Key Employment Law Considerations in Business Transfers

The approach towards employee transfers or redundancies, structuring of pay and benefits, etc., can be complex and often be the subject matter of heavy negotiations between parties in case of transfer of business undertakings. This is further complicated by conflicting judicial precedents. These FAQs discuss key employment related considerations associated with business sales or acquisitions in the private sector in India.

Atul Gupta Partner

Parvathy Tharamel Counsel

In the backdrop of a volatile job market, effective handling of employee retention, movement and liabilities in business transfers is assuming increasing importance. Trade unions and employees play a more vocal role in influencing strategic business decisions that may impact their employment. India does not have clear guidelines addressing employee rights in the case of transfer of business undertakings, as in some countries. Therefore, the approach towards employee transfers or redundancies, structuring of pay and benefits, etc., can be complex and often be the subject matter of heavy negotiations between parties. This is further complicated by conflicting judicial precedents. The cost and financial impact associated with employee transfers, and with liabilities arising from diligence findings, assume a significant role in the commercial and financial design of a deal.

Laws impacting to employee transfers

• What laws govern the rights of employees during business transfers in India? In India, several central and state laws govern subjects relating to conditions of employment, compensation, trade unions, labour disputes, working hours, leave entitlement, termination of employment, social security, health, safety, and welfare. Such aspects are addressed in legislations such as the Industrial Disputes Act, 1947 (ID Act), the state-specific Shops and Establishments Acts, Payment of Gratuity Act, 1972, to name a few. The protections, benefits and restrictions under these statutes are relevant factors when considering a business transfer.
• Is there any legislation in India, similar to the Transfer of Undertakings Protection of Employment (TUPE) in the United Kingdom or the Acquired Rights Directive (ARD) in Europe, that provides for the automatic transfer of employees during business transfers? Unlike UK's TUPE or Europe's ARD, India does not have specific legislation that mandates an automatic transfer of employees in case of a business transfer. Section 25FF of the ID Act has been interpreted by some courts to enable the automatic transfer of ‘workman’ level employees (i.e., without requiring their consent) in certain limited situations when the following conditions are met:
  • the transfer of an entire business undertaking;
  • the transfer of employees without a break in service tenure; and
  • a transfer to the acquirer on ‘no less favourable’ terms and conditions of service.

  Some courts have interpreted such transfers as being in the nature of a statutory transfer (since they meet all the conditions of this section). This is merely an enabling provision, and not obligatory in nature, with deals often not satisfying some or all of these conditions based on the commercial interests of the parties.

  Employee consultations

  • Are there any specific obligations to consult with employees during a transfer? There are no specific consultation requirements under Indian laws unless otherwise agreed with trade unions or employee representatives. However, it is good practice for employers to communicate with employees and provide them with relevant information about the transaction at an appropriate point in the timeline of the deal. Where employee consent is being taken, communication around the proposed transfer would typically be shared reasonably in advance of the anticipated deal closing.

  Modes of transfer and payments

  • What are the modes commonly used for moving employees during a business transfer?

  Organisations tend to take a consent-based route to transfer employees to avoid disputes, particularly where there is a desire to retain some flexibility on the terms of service on which the employee transfers occur. This is often done to provide flexibility to the acquiror to tailor the terms of employment of the target’s employees to their own existing practices.

  • Automatic transfer: This refers to a statutory transfer discussed above, where all conditions of Section 25FF of the ID Act are met. In such deals, parties could attempt to argue (based on certain court rulings) that 'workman' level employees could be transferred from one entity to another without requiring their prior consent. Importantly, the provisions of the ID Act are only applicable to employees who can be classified as a ‘workman’. A workman is a person who is usually involved in manual, skilled, unskilled, technical, operational, clerical, or supervisory work. This definition specifically excludes individuals who are: (i) employed mainly in a supervisory capacity and drawing wages exceeding INR 10,000 per month; or (ii) employed mainly in a managerial or administrative capacity. The question of whether ‘workman’ consent is necessary, even when all conditions of Section 25FF are met, has been debated in multiple judgments and judicial views are varied. Therefore, the automatic transfer approach is not often the default method for employee movement but may be the preferred strategy while dealing with difficult trade unions (assuming the conditions of Section 25FF can also be met). Consent would be necessary (i) where there is an attempt to make any changes to employees’ terms of service by the acquirer at the time of transfer, and also (ii) for the transfer of non-workman category employees (usually supervisory and managerial level employees). Practically, organisations tend to take a consent-based route to transfer employees to avoid disputes, particularly where there is a desire to retain some flexibility on the terms of service on which the employee transfers occur. This is often done to provide flexibility to the acquiror to tailor the terms of employment of the target’s employees to their own existing practices.
  • Tripartite transfer: This is a consent-based transfer where the seller, buyer and each employee sign a Tripartite Transfer Agreement (TTA). This approach is commonly adopted in cases where there is no transfer of an entire business undertaking (e.g., transfer of a limited business vertical, outsourcing arrangement, etc.) and where past service of the employees is recognised by the transferee entity. If this approach is adopted, it will not normally trigger any severance obligations on the transferor (since there is no break in service), and such obligations will stand transferred to and assumed by the transferee. Further, ‘as favourable’ or comparable terms of employment are typically (though not mandatorily) offered to incentivise the employees to accept the offer of employment, and to facilitate a smooth transfer of employees. Since this is a consent-based approach, parties sometimes adopt hybrid approaches for matters such as service continuity as well, in instances where tenure is recognised for some benefits but not all.
  • Separation and re-hire model: In this approach, the transferor terminates services of the impacted employees (or if the employees wish, they may voluntarily resign) and settles all their dues. Such employees would be free to take up an offer of employment from the transferee, which is often extended simultaneously. Such a structure creates a break in service tenure for the employees (which they may not necessarily find favourable), but it can sometimes help insulate the acquirer from past liabilities. Generally, this approach is adopted if there are several legacy benefits or liabilities that the transferee entity does not want to assume. However, it is uncommon in intra-group transfers, unless there are tax or regulatory reasons to do so, since the break in the service tenure may cause some employees to lose out on tenure-linked benefits like gratuity. In this model, the question of whether or not the acquirer wants to offer 'as favourable' or comparable terms of employment would be a matter of commercial construct.

  The TTA and separation and re-hire approaches offer both parties greater flexibility to structure the terms and conditions around employee movements, but there can be both human resource (HR) factors (such as employee retention) and certain legal factors (such as advance notification under Section 9A of the ID Act for some types of transactions, discussed later) based on which parties may normally want to ensure that employee terms and conditions are not detrimentally impacted.

  • retrenchment compensation for workman category staff,
  • leave encashment,
  • notice pay,
  • gratuity, and
  • pending salary and other contractual dues.

  If service continuity is maintained and acquired liabilities (gratuity, leave encashment, etc.) are transferred to the new employer, the obligation to pay out severance at the time of transfer can be avoided.

  Timeline and employer obligations

  • Is there a minimum time period prescribed for effecting transfers? How long does it usually take for employee transfers to be completed? No statutory time period has been prescribed for implementing employee transfers. In a consent-based approach, the TTA and/or offer of employment or employment contract from the transferee is shared sufficiently in advance, prior to the anticipated date of transfer or deal closure. Depending on the number of employees, it is generally advisable to factor in at least two-three weeks for this to give employees reasonable time to consider and accept the offer of employment to avoid subsequent disputes. The timelines could be shorter if there are no changes in terms of service. From an overall timing perspective, it is important to bear in mind that if certain benefits offered by the transferor are extended via special tax-exempt trust structures, then replicating similar structures at the transferee’s end could be a time-consuming exercise. The mechanics to transfer or replicate such benefits can take planning, and parties may need to assess how the affected employees can be compensated for such benefits if the transferee would not be extending the same.
  • Are there any external approvals or notification requirements related to employee transfers? No, there are no approval or notification requirements under employment laws in the context of transfer of employees, specifically. The transferor may need to notify a reduction in its headcount as part of routine reporting requirements. Further, new social security accounts would be set up for the transferred employees under the transferee and funds from the old accounts transferred to the new account, but these would all normally follow after the transfer. For any workman who is retrenched unilaterally on grounds of redundancy (if he refuses to transfer), notifications may need to be made in the prescribed form to jurisdictional labour authorities. There could also be post-facto intimation obligations under various labour statutes depending on any change in directors or managers or any person having control over the affairs of the company pursuant to the transfer. The timeframe for notifying authorities varies depending on location, statute and mode of termination or changes.
  • Are there any statutory requirements to offer employees certain level of benefits or preserve their terms following the business transfer? As discussed above, there is no legal obligation for the transferee to offer ‘as beneficial’ terms of service to transferring employees in a consent-based transfer. This may or may not be done based on various factors, including (i) the need for employee retention (for HR or tax reasons), and (ii) avoiding having to comply with Section 9A of the ID Act, in certain types of deals. Once the employees have been transferred, the transferee could potentially change the terms of employment to harmonise them with their own practices. Depending on what is being changed, these may require employee consent or advance notification to 'workman' as per law (typically 21-42 days based on location), before the terms can be modified.

  Employee liabilities and benefits

  • Would the transferee acquire employee-related liabilities at the time of transfer? How are employee liabilities handled in practice? Where the business is being transferred as a going concern, the transferee can be considered as its ‘successor-in-interest’ and may face liability for pre-transfer employee costs. Certain social security laws like the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the Employees State Insurance Act, 1948 expressly impose joint and several liability on the acquirer in cases of transfer of an establishment. It is common to contractually demarcate the pre-transfer and post-transfer liabilities between the transferor and transferee, respectively, and for the transferor to indemnify the transferee for any claims or liability that relate to the pre-transfer period. Where the transferee is agreeing to acquire the staff with service continuity, it is advisable to agree upfront as to how the associated liabilities towards accrued benefits at the transferor and other tenure-linked liabilities (such as future liability to pay retrenchment compensation) will be dealt with commercially. Where employees are being transferred without a break in service tenure, the transferee would agree to assume identified liabilities associated with the tenure of employment. In such cases, any accumulated amounts towards these tenure-linked liabilities would also typically transfer over to the transferee or be set-off from the deal consideration. For example:
    • Gratuity - If the transferor has a funded gratuity plan managed by a trust, tax considerations would apply on how to transfer the accumulated corpus to the transferee. Such a transfer of funds may require tax approvals and the setting up of a similar trust by the acquirer.
    • Superannuation - Similar considerations as gratuity could apply if the transferor operates a superannuation benefit. However, since this is not a statutory benefit, the acquirer could also examine the option of offering an alternate benefit (like National Pension Scheme coverage).
    • Leave encashment - The liability towards accumulated leave of the employees with the transferor would be assumed by the transferee to be encashed in the future. This benefit is not normally tenure linked in India, so often, parties also agree to the settlement of accumulated leave balances by the transferor.
    • Retrenchment compensation - The liability towards paying retrenchment compensation to workman-level employees in the future would be assumed by the transferee (should it retrench anyone) based on their cumulative service period.
    • PF is both employer and employee funded, and money is deposited with the government fund (Employees’ Provident Fund Organisation), unless the organisation has sought an exemption and established its own PF trust. Where PF is deposited with the government, no special steps are necessary in the event of employee transfer since the accumulated amounts are in the government established fund and remain accessible to the employee directly. Where there is an internal trust, the accumulated PF for the impacted employees would need to be transferred with due regulatory and tax approvals. This would either transfer to the acquirer's PF trust (if it also obtains an exemption and establishes its own trust) or to the government fund where the acquirer does not set up an internal PF trust. No payments will be made to the employees at this stage.
    • Gratuity liability can either be funded (i.e., where the transferor entity has set up an internal gratuity trust), or non-funded (i.e., where the transferor entity only makes provisions for the same in its books of account). Where employees are transferred without a break in service, the transferee would assume this gratuity liability (i.e., no payment will be made to the transferred employees at this stage). This would typically be set-off from the deal consideration or actually transferred to the transferee (where it is funded) with necessary regulatory and tax approvals. If employees are terminated and re-hired without past service credit, the transferor would settle or pay the gratuity for eligible employees.
    • Superannuation would normally be dealt with as per the terms of the superannuation plan or scheme. If the transferee does not have or does not want to set up a superannuation benefit, the existing superannuation benefit at the transferor would have to be settled as per the terms of the plan. If the intention is to transfer employees on ‘as favourable’ terms, the transferee may need to offer alternate financial compensation instead of the superannuation benefit.

    Key considerations for employers

    • Are there special considerations for outsourcing deals? While a transfer of a business undertaking would typically involve a transfer of all underlying employees, that may not always be the case in outsourcing deals, where the acquirer (service provider) may not want to hire all staff (or cherry pick staff) based on its commercial needs and/or not offer ‘as beneficial’ terms of service. In such a situation, an advance notification requirement under Section 9A of the ID Act (9A notice) could apply since such a transaction may be seen as rationalisation of operations that is likely to result in retrenchment of workmen and also potentially result in an adverse impact on pay and benefits. Failure to provide a 9A notice could result in claims from workmen that the outsourcing arrangement is illegal. To avoid the need for a 9A notice, parties would typically need to agree that all staff will be hired on terms that are not detrimental.
    • Are there any anti-discrimination laws that apply during a business transfer? Yes, anti-discrimination laws continue to apply even in such transactions. Employers must not discriminate against employees based on factors such as gender, caste, religion, disability, or any other protected characteristic. Additionally, women employees are protected from termination of employment while they are on maternity leave. If the affected employee is on maternity leave and opts out of the transfer, the employer may be able to terminate her employment once the leave ends or separate mutually while agreeing to pay for the balance maternity benefit. Further, employees receiving sickness benefits, maternity benefits or disablement benefits under the Employees State Insurance Act, 1948 are protected from dismissal during the period in which they are receiving that benefit.

    Where the business is being transferred as a going concern, the transferee can be considered as its ‘successor-in-interest’ and may face liability for pre-transfer employee costs. Hence, it is common to contractually demarcate the pre and post transfer liabilities between the transferor and transferee, respectively, and for the transferor to indemnify the transferee for any pre-transfer claims or liabilities.

    • Importance of due diligence: As an acquirer, it would be critical to conduct a thorough employment diligence to identify potential lapses in key laws which could create financial exposure for the acquirer (who may be treated as a ‘successor in interest’) and its management. The findings of the diligence would also feed into commercial negotiations, including identifying appropriate corrective measures as conditions precedent to the deal, potential purchase price adjustments (for issues with a large financial exposure), holdbacks and/or indemnities. Diligence findings would often also dictate whether employees ought to be transferred with or without a break in service and what changes or updates to their employment terms may be required – either at the time of the transfer or as part of a post-closing harmonisation exercise.
    • If the transferee is setting up operations or offices to accommodate the transferred employees, it would need to obtain local statutory registrations and permits under various employment and social security laws. Corporate resolutions may be required in connection with certain benefits like employee stock options, if any, depending on the manner in which they are handled as part of the transfer.
    • If the transferee is acquiring the transferor’s premises or factories, underlying labour registrations would either need to be surrendered by the transferor and re-applied by the acquiror or transferred to it, based on state-specific rules. The transfer of such operating permits would typically require advance planning and coordination between the parties to avoid disruptions in operations.
    • New Labour Codes have been passed by the Indian Parliament, consolidating and amalgamating various employment laws in India. These codes are yet to come into force, and the employment aspects set out here will need to be revisited as and when the new codes are enforced.

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