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A key aspect of business reorganisations that requires consideration is the employment status of the workforce that is impacted by the proposed transaction. Companies must consider the applicable labour laws for employees whose employment may be terminated and for those who may be transferred to the new entity.

To appreciate the protections available to employees involved in a reorganisation, it is important to discern the classification of employees, that is, whether the affected employees may be classified as workmen under the Industrial Disputes Act, 1947 (ID act), and are hence, protected and eligible for the benefits set out in its provisions. Typically, white-collar employees in managerial and supervisory roles fall outside the purview of the ID act and their employment is governed by the applicable state-specific Shops and Establishments Act (shops act) along with the terms in their employment agreements.

Section 25FF of the ID act offers specific protection to employees under the workmen category in the event the ownership or management of a business is transferred, which in effect, results in a change of employer. According to section 25FF, workmen with at least one year of continuous service are entitled to compensation as if they were retrenched under section 25F of the ID act. This includes the employer having to serve one month’s notice or payment in lieu and 15 days of average pay for each completed year of service. However, these notice and compensation requirements do not apply if the affected employee’s service continues uninterrupted, the new terms of employment are equal or superior to those agreed with the transferee, and the continuing benefits of the service performed prior to the transfer are maintained.

While section 25FF of the ID act can be interpreted as envisaging an automatic transfer, that is, one where the consent of the employee may not be required for the proposed transfer, the Supreme Court in held that workmen cannot be compelled to join a new employer, that is the transferee entity, without their specific consent. Given the foregoing, while the ID act does not stipulate prior consent as a requirement for transfer, it would be prudent for the employers to have in place appropriate documentation showing that the affected employees, both workmen and non-workmen, consented to the proposed change in employer.

For non-workmen employees, the shops act of certain states such as Andhra Pradesh and Telangana impose similar obligations to those under the ID act and require that retrenchment compensation be paid in the event of a change in employer. Exceptions similar to the ID act in respect of uninterrupted service, favourable terms and continuity of benefits are also provided under the shops acts.

If employees in the workman category are terminated due to redundancy post reorganisation or as a consequence of their refusal to consent to the transfer, employers are required to comply with section 25F of the ID act. This section also requires the employer to comply with other obligations under the ID act, such as the last in, first out principle and issuing a notice to the labour authorities.

When looking into the compliances under state-specific shops acts for non-workmen employees, employers should bear in mind that certain state-specific shops acts only permit termination with cause. In such cases, it may be prudent to explore alternative separation strategies such as drawing up robust settlement agreements with such employees. Where a proposed reorganisation contemplates the closure of a business vertical, employers must also give due notice to, or seek prior consent from, the labour authorities in compliance with the ID act.

Companies should also look out for statutory benefits such as provident fund, gratuity and leave encashment at the time of such reorganisations and other contractual benefits such as discretionary bonuses, options and other incentives that may have been extended to affected employees. It must be ensured that the benefits accrued are paid out or contributions are made by the transferor entity at the end of the employment of the affected employees. In case of continued service, the benefits should be extended at par or on better terms than those provided during employment with the transferor entity.

Agrima Awasthi is a counsel and Diksha Singh is an associate at Wadhwa Law Offices.