Transactions involving business transfers or changes in ownership or management of an undertaking fall under the ambit of mergers and acquisitions transactions which include mergers, demergers, acquisitions, takeovers, slump sales, etc. The primary motive behind any such rearrangement of the undertaking is to succeed in terms of both growth and earnings.
It is pertinent to note that employees of the target companies are always impacted by mergers and acquisitions transactions, and the success of these transactions majorly depends on striking a reasonable balance between the business interest and security of the employees. It is important to keep in mind that business transfers can take place in one of two ways, either by selling the complete company or just its assets.
An asset sale gives the buyer the chance to take advantage of early depreciation and avoid taking on the former company's liabilities. In contrast to the higher income tax rate that is applicable to asset sales, however, a complete sale of the company is beneficial for the Seller in order to pay taxes at a low long-term capital gain rate.
A ‘slump sale’ is a way to transfer the company as a ‘going concern’ with all of its liabilities on ‘as is’ basis.
Types of Employees
According to Section 2(s) of the Industrial Dispute Act, 1947 (hereinafter ‘the Act’), a workman is defined as any individual who is employed in any industry to perform manual, unskilled, skilled, technical, operational, clerical, or supervisory work for hire or reward, regardless of whether the terms of employment are express or implied. Additionally, any employee who does not hold a management or administrative position, or who holds a supervisory position but receives a monthly salary of less than INR 10,000 is regarded as a workman.
All employees other than a workman will fall under the category of the non-workman. Meaning, any employee performing managerial and supervisory functions and earning monthly wages of more than INR 10,000 will be a non-workman.
Protection & Benefits to Workmen under the Industrial Disputes Act
As per Section 25FF of the Industrial Dispute Act, 1947 cases where ownership or management of an undertaking is to be transferred, whether by agreement or by operation of law, to a new employer, every workman who has been in continuous service for at least one year immediately prior to such transfer is entitled to notice and compensation in accordance with the provisions of Section 25F of the Act, as if the workman had been retrenched.
- A one-month notice period or payment in lieu of notice.
- 15 days' average pay in compensation for each completed year of continuous service, or any portion thereof over a six-month period.
However, no compensation is to be paid or notice is to be provided if all of the following conditions are met in respect of workmen employees:
- Employee's service has not been interrupted.
- Terms and conditions of employment following the transfer are equal to or better than those in effect immediately before the transfer.
- Employee receives the benefit of continuity of service for the work performed prior to the transfer.
These requirements under the Act clearly apply in respect of workmen for any merger, slump sale acquisition and asset purchase acquisition.
Rights of Non-Workman
The employment contract is the primary legal document that governs the rights of non-workman in business transfer transactions of any sort. Contrary to what is required for a workman, non- workman is not entitled to continuous employment with the same or better terms of employment following the acquisition of an undertaking or by the resulting entity following a merger.
- However, from a practical standpoint, businesses typically treat non-worker workers on par with workman employees, if not better, in so far as benefits are concerned.
Understanding the incentives and remuneration that may be triggered by a business transfer transaction requires a consideration of the employment contracts of non-workman employees.
Consent of Employees Prior to the Business Transfer Transactions
The Supreme Court in the case of
Sunil Kr Ghosh vs. K Ram Chandran held that workmen can choose to leave their jobs and be entitled to severance pay under the Industrial Dispute Act, 1972, which is equal to 15 days' average pay for each completed year of continuous service, or any portion thereof over six months, and cannot be forced to work under new management without their consent. Workers who choose not to work for new management can also terminate their employment.
Under the Industrial Dispute Act, 1972 an employer is not required to pay any compensation or notice period to the workman if the conditions mentioned under the proviso of the Section 25FF of the Act are met. However, as per the new jurisprudence introduced by the Supreme Court on the right of employees in merger and acquisition transactions, the transferor entities are now required to obtain consent from workman before effecting any change in ownership or management of the establishment.
In case of the non-workman the Act does not specifically provide that the employers need to obtain consent from them before the transfer of the ownership or management of the company to a third party in merger and acquisition transactions.
Statutory Benefits
Contributions provided by employers and workman under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees State Insurance Act, 1948 are included in social security benefits. It is critical to confirm that the target company has appropriately computed and deposited social security benefits with the authorities.
In the case of
McLeod Russel India Limited vs. Regional Provident Fund Commissioner of Jalpaiguri and Others, the Supreme Court has held that if the transferor entity fails to pay social security payments, the transferee business company would be held accountable, even though the parties signed an agreement indicating that the transferor entity will be held liable.
Conclusion
Although business transfers are an essential aspect when planning growth and development, it is imperative to ensure that the employees of the company are protected and face no inconvenience due to the transfer. Whether they are workmen or non-workmen, several laws of India safeguard employees’ rights during a business transfer and ensure they receive their due remuneration and benefits for their work in the organization.
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