Mergers and acquisitions (M&A) have increasingly become popular corporate strategies to further establish and expand the business practices of the corporate institutions. For employees, however, M&As often prove to be personally disruptive as such activities often lead to restructuring of employees, positions and perks.

Employment law requirements

The primary legislation which deals with the subject is Industrial Disputes Act, 1947 (ID Act) which applies to employees called workmen.

Under Section 2(s) of the ID Act, workmen has been defined as someone who is employed to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work and draws wages exceeding Rs 10,000 per month.

Employees whose duties are ‘largely’ of managerial or supervisory nature fall outside the purview of the term workmen. The Supreme Court, has laid down the ‘dominant nature’ test to determine the qualification of a person within the definition of a workman.

Under this test, to determine the status of an employee, the actual work of the employee must be examined. The Supreme Court has held that the incidental duties of a person to supervise work, wherein the main duties of such person is clerical, does not convert the employment of such person into supervisory capacity.

Therefore, majority of the employees fall within the category of workmen and therefore, come under the purview of the ID Act. Others will be governed by their respective employment contracts.

Now, it is imperative to see how it regulates the restructuring of the workforce pursuant to M&A. Section 25FF of the ID Act deals with compensation to workmen in case of transfer of undertakings.

If the ownership or management of an undertaking is transferred then any workman employed for minimum of one year will be entitled to notice and compensation as if they have been retrenched.

Under Section 25F, the retrenchment benefits are that the employer must give at least one month prior notice and compensation which is equivalent to 15 days average wages for every completed years of service. However, the transferee company will not be obligated to pay if all of the following conditions are met:

The service of the workmen continues to remain uninterrupted.

The terms and conditions of such workmen do not vary to their disadvantage.

The transferee company is bound to pay retrenchment compensation to the workmen on the basis that service has been continued and uninterrupted. It has been held that the consent of employees must also be obtained and if they do not give consent then they must be compensated as if they have been retrenched.

Applicability in different scenarios

Now it is interesting to see how the law will apply in different scenarios. In case of merger which entails change in the employer, Section 25FF of the ID Act will apply.

In case of business transfer wherein the existing employer terminates the employment of the employees and the purchaser employs the employees with effect from the closing, Section 25FF will apply as there is a change in the employer. However, in case of purchase of shares, Section 25FF will not apply as there is no change in the employer.

Conclusion

The law does permit restructuring of the employees but with certain conditions. It is advisable that the acquirers should provide details in the transaction document with regard to the three conditions under Section 25FF of the ID Act. This will help them avoid situation that may entail payment of retrenchment compensation to employees.

They may also consider adding a condition precedent in the agreement that the seller must provide reasonable notice to the employees along with consent letter from the employees that they don’t have any objection in continuing with new employer.