Employee Transfers at the time of Mergers and Acquisitions

Corporate expansion through various modes of transactions like, mergers, acquisitions, leveraged buyouts, hostile takeovers, has become the most popular means of restructuring and acquiring corporate assets including the human resources and intellectual property. Other than the commercial aspects of any transaction, what play the next big role is the human resources and employment related consequences of such transactions. These are important determinants of the eventual corporate landscape, and pose potentially significant liabilities for both buyers and the seller.

Transfer of an undertaking: International Perspective

The term ‘transfer of undertaking’ has a wide connotation. The EU Council Directive[1] has defined it in a precise manner by stating that it is “a transfer of an economic entity which retains its identity, meaning an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary”.

In this regard, it is important to know the nuances between the ‘successorship doctrine’ and the ‘doctrine of a continuing employer’. Successorship doctrine is ordinarily applied to determine obligations when one corporate entity is replaced by another, i.e. when there has been a complete change of ownership.  However, the concept of “successorship,” unlike that of the single employer, contemplates “the substitution of one employer for another, where the predecessor employer either terminates its existence or otherwise ceases to have any relationship to the ongoing operations of the successor employer.”[2] In contrast to a stock ‘doctrine of a continuing employer’, where a continuing employer remains bound by its collective bargaining agreement, a successor is not bound by the substantive terms of its predecessor’s labour/employment agreement.

Mostly in Mergers, cases where there is a sale or transfer of stock and no change in corporate form, “successorship doctrine” gives way to the doctrine of a “continuing employer.” For example, in EPE, Inc. vs. NLRB^[3], the court enforced the Board’s order holding that where there was a 100 percent stock sale, no termination of operations or employees, and no severance payments made, “there was effectively no change of corporate employers” even though new equipment and product lines were added. The continuing employer is obliged to adopt the substantive provisions of the collective bargaining agreement, as well as to recognize and bargain with the incumbent union. However, in Asset Purchase, the purchaser of assets, although not bound to the substantive provisions of the collective bargaining agreement, but may incur other obligations as a successor employer.

POSITION IN INDIA

Who is Workman?

The Industrial Disputes Act, 1947 is the governing legislation that provides the machinery and procedure for the amicable settlement of conflicts between employer and employee. To determine whether or not an employee is a ‘workman’ within the meaning of this Act has always been a subject of constant controversy before the Courts in India. The reason being, when an employee is involved in a dispute with the employer or in a situation where his employment is terminated and such individual wants to avail the protective umbrella of the Act, the employer always contests by raising an objection that the employee is not a ‘workman’ within the definition of the Act. At the time of any corporate deal or restructuring, the employees of a business entity do not automatically get transferred to the purchasing company and thus their grievances can be addressed only if they can be classified as a ‘workman’ before the eyes of law. As per Section 2(s) of the Act, a “workman” means any person (even including an apprentice) who is employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, regardless of whether the terms of employment are express or implied. For the purpose of any industrial dispute, the definition also includes any person who may be dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute. It is important to note that this definition of “workman” does not include a person who may be employed primarily in a managerial or administrative capacity.

Compensation to Workman at the time of Transfer of Undertaking

Section 25FF of the Industrial Disputes Act, 1947 provides for Compensation to workmen in case of transfer of undertakings. Thus, for an employee to get compensation under Section 25FF, three conditions need to be satisfied.

First, the workman’s term of service should be uninterrupted. Second, the terms and conditions of service stipulated by transferee should be at par with the transferor. Third, the new employer should undertake to pay retrenchment compensation to the workmen on the basic premise that there was continuous service and the continuity was not hampered due to transfer of undertaking. Such provision has given rise to litigation wherein many conflicting judgments have been passed.

Transfer of Undertaking: Procedure for Workman

Seller in an Asset Purchase has an obligation to provide termination notice and compensation to workmen if the prospective Buyer refuses to employ them and Seller does not wish to keep the employees working for a different division. If the Buyer voluntarily decides to employ these employees, it would be obliged to acknowledge their seniority for all purposes (including a future termination) and to provide the same terms and conditions of employment which they had with seller. A possible procedure for this would be:

Seller holds informal discussions with employees, either collectively or individually, and informs them that they have an opportunity to join Buyer. Buyer may join these discussions to address the concerns the affected employees may have as a result of the transfer. Employees are asked to resign from their current employment and, simultaneously with their resignation, an offer letter would be issued to them by the Buyer. The offer letter will acknowledge seniority for all purposes and provide the same terms and conditions of employment.

On the date of Closing, Seller accepts the resignations, waives employees’ notice, and makes any outstanding payments due to the employees. The new employment agreements are executed reiterating the terms of the offer letter. It is also advisable to have the employees execute a “no claim letter” (i.e., waiver and release of future claims) in favour of the Seller.

Transfer of Undertaking: Procedure for Non-workman

The rights for non-workmen in case of a transfer of an undertaking are governed by the terms and conditions of their employment contracts.

If the Buyer refuses to employ them and the Seller does not wish to keep the employees, Seller will only have to provide them with their contractual termination entitlements.

However, if the Buyer voluntarily decides to employ these employees, the employment agreements must be terminated and the selected employees hired by the Buyer, for which a procedure very similar to the one described above for workmen can be followed (unless special contractual provisions apply). The main difference would be that the offer letter does not have to acknowledge seniority or to provide the same terms and conditions, although it is advisable to do so to ensure that the employees accept the offer.

Continuity of Service

Most employees are entitled to earn such rights as vacations, pregnancy and parental leaves, termination and severance pay. However, they are not eligible to receive them until they have worked for an employer for a certain minimum time, which varies according to each kind of right. The continuity of employment provisions provide that a person’s length of employment with the Seller of a business is attributed, or “flows through” to the purchaser of the business. This means that an employee’s entitlements to rights that are based on length of employment are unchanged, despite the sale of the business or the change in building service providers.

When a person’s length of employment is attributed to a new employer, the new employer has to recognize the time the person worked for the previous employer. This “earned” time must be credited toward any rights the employee has that are based on his or her length of employment.

Seller has to compensate the workmen if they are not employed by the Buyer or even when the Buyer does not allocate any work to them in another division. If the Buyer employs such employees on his own volition then such Buyer has to take into the account the seniority status enjoyed by the employee in the transferor.[4]

In majority number of cases where unions are party to an agreement with the employers, for any corporate decision that has impact on workers’ rights and obligation, then such union representatives have to be intimated about the same and they should be consulted as well. The transfer of business does not incorporate transfer of employees to the transferee company. Employers can retain the employees or terminate their contracts on giving notice, depending on the provisions of applicable laws and their employment contract.

Also, if the terms and conditions that govern the transferee company are more attuned to the employees’ interests than the transferor company, then in such a case protective termination provisions will not be invoked. The Industrial Disputes Act, 1947 provides for retrenchment compensation in cases of transfer or closure of undertaking.

Retrenchment Compensation

As regards for retrenchment compensation, the position which held the ground till Sunil Kr. Ghosh vs. K. Ram Chandran[5] decided in November 2011 was that, in most of the mergers and acquisitions where there was a change of ownership or management of an industrial undertaking on a going concern basis and there was no variation in the terms of employment of the workmen as part of the transaction, there was no requirement to obtain consent of workmen or to pay retrenchment compensation to any workman who did not wish to continue working under the new management. With Sunil Kr. Ghosh Case (supra) the position changed and now no workmen can be forced to work under a new management even when the terms of employment under the new management are no less favourable as those applicable prior to the transfer. The Apex Court in this case held: “It is settled law that without consent, workmen cannot be forced to work under different management and in that event, those workmen are entitled to retirement / retrenchment compensation in terms of the Act. In view of the same, we are of the view that the workmen are entitled to the benefit of such direction and it is the obligation on the part of the Management- Philips India Limited, to comply with the same.” This effect of this judgment is that, contrary to the judgments given by this Court earlier, the present case makes it mandatory for the Acquirers and Sellers in any merger or acquisition involving a change in management or ownership of an undertaking to take prior consent from workmen. In case such workman does not consent to such transfer, they will be entitled to retrenchment compensation in terms of Section 25F (Conditions precedent to retrenchment of workmen) of the Act. Section 25F of the Act provides for the amount of retrenchment compensation to be paid at the time of retrenchment. The compensation should be equivalent to fifteen days’ average pay of the workman for every completed year of continuous service or any part thereof in excess of six months.

Legitimate Expectation of the Employees

The employees will have a legitimate expectation that the management will uphold their right and ensure they are benefitted during the transfer. In Ram Pravesh Singh and Ors. vs. State of Bihar and Ors.[6] this aspect of legitimate expectation was elaborately discussed. In the case the employees contended that their legitimate expectations that they would be employed in the firm after the transfer arose due to the following reasons:

1. A similar situation in the past where all private companies were taken over and their employees were absorbed;
2. Whenever the undertaking of any company or institution was taken over by any statutory body or corporation like the current situation, the services of employees of such undertaking are also normally taken over;
3. When an ‘undertaking’ is purchased, in the absence of an intention to the contrary, all the assets and liabilities, as also the services of all employees are transferred to the purchaser and therefore the Board cannot refuse to absorb them
4. All the employees of the society have crossed the maximum age limit for seeking fresh employment and if they were not absorbed by the Board, they will be deprived of their livelihood.
5. When the undertakings of such instrumentality of the state was taken over by another instrumentality of the State, ‘fairness in action’ which is one of the hallmarks of a ‘State’ (Article 12 of the Constitution of India) requires that the rights of the employees are protected by providing for their absorption in an appropriate manner.

The court thus held that, a person can be said to have a ‘legitimate expectation’ of a particular treatment, if any representation or promise is made by an authority, either expressly or impliedly, or if the regular and consistent past practice of the authority gives room for such expectation in the normal course. Hence where this legitimate expectation persists there is a need to meet such expectations and give effect to the rights of the employees.

Procedure for Transfer of Provident Fund

A resigned employee who joins another company is left with an option of transferring the PF monies from his previous PF account to the current PF account, by filling the Form 13.

When an employee joins new company and he wishes to transfer his previous company provident fund amount, he should inform the HR department or Accounts department of the new company. The employer will issue Form 13, in which the member has to fill the details of previous company like – name, address, provident fund account number and address of the provident fund office where the account was held. It is to be noted that the signature of the previous employer is not required on Form 13. Once he/she fills the required details and submit it to the current employer, the current employer will forward it to the provident fund office for transferring process. The time taken for transferring the fund from one account to other account normally takes about 40 days from date of submission.

Problem during Transfer of Monies

In the case of transfer and when the previous employer is an exempted establishment (which means, having its own PF trust), the procedures requires that the current employer should forward the transfer form, i.e. Form 13 to the previous employer who will process a cheque (after validation) in favour of PF office of the current employer and it will be sent to the current employer. It becomes the responsibility of the current employer to submit the cheque along with a request letter to the PF office for transferring the monies. Here, the normal problems that might occur are:

• Previous employer might have changed their address;
• Documents lost in transit / do not reach the concerned department;
• Delay in processing the application for reasons like tedious internal processing procedures, processing person is on vacation / busy on some other assignments, signatory not available etc.

Conclusion

Labor relations breed in an atmosphere charged with the acute awareness that today’s company may not survive tomorrow’s hostile takeover or leveraged buyout. As a result, the security once enjoyed by organized employees has been significantly eroded, and the relationship between employers and employees reflects the sometimes invigorating, sometimes threatening fluctuations of the current corporate marketplace. It is rightly said that along with rights, responsibilities operate hence, if employees are entrusted with a lot of responsibilities at their workplace, its important that their rights are enforced especially during transfers.

Author: Sushmita Ravi    |    Editor: Vivek Verma    |    Image from here

[1] 2001/23/EC (the revised  Transfer of Undertakings Directive)

[2] TKB Int’l Corp., 240 N.L.R.B. at 1083 n. 4

[3] 845 F2d 483 (4th Cir 1988)

[4] S.D. Puri and Sandeep Puri, Treatise on Industrial Disputes Act, 1967, (Snowhite Publications, 2009)

[5] 2011(13)SCALE23

[6] Ram Pravesh Singh and Ors. Vs: State of Bihar and Ors [2007(113)FLR639]