What Employment Issues Can Arise During M&A Transactions?

M&A, Employment, Transfer, Employment Law, Employment contracts, Employee transfer, Section 25FF, IDA

What employment issues can potentially arise during a merger and acquisition process? One of the most important aspects for corporations to consider during a merger or acquisition process is human resources. Whether the transaction is by way of sale of the business as a going concern or sale of assets or court-approved merger schemes, it is important that the seller and purchaser consider carefully the mode of employee transfer.

Accordingly, Section 25FF of the Industrial Disputes Act, 1947 (“IDA”) re transfer of ownership or management of an undertaking from the former employer to a new employer (“Section 25FF Transfer”), that would trigger a deeming provision where every “workman” who has been in continuous service for not less than one year is deemed to have been retrenched – unless inter alia the workman agrees to be transferred – their services are not interrupted by such transfer. In other words, seniority benefits for the workman’s past period of employment are preserved post transfer and the terms and conditions of service offered by the new employer are no less favourable in comparison to the one immediately before the transfer (“Section 25FF Conditions”).

Therefore, in case of Section 25FF Transfer, if the Section 25FF Conditions are not complied with by the Transferee entity or where the workman does not consent to his being transferred, then the workmen who have been in continuous service for one year (i.e., 240 days) or more, would be deemed to have been retrenched by the Transferor. Consequently, salary in lieu of notice and retrenchment compensation as laid down in Section 25F of the IDA would be due to be given by the transferor to such employees.

In such cases, the transferee entity should ensure that all dues and social security contributions due to the transferring employees are cleared and paid by the transferor entity to mitigate liability on the transferee entity for past dues.

How can clients avoid such issues? What are the premeditated measures they ought to take in this instance? What measures must you take when constructing new service agreements and contracts?

In light of Section 25FF, it is important for parties to review the terms and conditions of employment offered by the transferor entity and map this against the new terms and conditions being offered by the transferee entity. This takes on a greater significance where the client is the transferor who would otherwise have to bear the burden of the severance payments if the terms were not comparable.

Accordingly, whilst statutorily there is no consultation obligation in such a case (unless the employer has assumed such obligations under an arrangement or a settlement with workmen individually or with their trade unions), it is important that the seller ensures that the Section 25FF Conditions are fulfilled and the workmen accept the transfer. Additionally, for the transferee entity, it is important, to the extent possible, to achieve a harmony of the service conditions for these transferring employees with their existing employees for smooth integration into the transferee entity.

In order to comply with Section 25FF of the IDA, the transferee will be required to provide the workman with terms and conditions of service which are no less favourable to the workman post transfer; however, there is no statutory restriction on the transferee entity to modify the workmen’s service conditions at a later stage. This comes with the proviso that if the change at a later stage to the specified service conditions of the workmen (such as basic wages, hours of work and rest intervals, classification of grades, leave with wages and holidays, withdrawal of any customary concession or privilege, etc.) is prejudicial to the workman, it can only be affected after giving a prior notice as required and in the prescribed form and manner as provided under Section 9A of the IDA. It is therefore advisable, from the transferee entity’s viewpoint, that the conditions of service being offered to the transferring employees are identified at the time of the transfer of the undertaking, when the transferor entity would remain liable for a “deemed retrenchment” situation, rather than at a later stage when they would have to follow the process for effecting any prejudicial change.

Author:

Nohid Nooreyezdan