Workforce Continuity: Legal considerations for Employee Transfers

Business transfers can be a strategic decision for businesses aiming to enhance efficiency, streamline operations or adapt to shifting market dynamics. Within the realm of such mergers and acquisitions, the transfer of employees, redundancies, payroll and benefit restructuring is a complex matter and becomes a reason of heavy negotiations between the parties to the proposed transaction. Such employee transfers, whether associated with business transfers, change in ownership or slump sales, necessitate a nuanced understanding of legal provisions to uphold the rights of employees, ensure seamless workforce continuity and compliance with relevant laws.

Though there is no specific statute in India which solely governs the rights of employee in case of business transfer unlike Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) as applicable in the UK which stipulates that in case of takeover of an existing business, the employment of the employees will be automatically transferred to the new employer.

However, Section 25FF of the Industrial Disputes Act, 1947 (“ID Act”), plays a pivotal role in regulating the transfer of employees which lays down the guidelines for the employers for effectively transferring employees. This Section offers a framework designed to balance the interests of both employers and employees during business transfers.

Section 25FF deals with transfer of employees in case of a transfer of an undertaking, whether by agreement including but not limited to sale, lease or other forms of transfer or by operation of law. This Section comes into play to protect the rights of the employees. According to this Section, every employee who has rendered continuous service for a period of not less than 1 (one) year in the undertaking immediately before the transfer shall be entitled to receive a notice and compensation, aligning with the provisions and conditions as if the employee had been retrenched provided under Section 25F of the ID Act.

In the matter of Maruti Udyog Ltd. vs. Ram Lal and Ors., the Hon’ble Supreme Court interpreted the extent of Section 25F of the ID Act which outlines conditions precedent to the retrenchment of workmen that needs to be complied with especially in matters dealing with the transfer of employees due to transfer of an undertaking under Section 25FF. The Apex Court observed that the expression “as if” used in Section 25FF has limited application and has been included only for the purposes of computation of compensation in terms of Section 25F of the ID Act. Therefore, its application is limited to determining compensation and does not extend to other consequences flowing therefrom.

It is pertinent to note that the ID Act covers in its ambit the workmen level employees which includes a person involved in manual, skilled, unskilled, technical, operational, clerical work and excludes from its ambit any employee (i) who is employed within the capacity of supervisory level and drawing a salary of ₹ 10,000 per month or; (ii) employed as a manager or in the administrative capacity. Therefore, as per the provision of Section 25FF of the ID Act, it becomes imperative for the employer to obtain consent from the employees who are categorized as ‘workmen’ as per its definition under the ID Act. However, there are exceptions to the applicability of this Section 25FF to employees in case where there has been a change of employers due to the transfer, under the following circumstances:

(a) The service of the employee has not been interrupted by the transfer and there is a seamless continuation of service from the previous employer to the new one.

(b) The terms and conditions of service applicable to the employee after the transfer are not less favorable than those applicable immediately before such transfer, which ensures that the employees have not faced detrimental changes in their working conditions due to the transfer.

(c) The new employer, either under the terms of such transfer or otherwise, is legally obligated to provide compensation to the employee in the event of his/her retrenchment. Such compensation should be based on the premise that the employee’s service has been continuous and not been interrupted by the transfer. 

These exceptions are crucial in situations where the standard provisions for notice and compensation may not be automatically applicable. This emphasizes the importance of maintaining the rights and interests of employees during business transfers and changes in ownership.

In light of the above, in the matter of IPCL Employees Association v. India Petrochemical Corporation Ltd., the Gujarat High Court observed that all employees of the transferor company should become employees of transferee company with effect from amalgamation date and terms and conditions of the employment should not be less favorable. However, it was further held that, upon amalgamation taking place and employees of transferor company becoming employees of transferee company, this by itself could not entitle such employees to claim all rights, benefits and privileges which were available to employees of transferee company prior to amalgamation.

While the ID Act provides for protection of businesses in cases of transfer and closure of undertakings, it also ensures that such transaction is not detrimental to the employee’s rights and benefits.

In the matter of Sunil Kr. Ghosh Vs. K. Ram Chandra and Ors., the Hon’ble Supreme Court held that compelling workers to work under a different management without their consent is impermissible. The Court observed that under such circumstances, workmen are entitled to receive retirement/retrenchment compensation in terms of the ID Act. This decision not only upheld the rights of workers but further reinforced and strengthened their legal standing in such matters. 

Beyond statutory compliance, the importance of a diligently curated Business Transfer Agreement (BTA) cannot be overstated, as that serves in ensuring seamless workforce continuity and mitigating legal complexities. A BTA is a structured document designed to facilitate comprehensive transfer of assets and liabilities from one entity to another. Such an agreement may explicitly define the status of employees post-transfer, ensuring clarity on the roles, responsibilities and employment terms under the new management.

The BTA must outline various aspects including but not limited to the type of transfer, sale terms and specifics of the assets being transferred. Commonly referred to as a slump sale, the transaction enumerated in the BTA records the crucial terms and conditions of the transfer of the undertaking. To comply with statutory requirements, the BTA may specify the terms and conditions of service for employees post the transaction, as favorable as those before the transfer preventing any unfavorable alterations.

In essence, a well drafted BTA is integral to ensure a smooth and compliant transfer of business assets and liabilities, providing understanding and clarity on the terms of the transaction and safeguarding the interests of the business involved and the employees of concerned parties.

During such business transfers, the responsibilities of the transferee company extend beyond the mere compliance with statutory requirements. The terms and conditions outlined in the BTA add to the obligations towards the employees and the overall framework governing the business transfer.

It is crucial to emphasize that, during the transfer of businesses, not only the operational aspects but also the associated statutory benefits are transferred to the transferee company. Statutory benefits provided to employees may include, but are not limited to, employee welfare schemes, provident fund benefits, gratuity and other entitlements mandated by applicable labour laws of India.

Navigating employee transfers and change in ownership requires a comprehensive approach that encompasses legal provisions, business transfer agreements, and protection of rights of both employer and employee.

As business engage in such transactions, employers must prioritize understanding of the applicable laws, diligent compliance to notice requirements and calculations of compensation. Failure to comply with the legal requirements and the provisions outlined in a BTA may lead to disputes, legal actions and reputational damage to the business. By incorporating and implementing the regulations outlined in the ID Act, companies can execute employee transfers smoothly and ensure continuity in the workforce of the company.

About the author: Khyati Bhatia is a Senior Associate and Shreyika Walia is an Associate at Ahlawat & Associates.