This article is written by James Sibi who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
Mergers and Acquisitions are a way for companies to pool their resources and thereby create an even bigger outcome. One of the key resources that are transferred in a merger and acquisition transaction is the human resource. Human resources when compared to other resources have to be taken care of properly.
There are many rules and regulations on the use of human resources, especially that of workmen. These rules are made to protect their rights. One of the most important laws that govern companies’ work is the Industrial Disputes Act.
The Industrial Disputes Act Disputes Act plays an important role in mergers and acquisitions. Certain provisions in the Industrial Disputes Act are relevant in the case of mergers and acquisitions. It gives a sense of protection for the workers as well and ensures the smooth integration of resources.
The Industrial Disputes Act an overview
The Industrial Disputes Act Disputes Act came into force in 1947. The Act was enacted to make provisions for the prevention and settlement of industrial disputes and providing certain safeguards to the workers.
The statute attempts to reduce labour-management conflicts by providing economic and social justice. The Industrial Disputes Act Disputes Act 1947 provides for certain ways to deal with how employees have to be treated at the time of integration.
Some basic features of the act are :
- It promotes arbitration over litigation between employers and employees.
- It affords for setting up of works committees as machinery for mutual discussion between employers and workers to promote friendly relations.
- The statute made ground for a conciliation mechanism which is to be established at various stages, including time restrictions for conciliation and arbitration.
- The Act gives the government the ability to refer a disagreement to the relevant authority, such as the Labour Court, Industrial Tribunal, or National Tribunal, depending on the nature of the issue, either on its own or at the request of the parties.
Major provisions in industrial disputes that are relevant for mergers and acquisitions.
Certain sections of the Industrial Disputes Act are relevant in mergers and acquisitions. These provisions take care of the rights of employees and mandates some compulsory obligation on the part of employers. These provisions secure the rights and support the employees who were affected by the acquisition (Ambala Cantt. Electric Supply vs Commissioner Of Income-Tax on 27 July, 1981).
Who is Workman under the Industrial Disputes Act Disputes Act?
Workmen are defined as employees who have been hired to undertake manual, unskilled, skilled, or technical labour under the Industrial Disputes Act of 1947, but they do not include persons who are employed in a management or administrative capacity. It also excludes individuals engaged in the army/navy/air force/police, as well as those employed in primarily managerial or administrative, supervisory capacities and earning more than INR10,000 per month.
Can IT workers be considered as a workman?
The issue as to whether an educated and highly skilled employee of an IT company is “skilled, manual, technical, or unskilled” enough for such a person to be classified as a workman under the Act has gained prominence in recent years The employees working in IT require skilled or technical labour and cannot be considered to be working in a management or administrative capacity.
In the case of Divyash Pandit vs. The National Council for Cement and Building Materials, the Delhi High Court ruled whether an engineering graduate working as a scientist was a workman under the Act. In this case, the employee was a recent engineering graduate who was researching the process engineering sector connected to the cement industry and possessed specialised knowledge in this subject.
The court determined that research activity would not be considered skilled, unskilled, manual, or technical labour, and therefore such an employee would not be classified as a workman under the Act.
Rights for employees in mergers and acquisition as prescribed under the Industrial Disputes Act
Compensation to Workmen at the time of Transfer of Undertaking
According to Section 25FF of the ID Act, when ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer with that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer is entitled to notice and compensation in accordance with Section 25FF of the ID Act. This clause has a proviso that specifies that a worker is not entitled to any notice or compensation if the following criteria are met:
- The workman’s service has not been disrupted as a result of the move;
- the workman’s terms and conditions of employment following such a transfer are not in any manner less favourable to him than they were before the move; and
- The new employer is legally obligated to provide compensation to the workman in the case of his retrenchment, whether under the conditions of the transfer or otherwise, on the assumption that his employment has been continuous and that the transfer has not disrupted it.
However, in the case of Sunil Kr. Ghosh v. K. Ram Chandran, the Supreme Court held that when employees are transferred to a new employer, the old employer must obtain their consent even if there is no change in the terms and conditions of their service and they are transferred on the same or better terms.
If the workers do not agree to the move, they will be entitled to retrenchment compensation under the terms of the ID Act. This resulted in a paradigm shift in industrial jurisprudence regarding workers’ rights when transferred to new companies. The Supreme Court’s reasoning for the judgement is that a worker cannot be compelled to work for someone against their will.
It is not always the case that employment will be altered as a result of a merger or acquisition. For example, if one business acquires the shares of another and employees continue to work for the latter on the same conditions, there is no change in employer. However, when a business and its management are bought as a whole, the employer changes.
First and foremost, the worker’s period of service should be continuous. Second, the transferee’s service terms and conditions should be comparable to those of the transferor. Third, the new employer should agree to provide retrenchment compensation to the workers on the basis that there was continuous service and that the continuity was not jeopardised by the transfer of undertaking.
Continuity of Service
The laws governing continuity of employment provide that a person’s term of employment with the Seller of a business is ascribed, or “flows through,” to the purchaser of the business. This implies that, notwithstanding the sale of the firm or a change in management, an employee’s claims to rights based on length of service remain unaffected.
When a person’s duration of employment is assigned to a new employer, the new employer is required to acknowledge the time the individual spent with the prior company. This time must be applied to whatever rights the employee has depended on the length of his or her employment.
Notice of Change
According to Section 9A of the ID Act, if there is a change in a workman’s working conditions as stipulated in Schedule IV of the ID Act, the workman must be notified at least 21 days in advance of the change.
Retrenchment happens when a company terminates employment for causes other than disciplinary action. This usually happens when the company aims to reduce expenditures and tries to “downsize” it to stay solvent. Section 25F of the Industrial Disputes Act specifies how a company should compensate for the retrenchment.
Procedure for retrenchment
The retrenchment method is outlined in Section 25G. In the absence of any agreement between the employer and the workman in this regard, if any workman in an industrial establishment who is a citizen of India is to be retrenched and he belongs to a particular category of workmen in that establishment, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded. The employer is also obligated to keep track of the workers’ seniority.
Calculation of retrenchment compensation
While effecting retrenchment of the workmen, it is obligatory on the part of the employer to pay retrenchment compensation at the rate of 15 days wages (for every completed year) to be calculated at the last drawn salary of an employee. The calculation of compensation is to be based on the date of appointment.
In case an employee has completed 240 days, he will be entitled to 15 days retrenchment compensation besides one month’s notice or salary in lieu as if he has worked for one year. These 240 days include Sundays or off days as well as festivals and national holidays.
Labour jurisprudence in other countries
In the United States, the Worker Adjustment and Retraining Notification Act (‘WARN Act’), enacted in 1988, requires employers to provide employees with a two-month notice if they plan to lay off more than fifty workers or close their business.
As a result, if an amalgamation results in the termination of the employment of fifty or more people, a US firm is required by the WARN Act to notify the employees two months in advance. However, if the WARN Act requirements are not reached, the employer has no additional responsibilities to notify employees of a merger.
The Transfer of Undertaking (Protection of Employees) Regulations, 2006 (‘TUPE Regulations’) in the United Kingdom require employers to retain all employees during an amalgamation, to notify employees before the amalgamation, and to give employees the option to terminate their employment if they object to being employed by the transferee company.
As a result, the TUPE Regulations are an employee-friendly regulation that strives to protect employees’ rights and outline employers’ duties during a merger.
Meanwhile, just one part of India’s Industrial Disputes Act, 1947, addresses employees’ rights in the event of a merger or acquisition. According to Section 25FF of the Industrial Disputes Act of 1947, if an employee is transferred to another company as a result of a merger resulting in the transfer of management and ownership, the employee is entitled to notice of change and compensation if he has been working for at least one year and his employment has not become any less favourable than it was before the merger.
How can clients avoid such issues? What measures must you take when constructing new employment agreements and contracts?
In light of Section 25FF, parties must evaluate the transferor entity’s employment terms and conditions and compare them to the transferee entity’s new terms and conditions. This is especially important when the client is the transferor, who would otherwise face the burden of the severance payments if the conditions were not acceptable.
As a result, while there is no statutory obligation to consult in such a case (unless the employer has assumed such obligations under an arrangement or settlement with workmen individually or through their trade unions), the seller must ensure that the conditions in Section 25FF of the Industrial Disputes Act Disputes Acts are met and that the workmen accept the transfer.
Furthermore, for the transferee company, it is critical to creating, to the greatest degree possible, a harmony of service conditions for these transferring workers with their current employees for smooth integration into the transferee organisation.
To comply with Section 25FF of the IDA, the transferee must provide the workman with terms and conditions of service that are no less favourable to the workman after the transfer; however, there is no statutory restriction on the transferee entity’s ability to modify the workmen’s service conditions at a later stage.
This comes with the caveat that if a later change to the workmen’s specified operating conditions (such as base pay, hours of work and rest of categorization of grades, leave with wages and holidays, withdrawal of any conventional concession or privilege, etc.) is detrimental to the workmen, it can only be made after giving proper prior notification and in the manner prescribed.
From the perspective of the transferee entity, it is preferable to identify the conditions of service being offered to the transferring employees at the time of the undertaking transfer, when the transferor entity would still be liable for a “deemed retrenchment” situation, rather than later when they would have to go through the process of making any prejudicial changes.
The Industrial Disputes Act Disputes Act has a significant role in mergers and acquisitions. These provisions aim to protect the rights of employees, especially workmen. To integrate the new employees with the existing ones, the transferee has to make sure that certain rights in the act are provided to the employees. A company that does this efficiently would gain the trust of the employees and ensure smooth integration of human resources.
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