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TRANSFER OF EMPLOYEES IN M&A TRANSACTIONS - A NEED FOR REVISED FRAMEWORK IN INDIA


Source : Atlas Law Partners

This article has been authored by Priyashi Chhajer and Stuti Agarwal, fourth year students at National Law University, Jodhpur.


Introduction


Mergers and acquisitions have progressively become very common corporate arrangements to grow and expand business practices in order to make the industrial unit successful. With such practices, the most impacted are the human resources of the firm i.e., employees of the firm. A change in the structure of management or ownership of an organization results in a change in the working environment and conditions of the employees. Various provisions have been laid down to deal with this and protect the rights of employees. It is crucial to see how India strives for a balance between the value creation from M&A practices and the risks exposure.


The article will analyse the rights of employees in the event of transfer of undertaking under different jurisdictions and what remedies are provided to them if they are not given adequate retrenchment compensation. The authors analyse different jurisdictions to understand how rights of the employees are safeguarded in other countries and what lessons India needs to take away from them.


Indian Framework - Industrial Disputes Act, 1947


The evolution of industrial jurisprudence in India started from the period of post-independence. Before the inception of the Constitution of India, importance was given to improve the conditions of factory workers only. But post-independence, the concern shifted towards the concept of social and economic justice for the employees. The Government of India has played a major role by adopting a progressive policy and giving shape to our labour regulations in India.


The Industrial Disputes Act, 1947 (“IDA”) is the regulatory legislation that governs the disputes between employer and employee by providing them with the instrument and plan of action for the amicable settlement. Section 25FF of the IDA provides for the right of workmen to get compensation in case of transfer or closure of the undertaking. It provides that every workman who has been in service of employment for more than one year is deemed to be retrenched shall be entitled to notice and compensation. However, for an employee to get compensation under Section 25FF, three conditions need to be satisfied which are as follows:


“1. The service of the workman has not been interrupted by such transfer;

2. The terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and

3. 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.”


The main aim of Section 25FF is to provide compensation to workmen for loss of employment and to provide him with the resources until he gets back on his feet. This section was introduced to protect the rights of workmen, who lost their jobs because of transfer of an undertaking. However, this section was not given much importance when it was first formulated in the IDA, 1956. For instance, in the case of Hari Prasad Shiv Shankar Shukla v. A.P. Divelkar, the employees were not given any retrenchment benefits under section 25F of the IDA. Similar cases were registered and thus in 1957, Section 25FF was amended to render justice to the employees. It is pertinent to note that the term “undertaking” has to be read in the simplest sense, hereby meaning any work, project, enterprise or business undertaking.


In the case of R.C. Cooper v. Union of India, the court held that the undertaking means the entire organization and a going concern. With respect to retrenchment compensation, the position till 2011 was that when the mergers and acquisitions involve transfer of employees to the new organization with change in ownership but without any change in terms of employment, there is no obligation on the previous employee to pay any retrenchment compensation or to obtain any consent of workmen who did not wish to keep working under the new leadership.


However, in the case of Sunil Kr. Ghosh & Ors v. K. Ram Chandran decided in November 2011, the Honourable Supreme Court has stated that if the workmen have not consented to work under different management, they cannot be compelled to work and those workmen will be entitled to get retrenchment compensation as per the terms of the IDA. With this judgment, the position has changed; the present case obligates the Acquirers and Sellers to take prior approval from workers in case of any merger or acquisition involving transfer of ownership or management of any industrial unit. In case such workman does not agree to such transfer, they will be qualified to get retrenchment compensation, which is provided under Section 25F of the IDA. Notably, this judgment was a quantum leap in the industrial jurisprudence by keeping the rights of the employees at a lofty pedestal. However, with due respect, it is submitted that this judgment is per incuriam as it goes against the provisions of section 25FF which explicitly states that no prior notice for transfer or settlement of retrenchment compensation would be required if the conditions given under the proviso of Section 25FF are fulfilled.

In the case of Monthly Related Workmen v. Indian Hume Pipe Co., it has been held that if there are no compelling materials, employees have the right to enjoy the benefits that they have been enjoying until now; thereby implying that the parties ought to negotiate a settlement with regards to switching in terms of services.


In the case of Ram Pravesh Singh and Ors. v. State of Bihar and Ors., the court has held that the employees have a ‘legitimate expectation’ to enjoy their rights guaranteed during the transfer. If any representation is made by the management, either expressly or impliedly, an employee can be said to have a legitimate expectation and there is a need to meet such expectations.


However, in the case of Gurmail Singh v. State of Punjab, the Apex Court has held that for the compensation to be granted there needs to be a genuine transfer of undertaking. In the case of succession or in case of transfer which is benami or fictitious, principle of compensation has no application as there is no change of ownership or management.

Moreover, the Companies Act, 2013 provides no protection to employees to hold a meeting or convey their concerns at the time of transfer as is evident from the case of Gujarat Nylons v. Gujarat State Fertilisers Co. Ltd.


In India, there is no provision for automatic transfer of employees to the transferee company. Employers have the powers to either retain or terminate contacts with the employees by giving a notice, requirements of which can be provided in applicable law or the employment contract. Apart from that, protective termination will not be granted if new terms of contract are detrimental to the employees when compared to earlier terms of contracts. Retrenchment compensation is given in case of transfer or winding up of the company as stated under IDA.


United Kingdom (“UK”): Transfer of Undertaking (Protection of Employment) Regulations 1981 (“TUPE”)


Jurisprudential Theories


i. Venture of Corporate Entity Survives even after transfer


Labour law framework in the UK endorses automatic transfer of employees along with their rights and obligations to the transferee company. Theory often highlighted to substantiate this is that; when the transfer is undertaken, it might perish the legal personality of the corporate entity (depending upon the type of transfer – merger, acquisition or amalgamation). However, its socio-economic venture might still continue. This venture essentially revolves around labour, management of an organization and the capital infused therein along with the assets and liabilities of the company. And the company is an entity consistently working in promotion of its socio-economic objectives.

A transfer will become futile if labours and management, who preserve this venture are not transferred along with the corporate entity. Therefore, during a transfer human resource, along with their rights and pending obligations are transferred to the transferee company.


ii. Labour is not a commodity


A worker shall not be forced to continue working with the new employer without his willingness. This is derived from the theory “labour should not be considered as a commodity”. Philadelphia Declaration, 1944 also designated it as one of the fundamental principles in the constitution of ILO.


European Court of Justice, in the case of Katsikas v. Konstantinidis also reasoned out that an employee can exercise his right to refuse from working under the new employer and he cannot be forced to get transferred as then, it will be violative of his fundamental right to choose and right to trade as per his willingness.


Transfer of Undertaking: Meaning and Scope


“Transfer of Undertaking” happens when the employer’s undertaking is sold off or being transferred, whole or in part as a going concern to another employer. It is also considered as transfer when there is “service provision change” i.e. a service is being outsourced or insourced. Such transfer may include any transfer of assets, tangible or intangible.

Transfer not governed under this Regulation - Jurisdiction of this law is limited to those undertakings which are situated in the UK. Transfer of Company by sale of shares is not covered under this regulation unless the identity of employer changes. Apart from this, asset sale transactions are not considered as transfer of undertaking and are thus outside the ambit of TUPE Regulations.


TUPE


TUPE Regulations govern any transfer of commercial undertaking. Regulations govern both represented and unrepresented employees. Regulations also concerns re-organisation of governmental entities.


Regulation 5 provides that: “transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred, but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee


Employees are provided remedies under Regulation 8 if they are unfairly dismissed because of transfer. General rule is that an employee cannot be terminated either by the former or latter employer, before or after the transfer of undertaking; only because of this reason. It will be judged as unfair. Moreover, if the proper procedure is not followed for their termination it will be considered as unfair dismissal, in those exceptional cases where termination is allowed. Exception to this general rule is created in case of Litster v. Forth Dry Dock and Engineering, wherein it was said that employees cannot be unfairly terminated because of transfer of undertaking and their rights are safeguarded, however, termination is allowed for economic, technical and organisational (ETO) reasons, which may be listed as follows:


i. Economic Reason –For instance, where it is not possible to sustain profitability of the business due to a fall in the demand for the output without dismissing the staff.

ii. Technical Reason –For instance, where the employees of the entity being acquired do not possess the skills required to use the new technology.

iii. Organisational Reason –For instance, where it is not feasible to transfer the employees to a different location where the new employer operates.


There may be circumstances in which an employee opposes transfer. If such an employee is terminated, it will not be listed as unfair. However, there are two situations in which objection can be taken for termination –

  • When there is “substantial change in working conditions to the material detriment” because of transfer”.

  • When there is “major detrimental change in terms and conditions amounting to a serious breach of contract


Safeguards to Employees under TUPE Regulation


1. It provides for automatic transfer of all the employees working in the undertaking with the existing employment contract to the transferor

2. It provides for transferring all the liability in relation to employees dismissed prior to transfer, to the transferee if the reason for dismissal was connected with the transfer.

3. Transfers recognizes any trade union as well as any collective agreements and makes them applicable to the transferred employees.

4. It mandates sharing of information with the elected representatives of the with a well-documented information memorandum. This information memorandum must contain information with respect to:

a. The reason of transfer

b. Approximate time when it will happen including a timetable for meetings for negotiations

c. The legal, social and economic implications of affected employees including change in terms and conditions of the employment contract.

d. What would be the process of such transfer and the rights of the employees after such a transfer.


Analysis & Conclusion


In the Indian scenario, interests of the employees are considered only at the time of winding up of the company. It can be clearly concluded that at the time of mergers and acquisitions, the employees are left with only one right which is given under Section 25FF of the Act. Moreover, this section also provides only two options to a labourer i.e., either gets compensation or carry on with the assured employment after transfer.

As stated above, the Supreme Court has ruled that prior consent of an employee is necessary while transfer of undertaking, even when there are no changes in terms of contract and work environment provided by the transferee company. As per Section 9A, of the IDA any notice pertaining to change of terms is required to be given at least 21 days in advance.


However, certain changes are required to be introduced by way of amendments in the legislation landscape providing for enforcement provisions under Section 25F of the Act. Service of adequate notice must be there prior to transfer and compensation to workers should be there. Section 25H of the Act, must be expanded to provide re-employment of those employees that are retrenched because of transfer of undertaking


It is crucial at this point to enforce a legislation to provide protection to employees and safeguard their rights. There is extreme vagueness on the issue of workmen’ rights during transfer of an undertaking. Therefore, the most pressing need is to provide scope of transfer and to provide rights of workmen in a comprehensive manner. In addition to this, there is an urgent need to provide for a concept of corporate governance to encourage democracy in the workplace as the Industrial Disputes Act, 1947 which regulates the transfer of employees is misled in the present day’s corporate environment. With the increasing rise in mergers and acquisitions in India, a domestic legislation similar to TUPE Regulations of the UK, should be seriously considered and implemented to safeguard the rights of employees and administer the responsibilities of employers.

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