Reorganisation Conundrums: Navigating Labour Laws in Post-Mergers And acquisitions

MUMBAI, INDIA - In the heat of a re organisation transaction, employers often overlook the employment status of their workforce. Companies are faced with the daunting task of deciphering labour laws applicable to employees impacted by the proposed change.

One crucial aspect is to classify employees under the Industrial Disputes Act, 1947 (ID act), as workmen and non-workmen. Typically, white-collar employees fall outside the ID act's purview and are governed by state-specific Shops and Establishments Acts. A detailed comprehension of these laws is indispensable for employers to prevent potential lawsuits.

Section 25FF of the ID act offers specific protection to workers with continuous service exceeding a year in the event of ownership or management changes, entitling them to compensation similar to retrenchment under section 25F of the ID act.

However, a recent Supreme Court decision in Sunil Kr Ghosh and Ors v K Ram Chandran clarifies that workmen cannot be compelled to join a new employer without their specific consent. To mitigate potential disputes arising from this interpretation, employers are advised to have documented evidence of employee consent prior to the transfer process.

States such as Andhra Pradesh and Telangana impose obligations similar to the ID act for non-workmen employees under their Shops Acts, with provisions for terminated compensation in case of a change in employer. Notable caveats exist; exceptions under sections 25FF(2)(a) of the ID Act and Shops Act permit termination without cause.

Employers navigating statutory compliances should be aware that Section 25F of the ID act requires payment of retrenchment compensation, adherence to the 'last in-first out' principle, and issuing a notice to labour authorities. Similarly, state-specific shops acts may only allow terminations for valid causes, advising them to consider robust settlement agreements with affected employees.

For companies undergoing reorganisation, paying attention to statutory benefits, such as provident fund, gratuity, and leave encashment, is imperative. Additionally, contractual benefits like discretionary bonuses, options, and incentives should be paid out or contributions made by the transferor entity as per agreed-upon terms.

A robust understanding of post-merger labour laws necessitates consultation with lawyers to ensure compliance and prevent potential disputes arising from unintended consequences of reorganisation transactions.

(Written by: Agrima Awasthi & Diksha Singh, Associates at Wadhwa Law Offices)