In the backdrop of growing business reorganisations in India, managing employee mobility and resultant costs and liabilities associated in business transfers, assumes significant importance. Strategic business decisions can be influenced by employee demands impacting their mobility and employment continuity, especially when backed by trade union involvements. Set out below are some key considerations to note in the context of transfer of business undertakings in India, with significant employee involvement.
Laws governing rights of employees in business transfers
Employment related laws in India are governed by both Central and State laws, as part of the federal governance structure. These include laws on benefits, compensation, disputes, trade unions, work hours, social security, health and safety and cessation. Amongst other statutes, the Industrial Disputes Act, 1947 (“ID Act”) and the state-specific Shops and Establishments Acts (“S&E Acts”) are relevant in this context. Stipulations under these statutes, amongst others, in terms of employee rights, protections, terminal benefits and restrictions are critical to consider in business transfer cases.
Employee movement in business transfers: the modes
1. Automatic transfer: No labour legislation in India mandates automatic transfer of employees in case of business transfers. However, some Indian courts have interpreted Section 25FF of the ID Act as enabling an automatic transfer (that is, without prior consent) of ‘workman' category employees in limited situations during transfer of an ‘entire business undertaking'. This is linked to satisfaction of the following conditions:
- transfer is effected with continuity of service, or without service tenure interruption;
- transferee employer provides ‘no less favourable' terms of employment to the workers; and
- transferee employer recognises period of employment with transferor for payment of tenure linked benefits.
Satisfaction of these conditions is only an enabling provision and not obligatory in nature. In transactions where the above conditions are satisfied, it is arguable, based on judicial precedents that ‘workmen' category employees can be transferred without prior consent. However, even when all conditions of Section 25FF of the ID Act are met, the position on whether this overrides the prior consent requirement from workman category employees, has been debated by several Indian courts. These deliberations have been conflicting. Considering this, automatic transfer approach is not often the default or preferred method for employee movement, but is typically considered in cases involving trade unions.
Consent requirement triggers where (a) change in conditions of service, and (b) transfer of ‘non-workman' category employees (typically those performing supervisory and managerial job functions), are envisaged. To avoid potential disputes and deficiencies linked to employee movement, organisations nevertheless tend to consider a consent-based route to transfer employees, particularly when revisions to service conditions are envisaged. In doing so, acquiring employer enjoys the flexibility to align transferring employees' service conditions to its existing practices.
2. Separation and re-hire: Under this approach, employees separate from the transferor employer (i.e., transferor employer initiated termination, or employee initiated voluntary resignation), and are simultaneously offered employment by the transferee employer. Employee dues are settled by the transferor employer. This approach results in a ‘break in service' impacting an employee's tenure linked benefits (for example, gratuity) and hence, frowned upon by employees.However, from commercial perspective, a separation and re-hire method can in some cases, insulate the transferee employer from past liabilities (or, benefits) and hence, is generally favoured when the transferee employer is reluctant to assume legacy liabilities. Service conditions including recognising an employee's past services for limited aspects, remains subject to commercial agreement between the parties.
3. Tripartite arrangement: A consent based transfer involving execution of a ‘tripartite transfer agreement' (“TTA”) or similar agreement amongst the transferor employer, transferee employer and employee, is also another approach. This is typically considered in instances where transfer of only a vertical or unit is envisaged, as opposed to the entire business undertaking. An employee's service continuity is usually recognised and resultantly, severance obligations are unlikely to trigger on the transferor. Entitlements, benefits and obligations associated with employment tenure stands transferred to, and assumed by the transferee. Backed by the comfort that such a transfer is consent-based, parties often explore alternate structures – for instance, recognising service continuity for certain benefits, and not for all. However, to ensure a smooth transition and to incentivise employees to accept the transferee's offer, favourable terms of employment are typically offered, although not a mandate.
Quick Q&A based on the above approaches
1. Timeline for effecting employee transfers.
None, statutorily. In consent-based approaches, employment offers are rolled out sufficiently in advance, prior to the proposed transfer date. Practically, at least 2 (two) or 3 (three) weeks' notice is provided so that employees have reasonable time to consider and/or accept the offer. Where there are no changes to service conditions, this timeline can be shorter. Further, depending on the transferor's existing employee benefit structures, parties should be cognisant of timelines to factor in a revision/adaptation of similar benefits by the transferee, which may be time consuming, depending on the structure.
2. Employee liabilities passing on to the transferee.
In slump sale structures where the entire business undertaking transfers as a going concern, pre-transfer employee liabilities may accrue on the transferee. Social security regulations such as the Employees State Insurance Act, 1948 and the Employees Provident Fund and Miscellaneous Provisions Act, 1952 provide for joint and several liability on transferees (acquirers) in case of establishment transfers. Parties often contractually agree on the pre-transfer and post-transfer liabilities. It is common in contracts to have transferor indemnify the transferee for any claims or liability that relates to the pre-transfer period.
Where service continuity is recognised, transferee assumes identified liabilities associated with employment tenure, for instance in cases of gratuity (tax considerations arise in cases of transferor's funded gratuity managed by a trust), leave encashment (which is not tenure linked; and hence, contractually parties may agree on who would bear costs towards accumulated privilege leaves), retrenchment compensation (transferee assumes liability towards retrenchment compensation payment to workman category employees at the time of separation, based on total years of service), etc.
3. Role of anti-discrimination laws, if any, impacting business transfers.
Discrimination on grounds of gender, caste, sex, religion, disability or other protected categories should be avoided even in business transfer arrangements. Under applicable laws, women employees cannot be terminated while on maternity leave. If an impacted employee on maternity leave chooses to opt out of the transfer, unless mutually agreed between them that the employer would bear costs for the remaining maternity benefits, her employment may be terminated only at the end of her maternity leave. Employees at the receiving end of inter alia sickness benefits or disablement benefits under the Employees State Insurance Act, 1948 are protected from dismissal during the period of that benefit.
4. Other general considerations
Transactions involving setting up of new establishment in India to house the transferred employees can result in the transferee being subject to local statutory permits and registration requirements under several employment regulations. Prior to deal closing, parties should be cognisant of practical timelines which may impede transaction (and consequent employee movement) progress. In comes cases, establishment linked labour registrations would either need to be surrendered and re-applied, or transferred to the transferee, depending on local/state-specific requirements. The new Labour Codes amalgamating various employment laws in India are yet to come into force, however, once enforced, employment considerations may need to be reassessed in case of business transfers.
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.
