Business transfers in India, whether by way of sale, slump sale, merger, or restructuring, raises a pressing question: What happens to the employees during a Business Transfer? While shareholders and creditors are protected under corporate and contract laws, it is the Industrial Disputes Act, 1947 that steps in to safeguard workmen during a transfer of ownership or management of an undertaking.
The governing provision, Section 25FF, ensures that employees are not reduced to collateral damage in corporate reorganisations.
It requires that when an undertaking changes hands, employees must either:
- be offered continuity of service on "no less favourable terms", or
- receive statutory compensation as if retrenched.
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Understanding Section 25FF
Section 25FF of the Industrial Disputes Act, 1947, specifically governs the rights of workmen when the ownership or management of an undertaking is transferred. The provision applies whether the Business transfer occurs by sale, lease, gift, amalgamation, or any other legal mode. Its central objective is to protect employees from sudden job loss or adverse changes in service conditions due to a corporate transaction.
The provision operates on two clear principles:
1.Continuity of Service – "No Less Favourable Terms"
If the new employer takes over the employees:
- without interrupting their service, and
- on terms and conditions that are not less favourable than those
under the previous employer,
then employees have no statutory right to retrenchment compensation. Their employment continues as if nothing changed, except for the identity of the employer.
2.Compensation for Deemed Retrenchment
If the transfer does not ensure continuity or if the new terms are less favourable, then the employees are deemed to have been retrenched. In that case, they are entitled to:
- notice and retrenchment compensation under Section 25F, typically calculated as 15 days' average pay for every completed year of service, along with notice pay or wages in lieu of notice.
Section 25FF, however, does not give employees an automatic right to reject continuity of service if favourable terms are offered. Conversely, it prevents employers from evading liability by restructuring ownership while leaving employees worse off.
Continuity Offers vs. Compensation
When a business is transferred in India, the first question is whether employees will move with the undertaking or be left behind? Section 25FF provides the framework, but the choice between continuity offers and compensation depends on how the transfer is structured.
Continuity Offers
A continuity offer means the transferee employer takes on employees with their service uninterrupted. But the law does not demand identical terms—it requires that the new terms are "no less favourable." This phrase has been interpreted by Indian courts to mean that:
- Substance matters more than form. A minor change in designation or reporting structure may not be "less favourable" if pay, benefits, and career prospects remain intact.
- Overall package is considered. The court will look at wages, allowances, leave benefits, retirement benefits, and conditions of service as a whole.
- Future prospects matter. If the transferor was providing regular increments or promotional opportunities, a new contract that freezes or diminishes these can be challenged as less favourable.
Employers drafting continuity clauses in business transfer agreements must therefore ensure parity not only in pay but also in other service conditions.
Compensation Route
If continuity cannot be offered—say, because the transferee wants to restructure the workforce or operate with a leaner team—then statutory compensation becomes mandatory. This is not a discretionary payment. It is calculated as per Section 25F:
- 15 days' average pay for every completed year of continuous service, and
- Notice pay of one month (or wages in lieu of notice).
Most corporate transactions in India prefer the continuity route, since it preserves goodwill, avoids litigation, and ensures operational stability. However, where the transferee intends significant restructuring, the compensation pathway becomes inevitable. Good drafting of business transfer agreements is important in reducing disputes.
Drafting "No Less Favourable Terms"
The phrase "no less favourable terms" in Section 25FF is deceptively simple but often the most litigated aspect of a business transfer. Indian courts evaluate it not by mechanical comparison but by examining whether employees are substantially disadvantaged in the new arrangement. Employers, therefore, must draft continuity clauses with precision.
1. Preserve Wages and Allowances
Basic salary, dearness allowance, and other recurring payments must at least match the previous structure. Even if nomenclature changes (for instance, merging certain allowances into consolidated pay), the take-home and gross compensation should not reduce.
2. Protect Retirement and Social Security Benefits
Continuity of service means that past service with the transferor counts towards gratuity, provident fund, leave encashment, and other terminal benefits. Any attempt to "reset" the clock at zero has been struck down by courts. A properly drafted clause should expressly state that past service will be recognised.
3. Ensure Parity in Working Conditions
Service conditions extend beyond wages. Courts look at:
- Working hours, leave entitlements, and holidays
- Health and safety measures
- Promotion policies and increments
- Disciplinary rules and job security provisions
Even if minor changes are made, the overall standard must not diminish.
4. Address Future Prospects
Employees are not only concerned with present benefits but also with career growth. For example, if the transferor had a structured promotion ladder but the transferee operates with flatter hierarchies, this may be viewed as "less favourable." Drafting should therefore clarify that employees will continue to be considered for increments and promotions in line with existing policies.
5. Written Acknowledgment from Employees
It is best practice to obtain written acceptance from employees acknowledging that they have been offered continuity on no less favourable terms. This protects the transferee from later claims of deemed retrenchment. Courts in India place value on such records in assessing disputes.
6. Allocation of Liability Between Transferor and Transferee
While Section 25FF primarily protects employees, employers must contractually decide who bears liability for past dues (like gratuity accrued till transfer date) and for compensation if continuity is not accepted. Business Transfer agreements must address this explicitly to prevent later litigation.
Conclusion
Business transfers are as much about people as they are about assets. Section 25FF of the Industrial Disputes Act ensures that employees are not treated as expendable when ownership changes hands.
For businesses, the challenge lies in careful drafting while ensuring that continuity clauses preserve wages, benefits, and career prospects, while also clarifying liability between transferor and transferee. For employees, awareness of their rights under Section 25FF helps them evaluate whether the continuity offer truly safeguards their interests or whether compensation is the rightful path.
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.
