India: Employee Rights In Mergers And Acquisitions

Last Updated: 13 August 2018
Article by Paul Albert and Sohini Mandal

An entity to entity merger/acquisition has manifold considerations, movement of employees and their rights being one of the most important aspects. A change in the ownership or management of a company may result in a significant change in the working conditions of employees. Transfer of employees between different locations of the new entity, change in work profiles and execution of fresh or revised employment agreement with the new entity are some of the changes that would arise as a result of a merger or an acquisition. In this post, we have tried to provide a bird's eye view of the many points and challenges to be conscious of in the process.

Status of the Employee: Workforce in India can be categorised into 2 broad categories of 'workman' and 'non-workman'. There are specific labour statutes which have to be mandatorily complied with in respect of a 'workman'.

Section 2 (s) of the Industrial Disputes Act, 1947 ("ID Act") defines 'workman' as any person who does any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward and for the purposes of any proceedings in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute. The section also makes certain exceptions. For example, an employee in a managerial or administrative capacity or a supervisor drawing wages in excess of Rs. 10,000/- is exempt from the definition of workman.

However, as it appears from a plethora of judicial pronouncements in this regard, it is clear that the courts rarely go by a bare reading of Section 2 (s). The courts look into the facts and circumstances of each case while determining whether an employee is a workman or not. As observed by the Delhi High Court in Tata Sons Ltd. v. S. Bandopadhyay [111 (2004) DLT 489], in examining the question of whether an employee is a 'workman' or not, what is of importance is the nature of his duties, particularly his primary duties or his basic duties and the dominant purpose of his employment. Further, as held by the Supreme Court in T.P. Srivastava v. National Tobacco Co. of India Ltd. [1991 AIR 2294], duties which require the imaginative and creative mind could not be termed as either manual, skilled, unskilled or clerical in nature and therefore, such a person cannot be termed as a workman. In the case of Delta Jute & Industries Ltd. Staff Association and Ors. v. State of West Bengal and Ors. [2015 (145) FLR105], the High Court of Calcutta held that when a person is performing multifarious functions, the nature of the main function that the employee performs should be taken into account to determine whether the person will fall under the ambit of workman or not.

As a result of these judgements, the courts appear to be creating a distinction between unskilled, skilled and highly skilled employees without actually setting out clear parameters on how and when to classify them as such. Hence, it would be crucial to show that the work performed by an employee is imaginative, creative and highly specialized, in order to claim that such employee does not fall within the ambit of the definition of 'workman' under the Act. If an employee falls under the ambit of workman, the old employer as well as the new employer has to ensure that compliance under all applicable labour legislations, including but not limited to those under the Industrial Disputes Act, 1947, Industrial Employment (Standing Orders) Act, 1946, etc. have been met with regard to the employees.

Consent of Employee: As per Section 25FF of the ID Act, where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to 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 shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched. There is a proviso to this section which states that a workman will not be entitled to any notice or compensation if the following conditions are fulfilled:

  • the service of the workman has not been interrupted by such transfer;
  • the terms and conditions of service applicable to the workman after such transfer are not in any way less favorable to the workman than those applicable to him immediately before the transfer; and
  • the new employer is under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

However, the Supreme Court in the case of Sunil Kr. Ghosh v. K. Ram Chandran ((2011) 14 SCC 320) has held that, in the event employees are transferred to a new employer, it is mandatory for the old employer to take the consent of the workmen even if there is no change in the terms and conditions of their service and they are transferred on same or more favourable terms. In the event the workmen do not consent to such transfer, they will have to be given retrenchment compensation as per the provisions of the ID Act. This brought through a paradigm shift in the industrial jurisprudence with regard to rights of workman in case of their transfer to new employer. The reasoning given by the Supreme Court for the decision is that a workman cannot be forced to work for anyone against their wish.

Even though the employer-employee relationship for a non-workman is mainly governed by his or her employment agreement, some concepts of the ID Act are extended to non-workman as well. Therefore, even though ID Act is applicable only to workman, it is advisable that certain concepts such as taking consent of the employee in case of transfer to a new entity and other principles of natural justice are followed in case of non-workman as well in order to avoid scrutiny by courts.It has to be noted that the labour statutes and the courts in India are pro-employee and therefore, employers need to be extra cautious while dealing with the rights of the employees.

Notice of Change: As per Section 9A of the ID Act, if there is any change in the working conditions of workman as prescribed in Schedule IV of the ID Act, the workman needs to be given notice at least 21 days in advance of such change.

Continuity of Service: Another important aspect with regard to employees in case of a merger or acquisition if the employees are being transferred is that, they need to be given continuity of service. Their seniority should be taken into account by the new employer and the conditions of service shall not in any way be less favourable than those immediately prior to the transfer. This has to be mentioned clearly in the new employment agreement/ appointment letter entered into with the new entity.

Social Security Obligations: The Supreme Court in the case of McLeod Russel India Limited vs. Regional Provident Fund Commissioner, Jalpaiguri and Others [2014(8)Scale 272] has held that the transferee entity will be liable for any default on part of the transferor entity even if there is an agreement to the contrary stating that the transferor will be liable. This decision of the Supreme Court highlights the importance of a thorough due diligence which has to be conducted by the acquiring entity and clearly ascertain the liabilities of the transferor entity towards provident fund and various other labour laws and obtain indemnification and damages from the transferor companies prior to such acquisition, if required.

The transaction documents entered into between the two entities should clearly provide for transfer of employee benefits, such as provident fund, to the new employer. Please refer to our handbook for details on this aspect, in case of an NCLT driven merger/amalgamation: https://novojurislegal.files.wordpress.com/2018/06/blog_ncltmerger-final-04062018.pdf

Another important aspect in case of a merger or acquisition is with regard to the treatment of leave under statutes such as the various States' Shops and Establishment Act. Every employee is entitled to certain number of days of leave depending on the length of service in a particular year which can be accumulated and also encashed depending on the state specific Shops and Establishments Act. For example, as per the Karnataka Shops and Establishment Act, 1961, if the employment of the employee is terminated by the employer before such employee has taken the privilege leave which he or she is entitled to or if the employee has applied for leave and have not been granted such leave, or quits his or her employment before he/she has taken the leave, the employer will be liable to pay the employee the wages for leave not taken. Thus, it becomes important for the transferee entity to give due regard to the leave balance of the employees who are being transferred and due regard must be given to the liability that may arise with regard to such leave encashment. Therefore, adequate adjustments may be made to the consideration amount paid to the transferor so that the transferee entity does not incur any additional burden in this regard.

Treatment of ESOPs: ESOPs usually have a vesting period and would be subject to exercise at a price before an acquisition or accelerated vesting in case of an acquisition. This becomes an especially significant point of consideration in case of stock swap structures.

The above-mentioned pointers are few of the many considerations during a merger/acquisition. Depending on the particular structure of a merger/acquisition, the steps for employee transfer/discontinuation needs to be evaluated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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