The Small Man in The Big Picture-Compensating Employees and Workers in M&A Transactions.

Author: Soumya Nayyar is a Final Year Law Student from Symbiosis Law School, Pune.

The article analyses the worker’s right to compensation stemming from Section 25FF of the Industrial Disputes Act, 1947 in the case of Mergers and acquisitions. The article details the provisions of Section 25FF, analyses the right with reference to qualification for compensation, the quantum of compensation and the payment of compensation and provides recommendations and solutions to contemporary issues in light of the aforementioned analysis. 


Introduction

Mergers and acquisitions are key instruments for the expansion of businesses and to make the most efficient use of available resources. Many factors must be taken into account when two companies combine or are acquired by one another. One of the most important factors among these is the transference of employees between the two entities and their corresponding rights. When there is a change in the company’s ownership or management, employees also undergo changes in their working conditions- such as transfers to different departments or locations or revised employment agreements.

An equitable middle ground must be found between employee financial and social security and corporate interests for these deals to be successful. In the interests of the same, the legislature has stipulated numerous provisions cementing the rights of workers in such transactions. These rights stem primarily from Section 25FF of the Industrial Disputes Act, 1947 (Section 73, Industrial Relations Code, 2020) which stipulates the right to equally or more favourable working conditions and the right to consent to these working conditions. The failure to satisfy the aforementioned rights, results in the worker’s right to compensation, which is the subject matter of this article.

In this regard, the article firstly details the provisions of Section 25FF, under which the right to compensation arises. Following this, secondly, the article analyses the right with reference to qualification for compensation, the quantum of compensation and the payment of compensation. Finally, the article provides certain recommendations and solutions to contemporary issues in light of the aforementioned analysis.

[I] Legal Provisions

Section 25FF (Section 73, Industrial Relations Code, 2020) provides workers with the right to continuous uninterrupted service with equally or more favourable terms and conditions of service when the ownership or management of an undertaking is transferred to a new employer. If the employer fails to satisfy the right or if he wishes to terminate the services of the employee, the section entitles the employee to notice and compensation in accordance with the provisions of section 25F (Section 70, Industrial Relations Code, 2020),  as if the workman had been retrenched. Only employees who have worked for the company for at least a year without interruption prior to the transfer will be eligible to exercise their rights under this clause.

A pertinent modification to the following section was made by the Supreme Court in the case of Sunil Kr. Ghosh v. K. Ram Chandran, wherein the right of consent of the worker was established. In this case, the court ruled that when an employer transfers employees to a new employer, even if the workers are transferred on the same or better terms, the previous company must obtain the workers’ consent. Should employees refuse such a transfer, retrenchment benefits must be provided in accordance with the ID Act. This caused a sea change in the law governing the rights of employees in the event of their transfer to a new company. The Supreme Court based its ruling on the principle that an individual cannot be compelled to provide services for another party against their wishes. This provision has even been incorporated in the Industrial Relations Code.

The combined reading of the law, along with legislative amendments and judicial interpretation currently stipulates that all workers are entitled to notice and compensation on the transfer of undertakings unless they expressly consent to the modified conditions of service. The compensation stipulated herein is the subject matter of the present article and will be analysed next.

[II] Qualification for Compensation

The compensation under the Section is applicable for every workman, as defined under Section 2(s) of the act, who has been under continuous service for at least a year in any industry, as defined under Section 2(j) of the act, as explained below:

[II.A] Form of Employment

The compensation granted to the employee may be contingent on the form of employment- whether regular or irregular or daily wage or part-time. Two contrasting views are present in this respect, the first granting such compensation only when the employment was regular, while the second only analysing whether ‘continuous service’ has been rendered in terms of Section 25F r/w Section 25B.

These decisions present the contrasting pulls of benefiting the employee who has worked temporarily, yet has completed one year of ‘continuous service’, and protecting the rights of employers from extraneous liabilities. Herein, it must be noted that the section does itself differentiate between the forms of employment and the invidious distinction drawn by the courts is wholly misconceived. It is pertinent to avoid any distinction to prevent the employer from evading its responsibilities by resorting the limited forms of employment. Therefore, resorting to a criterion composed of a variety of factors- form, contribution, contractual rights, etc. can address the multi-faceted concerns.

[II.B] Period of Employment

The period of employment interplays with the form of requirement in the determination of compensation. While the minimum duration mentioned in the Section is ‘one year’, for practical purposes a minimum of 240 days of employment is calculated to determine the period. In addition to the period, the specific duration of work, in terms of hours, is also a pertinent consideration, even though the same has not been quantified in the provision.

The consideration of time of employment as one year stands in absolute contrast to the purpose of the provision itself. There is no justification for why employees working for periods shorter than one year would not be affected by unforeseen termination, unlike employees working for periods longer than one year.

[II.C] Succession to Compensation

The right to compensation persists even upon the death of the workman, for his heirs-at-law as per the provisions of the section. However, the right to reinstatement does not survive.

[III] Quantum of Compensation
[III.A] Calculation of Compensation

Section 25F prescribes that the compensation payable to the workman should be at the rate of 15 days’ average pay for every year of continuous service that the workman has completed, or has been a part of for more than 6 months. Herein, the formula applicable for the calculation of gratuity under the Payment of Gratuity Act 1972, wherein, monthly wages are multiplied by 15 and divided by 26 is not applicable.

In certain cases, the court has enlarged the scope of quantum under the Section to include facts such as non-gainful employment of the workman, time spent in litigation, last drawn wages, paying capacity of the management at the relevant time, financial conditions of the workman, nature of job which was being performed by the workman, etc. This is extremely pertinent since it accounts for the variety of facts and circumstances that could influence the quantum. However, the lack of legislative guidance in this regard results in an overreliance on judicial discretion and therefore non-uniformity in the application of law.

Another issue that arises in the manner of compensation, is the reliance on period of service in the calculation. It is unclear as to the nexus between the years of service by the employee and the amount of compensation, especially in light of the purpose of the provision, i.e., to compensate against unforeseen termination. There is no justification as to why employees who have worked longer would be affected more and would require greater compensation, in comparison to employees who have worked for shorter periods.

[III.B] Compensation and Gratuity

While Gratuity is given to help workmen after their retirement, retrenchment compensation is intended to give relief for sudden and unexpected termination of employment by giving partial protection to the retrenched workman and his family to enable them to tide over hard periods of unemployment. Consequently, the workman is entitled to receive the double benefit, one under a gratuity scheme and the other as compensation for retrenchment.

[IV] Payment of Compensation
[IV.A] Time of Payment

In line with the object of compensation, i.e., to partially redress the hardship caused by retrenchment, the time of payment has been delineated as immediately on retrenchment, to the extent that it is considered as a ‘condition precedent’ to the retrenchment. Courts have differed in the rigidity of the exception, with certain courts accepting slightly delayed payments by cheques or demand drafts, and others rejecting the same.

[IV.B] Mode of Payment

The provision requires the employer to only tender the amount before the dismissal since the employer cannot force the employee to receive the payment before the dismissal becomes effective. This provision becomes pertinent when the employer has offered the payment, but the employee fails to collect it, or refuses to accept it. Therefore, the payment must be in the form of a bona fide offer to the workman as a part of the same transaction of retrenchment.

[V] Recommendations and Conclusion

Section 25FF raises important considerations, both from the employer and employee perspective. Employers are necessitated to pay hefty compensation for the termination of employees, which becomes a paramount consideration in the cost-structuring of M&A transactions. Employees, on the other hand, are provided work security and the right to compensation, which prevents issues arising from unforeseen unemployment.

However, as highlighted in the previous section, there are various legislative and enforcement issues which impede the effective application of the provision. Primarily, the principal issue that is observed in the structuring of the entire section, is the lack of nexus with the objective of the section itself. Additionally, the second issue is the failure of the law to address the modifications in the position of employees post the transfer of undertaking.

In this light, the following recommendations are made:

  1. The qualification of one year of service must be eliminated, due to its lack of nexus with the objective of the provision. Rather, some limited exemptions to this provision must be implemented, based on certain forms of employment which would not be affected by unforeseen termination.
  2. The method for calculation of the quantum of compensation must be modified to eliminate the ‘years of work’ determinant, due to its lack of nexus with the objective of the provision. Rather, elements such as non-gainful employment of the workman, time spent in litigation, last drawn wages, paying capacity of the management at the relevant time, financial conditions of the workman, nature of job which was being performed by the workman, etc. must be included, along with legislative guidelines for their consideration to account for the variety of facts and circumstances.
  3. The law should include restrictions on modification of terms of service for a period of at least one year post the transfer of undertaking. This would prevent circumvention of the compensation provisions in this section, by modification of terms of service after the transfer of undertaking.

The section brings forth promising considerations for the rights of employees, however, the limitations highlighted leave ample room for employers to circumvent the law. The Industrial Relations Code, 2020 while incorporating the consent requirement, has replicated these issues in its provisions. It is pertinent for the aforementioned amendments to be undertaken, to ensure the effective application of the law, and therefore the efficacious protection of worker rights.


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