India: Treatment of Employees Following Acquisition Presents ‘Legal Challenges'

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By Madhur Singh

Oct. 24—A change in corporate ownership such as a merger or an acquisition often entails significant change to employee working conditions. Employees may need to be reallocated or transferred between the existing and the acquired units, for example, contracts may need to be renegotiated and in the event of employee termination settlement packages may need to be worked out.

Given the complexity of Indian labor law, businesses making acquisitions must carefully design their labor retention, redeployment and/or retrenchment (layoff) plans to ensure compliance with, for example, the Industrial Disputes Act, various states' Shops & Establishments Acts and the Standing Orders Act, Sunil Kumar, partner with Singhania & Partners tells Bloomberg BNA.

Determination of Employee Status

According to a recent paper from Singhania & Partners emailed to Bloomberg BNA, the first step in ensuring compliance with employment laws is to determine the exact status of an employee under the relevant statutes, since procedures and conditions for termination of employment, for example, vary depending on whether the worker legally qualifies as a “workman” or a “consultant” (contractor).

“There are a number of statutory and judicially defined criteria that have to be applied to the employment agreements or appointment letters to determine the exact status in each case,” the paper states. In Balwant Rai Saluja vs. Air India Ltd. , the Supreme Court of India applied the integrated test approach, evaluating a set of factors—including control over the employee, supervision and direction of work, issuing of instructions and power of recruitment, termination or dismissal—to determine whether in a given set of circumstances a person is an employee or an independent contractor.

The Industrial Disputes Act and the Shops and Establishments Acts of individual states specify the procedure for issuing notices and the grounds for termination without cause (where permitted), and it is important to bear in mind that in most cases only “with cause” termination is permitted.

The type of industry (service or manufacturing) and the number of employees determine whether notice of termination must be given to the government or prior permission requested.

Transfer or Layoff

When an existing business is acquired by another and ownership transfers to the new entity, “workmen” may or may not be transferred to the new undertaking. (The Industrial Disputes Act 1947 defines “workman” as “any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied.”)

The Supreme Court of India has held that, if workmen are to be transferred to the new owner, the old employer must obtain the consent of the affected workers even if there is no change in their terms of service and they are transferred on no less favorable terms. If terms of employment will change, the original employer must give notice to the workmen and obtain their consent.

In Monthly Rated Workmen v. Indian Hume Pipe Co., the Supreme Court of India held that a benefit prevailing for so long that it has become a condition of service cannot be withdrawn in the absence of compelling reasons. In practice, this means that employers must attempt to negotiate a settlement with affected workers to obtain their consent to the proposed changes.

In Sunil Kr. Ghosh v. K. Ram Chandran, the Supreme Court held: “It is settled law that without consent, workmen cannot be forced to work under different management and in that event, those workmen are entitled to retirement/retrenchment compensation.”

Continuous Employment

Employment is to be treated as continuous and not interrupted by the transfer of ownership, and the terms and conditions of the workmen's service cannot be in any way less favorable than those in place immediately prior to the transfer of ownership.

In addition, the buyer and the seller must sign an agreement under which the workmen's seniority or period of service is maintained after the transfer of ownership for the purpose of social security benefits. This also involves transfer of provident (retirement) fund accounts and balances to the new owner.

Singhania & Partners notes that under Sunil Kr. Ghosh, “new employers must undertake due diligence to ensure that the appropriate deductions of statutory contributions were made by the old employer and only then take over the accounts.” Courts insist that the buyer incur the social security obligations as a successor employer.

Workers who don't want to transfer to the new owner and whom the previous owner will not continue to employ must be paid all compensation due and all termination benefits under the appropriate settlement agreements.

If the transfer of employment must take place on less favorable terms, workmen who agree to resign from the old employer and move to the new one are due severance benefits as stipulated in the Industrial Disputes Act. Workmen with at least five years' continuous employment are also entitled to gratuity benefits. (Under the Payment of Gratuity Act, employees who have completed five years' continuous service at the time of retirement, resignation, death or disability are entitled to a payment equivalent of 15 days' salary for every completed year of service up to 1 million rupees.)

Redeployment

Acquisitions or mergers may necessitate changes in job titles, duties and service conditions.

Under the Industrial Disputes Act, the conditions of service of any workman—particularly in matters such as wages, employer contributions to provident or pension funds, hours of work, leave with wages and holidays and disciplinary procedures—cannot be changed without giving prior notice to the workmen likely to be affected. If the workmen object to the proposed changes, management must negotiate.

According to Singhania & Partners, “if the two sides do not agree on a way out, then litigation proceedings can be long and contentious.”

“Managerial or supervisory employees who may not be ‘workmen' may be a simpler category of resources to redesign, depending on the type of employment contract, its duration, and provisions for termination or renewal,” Singhania says, noting, however, that under the Law of Contract, the employer may be required to seek the consent of the affected employee or renegotiate the agreement.

Negotiating ‘Voluntary’ Exits

“Given that termination of employment poses a host of legal challenges, it is better sometimes to consider softer options like negotiating voluntary exits (instead of terminations), or gradual separation of smaller numbers of employees rather than executing bulk discharge of employees,” Singhania & Partners says. “This option is preferable to more drastic measures but also requires careful drafting of settlement agreements and termination letters which must work around the delicate issue of grounds of removal such that employees are not left feeling aggrieved that the terms of their employment were violated or they were treated unfairly.”

To contact the reporter on this story: Madhur Singh in Chandigarh at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

The ruling in Balwant Rai Saluja vs. Air India Ltd. is available here), in Monthly Rated Workmen v. Indian Hume Pipe Co. here and in Sunil Kr. Ghosh v. K. Ram Chandran here.

For more information on Indian HR law and regulation, see the India primer.

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