This article has been written by Saswata Tiwari, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.com.
Mergers and acquisitions have been an integral part of the business world for centuries. With the help of mergers and acquisitions, companies develop and enhance themselves, create a competitive advantage for themselves, and have an upper hand while competing with other companies in the market.
However, with the change of a company, the administration system changes which brings a lot of modifications in the resources of the company. Human resources i.e the employees of the firm get affected the most in case of a merger or an acquisition. To safeguard the rights of employees, particular legislations have been made by the government keeping in mind the rights of the employees. The Industrial Disputes Act, 1947(the Act) is one such legislation, which provides for the procedure for amicable settlement of conflicts that occurs between the employers and employees.
This article talks about such challenges faced by the employees during a transfer and how these challenges are overcome with the help of appropriate legislation.
Status of the Employee
The status of the employee is a very important subject that is assessed before Courts in India about matters between the employer and employee because in cases like these, employers mostly always oppose by raising an argument that the employee is not a workman as has been defined under Section 2(s) of the Act.
According to Section 2(s) of the Act, the term ‘workman’ means any individual that is employed in an industry to perform any manual, unskilled, skilled, technical, operational, clerical, or supervisory work for hire or reward, irrespective of the fact of whether the terms of employment are being express or being implied and for the justification of any industrial dispute which includes any individual who may be dismissed, discharged or retrenched in connection with or as a result of, that dispute. The section also states the exception that the term workman does not include any individual who may be employed primarily in a managerial or administrative post.
However, the Supreme Court has laid down the dominant nature test where the Court looks into the actual work of the employee to determine the status of the employee. The Supreme Court said that when the primary work of an employee is to do clerical work than doing any secondary work of supervising would not amount to converting the employee’s employment into the category of supervisory work. In the case of T.P. Srivastava vs National Tobacco Co. Of India Ltd, the Supreme Court held that duties which need the imaginative and creative mind of a person cannot be termed as either manual, skilled, unskilled, or clerical, and as a result, the person was not falling under the term ‘workman’ and was not considered an employee of the organization.
The High Courts have also looked into the actual work of an employee to determine the status of an employee and it can be seen in several judgments passed by the Courts. In the case of Tata Sons v. S. Bandopadhya, the Delhi High Court looked into the facts and circumstances of the case by examining the question of whether an employee falls within the purview of ‘workman’ or not, assessing the primary and secondary duties of the employee, figuring out what is the exact nature of the duties performed by the employee and the governing objective of the employment of the employee. The High Court of Calcutta, in the case of Delta Juice and Industries Ltd. Staff Association and Ors. v. State of West Bengal held that in the situation where an employee performs many and various types of works, the nature of the primary work that that particular employee performs must be taken into consideration to determine whether the employee falls under the purview of ‘workman’ as defined by Section 2(s) of the Act.
Therefore in situations when an employee falls within the scope of workman as defined by the Act and a merger or an acquisition takes place then the old, as well as the new employer, has to make sure that compliance under all the applicable labor laws, Industrial Disputes Act 1947, Industrial Employment(Standing Orders) Act 1946, etc, have been fulfilled with, considering the employees.
Consent of Employee
According to Section 25FF of the Act, in situations where the ownership or management of an enterprise is transferred to a new employer, whether by agreement or by operation of law, from the old employer, then all the employees who have been in continuous service for not less than 1 year in that enterprise, shall be immediately be entitled to notice and compensation in compliance with the provisions laid down in Section 25F of the Act, as if the employee has been retrenched.
There are also some exceptions given under this section which state certain conditions where the employee shall not be entitled to notice and compensation. The conditions are:
- No interruption has occurred in the service because of the transfer.
- The working conditions and terms of service of an employee remain unchanged and are not less favourable than the working conditions and terms the employer had immediately before the transfer.
- The new employer is answerable and under the terms of such transfer where the new employer is legally liable to pay to the employee in case the employee retrenches, compensation on the supporting condition that the service of the employee has been continuous and has not been interrupted by the transfer.
Nonetheless, the Supreme Court took an important decision in the case of Sunil Kr. Ghosh v. K. Ram Chandran, about the employee’s consent to a merger or an acquisition. It was held that in the case where the employees are being transferred to a new employer, the old employer must take the consent of the employees irrespective of the fact that there have been no alterations in the working conditions and terms of the service and the employees are being transferred having the same or favourable terms and working conditions. In case, the employees do not give their consent to such a transfer then the employees shall be provided retrenchment compensation in compliance with the provisions given under the Act. This decision given by the Supreme Court brought in a standard alteration in industrial jurisprudence concerning the right of employees in case of a merger or an acquisition. The underlying reason for the decision given by the Supreme Court to highlight the point that an employee cannot be forced to work for anyone against their wishes.
In the case of a non-workman, the employment agreement generally guides the employer-employee agreement and even some concepts of the Act come in aid for the non-workman employees. Therefore particular concepts of the Act such as taking the consent of an employee in case of a merger or an acquisition and other concepts of natural justice are looked upon in the case of non-workman employees to avoid critical observation by courts in suspicion.
Notice of Change
According to Section 9A of the Act, a notice has to be provided to the workman at least 21 days in advance, if a change is made in the working conditions of workmen as prescribed in Schedule IV of the Act.
Continuity of Service
Employees have the right to enjoy vacations, get pregnancy and parental leaves, get a termination, and severance pay. The continuity of service is an important aspect that is looked upon in case of a merger or an acquisition as the transferred employees have to be given these rights by way of continuity of service. The provision for continuity of service provisions states that an employee’s privilege to rights that are based on the length of employment remains unchanged irrespective of the change in their employer.
The seniority of the employees is taken into consideration by the new employer and the employee’s entitlements to the conditions of service should not be anyway less favourable than those that the employees had with the previous employer. This has to be mentioned clearly in the new employment agreement that shall be made when entering for service with the new employer.
Social Security Obligations
In the case of McLeod Russel India Limited v. Regional Provident Fund Commissioner Jalpaiguri and Others, the Supreme Court held that the transferee business entity will be held liable in case of a default on part of the transferor entity even in the case of that an agreement was made to the clashing statement that the transferor entity will be held liable. This decision given by the Supreme Court focuses on the significance of in-depth due diligence which has to be organized and carried out by the organization acquiring the business and specifically identify the liabilities of the organization selling the business towards provident fund and several other labour laws and obtain reimbursement and damages from the company selling its business before the acquisition of that business if required.
Several State’s Shops and Establishment Act fall under the statutes which deal with the grant of leave to employees and this aspect is an important issue in the case of a merger or an acquisition. Employees should be given a certain number of days of leave that is conditional on the length of the service in a specific year which can be accumulated later and also encashed based on state-specific Shops and Establishments Act.
In India, most of the labour laws and Courts are pro-employee and as a result, Indian employers have to be extra careful while dealing with the rights of employees. Employees are the pillars that support the organizations built by the employers and it is mandatory on part of the employer that the employees feel respected and are satisfied with the working conditions and terms of service. In case of a transfer, the new employer should make sure that the employees do not feel that they are not getting the same or are getting less favourable working conditions that they had when they were working for their old employer. Satisfied employees will be working hard to help the employer in achieving the organizational goals set by the employer and will build a strong employer-employee relationship that will be beneficial for the organization.
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