Mergers and acquisitions along with private equity investments have increasingly become popular corporate strategies to further establish and expand the business practices of the corporate institutions. Much hair-splitting is done to analyze the possible benefits and risks associated with such pursuits. For employees, however, mergers or acquisitions including PE investments often prove to be personally disruptive events as such activities often entail restructuring of employees, their positions, perks, perquisites etc. In this context, it is important to examine laws which regulate the restructuring of the workforce in the context of mergers, acquisitions, and PE investments.
Employment Law requirements
The primary legislation which deals with the working conditions of employees is Industrial Disputes Act, 1947 (“ID Act”) which only applies to a protected category of employees defined as workmen1. Under Section 2(s) of the ID Act, workmen has been defined as someone who is employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, regardless of the fact that whether the terms of the facts are implied or expressed. Employees whose duties are largely of managerial or supervisory nature fall outside the purview of the term workmen. The Supreme Court of India has laid down various tests to determine the qualification of a person within the definition of a workman under the ID Act. One such integral test is the ‘dominant nature’ test. Under this test, to determine the status of an employee the actual work performed by the employee must be examined. To iterate this principle, the Supreme Court of India has, in the case of Ananda Bazar Patrika Private Limited vs Workmen2, held that the incidental duties of a person to supervise work, wherein the main duties of such person is clerical, does not convert the employment of such person into supervisory capacity.
In view of the above, majority of the employees fall within the category of workmen and therefore, come under the purview of the ID Act. As far as others are concerned, they will be governed by their respective employment contracts which will only govern their employability pursuant to a merger or acquisition.
Having analyzed the applicability of the ID Act, it is imperative to see how it regulates the restructuring and / or transition of the workforce pursuant to merger and / or acquisitions. The relevant section under the ID Act is Section 25FF which deals with compensation to workmen in case of transfer of undertakings. Under the Section, where the ownership or management of an undertaking is transferred to a new employer then any such workman who has been in the employment for not less than 1 year will be entitled to notice and compensation as if they have been retrenched. Under Section 25F of the ID Act, the retrenchment benefits would include at least 1 (one) month prior written notice to the employee and compensation which is equivalent to 15 (fifteen) days average wages for every completed year of service or part thereof in excess of six months.
However, the transferee company will not be obligated to pay if all of the following conditions are met: a) the service of the workmen continues to remain uninterrupted which means that they should not be given fresh employment by the new employer3; b) the terms and conditions of such workmen do not vary to their disadvantage and c) the transferee company is legally bound to pay retrenchment compensation to the workmen on the basis that service has been continuous and uninterrupted.
Applicability of the Law in different scenarios
Having laid down all the legal requirements, it is interesting to see how the law will apply in different scenarios. Starting with the case of merger or demerger which entails change in the employer, Section 25FF of the ID Act will apply. Similarly, in the case of business transfer agreement wherein the existing employer terminates the employment of the employees at the Closing, and the Purchaser employs the Employees with effect from the Closing, Section 25FF of the ID Act will apply as there is a change in the employer. However, when the acquisition is done through purchase of shares then in such a situation Section 25FF of the ID Act will not apply for the simple reason that there is no change in the employer owing to the change in shareholding pattern of the employing entity. Similarly, in the case of PE investments which buys stake in the target company through purchase of shares, Section 25FF of the ID Act will not apply for the same reason as above.
It is important to note that the employers do not really need to give notice and compensation even when Section 25FF of the ID Act applies if they are able to satisfy the conditions under Section 25FF of the ID Act as mentioned above. So, for example, when there is a transfer of an entire undertaking which includes transfer of employees from the original employer to the new employer but the services of the workmen continued uninterrupted and there was no adverse change in the working conditions then in such a situation the workmen will not be entitled to the notice and compensation4.
The change in stance
Notwithstanding what has been stated above, in a recent case Sunil Kumar Ghosh v. K. Ram Chandran5, it has been held that workmen cannot be forced to work with another employer even if there is no change in their terms of the service and they are transferred on no less favourable terms. It is necessary that their consent must be taken and if they do not give consent then in such a situation they must be compensated as if they have been retrenched. Even in the case of Monthly Related Workmen v. Indian Hume Pipe Co.6, it has been held that the employees have a legitimate expectation to enjoy the benefits which they have been enjoying for so long and that can be taken away only when there are compelling reasons to do the same. What this means is that the employers have to negotiate a settlement with the employees in order to obtain their consent for the change in such services.
In light of the above discussion, it can be fairly concluded that law does permit restructuring of the employees but with certain conditions. However, it is advisable that the acquirers should provide an express stipulation in the transaction document with regard to the three conditions which have been prescribed in the proviso to Section 25FF of the Act to avoid situation that may entail payment of retrenchment compensation to employees. They may also consider having a condition precedent in the transaction document that the seller must provide reasonable notice (15 to 30 days) to the employees along with no-objection letter from each of the employees that they don’t have any objections to continuing with new employer.
1See Section 2(s) of the Industrial Disputes Act, 1947.
2Ananda Bazar Patrika Private Limited vs Workmen, 1964 SCR (3) 601.
3BPL Limited v. State of Karnataka and Others, (2008) 11 VST 835 Karn.
4All India ITDC Workers Union v. ITDC, AIR 2007 SC 301,
5Sunil Kumar Ghosh v. K. Ram Chandran, 2011 (14) SCC 320
6Monthly Related Workmen v. Indian Hume Pipe Co, AIR 1986 SC 1794; Section 9A of the Industrial Disputes Act, 1947.