Ram Chandran (2009), that where there is a transfer of ownership in the management of the industrial unit, it is mandatory for the employer to take the consent of the workmen before transferring their services to a new employer. The workers cannot be forced to work for the new employer or in a new industry, even if the terms of the new employment are no less favourable than the earlier ones. In such cases, workers would be entitled to avail the option of retirement or termination and the employer will be obliged to pay retrenchment or retirement benefits according to the provisions of the act.

Therefore, it is your choice to either go and work for the new employer or resign and take the benefits of compensation as explained above. No one can force you to work for the new employer.

Conclusion

It can now be understood that the strategies of Merger and Acquisitions can prove to be personally and professionally disruptive for the employees and can often lead to confusion, miscommunication and a feeling of negativity among the employees and towards the employer. This can lead to a failure of the industrial unit itself. It can also result in a decline in the profits that were expected out of an M&A. To maximise the chances of success, it is important to analyse the needs, requirements and problems of the employees. An employer should always inform his workers and ask for their consent before restructuring them to a new industry, in order to prevent any disputes after such transfer since the employees are the building blocks of any industry.