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M & A’s – Establishment’s responsibility in complying with Employment Legislations

Posted by: on 3 January 2019 in Amendments, Compliance, HR, Human Capital Management, Talent Management

This post is part of the Coffee Break Guide to Compliance by Anandan Subramaniam. Please subscribe to the blog updates if you’d like to be notified of these posts. Please comment below with your doubts and queries.

The Coffee Break Guide to Compliance – Vol. 25 {M & A’s – Establishment’s responsibility in complying with Employment Legislations}

M & A – it’s a routine endeavor in Indian business scenarios, whether in manufacturing or in Commercial establishments. In a common man language, it is called Mergers, De-mergers, Acquisitions, Takeovers, Amalgamations, Joint venture etc. But, in business terms it is a strategy for having a competitive advantage or for getting an enhancement in shareholder value or to increase market share or to increase revenue or a geographical diversification or a corporate synergy, and so on.

Not going into details of different types of mergers namely, Horizontal, Vertical, Conglomerate, Product extension, Market extension, etc., let us analyze what employer has to do after such transformation, in relation to employment legislation. During the initial phases of such transformation, the external or internal Corporate Legal team shall comply with regulations under Indian Companies Act, SEBI regulations, IT Act, etc. Once this activity is completed, entities need to comply with employment legislation. In case of transfer of ownership or change in the Management, both the transferor and transferee shall comply with specific labor legislation, including Industrial Disputes Act, 1961 (ID Act), which is the primary legislation which governs the working conditions of employees and their disputes with the employer.

Establishment Duties: Establishment (Transferor Company) which was acquired or taken-over or amalgamated with another entity need to comply with the following:

Notice to Employees: At least 21 days in advance to the change, give notice to all workman under Section 9A of Industrial Disputes Act.

Safeguarding the interest of Employees: By complying with section 25FF of ID Act,

  • Get consent from the employee to transfer to the new entity
  • Ensure the employment conditions – job responsibilities, working schedule, applicable leave, amenities, infrastructure, termination clause etc. are ‘not less favorable’ in furtherance to transfer to the new entity
  • Ensure the service of employees are not interrupted by the transfer of his/her employment to a new entity
  • The date of appointment with transferor entity be reckoned for all statutory purposes

Payment of Gratuity: Service continuity shall be safeguarded for the workman to get Payment of Gratuity.
“In the matter of Bombay Garage Ltd. v. Industrial Tribunal[(1953) 1 Lab LJ 14 (Bombay), the court held that an employer cannot deprive his employees of the benefits that have accrued to them by reason of past services merely by transferring his business to another person or to another limited company; for the work done by the employees is primarily is for the benefit of the concern although the owner also derives benefit therefrom; that, therefore, a new employer is bound to take into account the services rendered by them to their predecessor-in-title”

Social Security: Transferor shall ensure that the Social security benefits like PF, ESI and LWF are remitted to the last date of such transfer and ensure a smooth transfer of benefits.

  • Profession tax remittance is to be considered till the last date of such transfer

Statutory Bonus is settled till such date of transfer, to the applicable employees

Leave provisions: Accumulated annual leave as per the Factories Act / Shop and Establishment Act, is either encashed or carried forward to rolls of the new entity. Similarly any other leave viz. sick leave or casual leave is to be considered for the current year, as applicable.

Settlement to Employees who are not in favor of transfer in employment In the case of Sunil Kr. Ghosh & Ors vs K.Ram Chandran & Ors on 18 November 2011 the Honorable Supreme Court has stated that “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 case the workman is not in agreement to transfer, pay legitimate retrenchment compensation, for those who have rendered more than 1 year of continuous service, as per Section 25F of ID Act.
    • One month’s written notice specifying the reasons for such dismissal (retrenchment) or one month’s pay
    • The payment of compensation equivalent to 15 days’ average pay for every completed year of service
    • Notice in the prescribed manner is served on the appropriate Government
  • In case if it is mutually agreed through an offer letter or an appointment letter, the actual term of notice

Surrender of Labour and other registrations

  • Surrender the Labour Registration Certificate (Labour License) with Appropriate Authority
  • Surrender LWF registration Certificate, if applicable
  • Closure of Profession Tax Registration, if applicable
  • Surrender ESIC Main code and sub-codes, if any, after due process of separation of all employees
    • A copy of Agreement on M & A and a copy of cancellation of Labour license also may be required during such surrender of ESIC code/s
  • Surrender of PF code may be possible only if all such members are either transferred their accumulation or settled. Until such time Admin charges need to be paid every month, within due date.

PF Liability in case of Transfer establishment: As per Section 17B of The Employees Provident Funds and Miscellaneous Provisions Act, 1952, Where an employer, in relation to an establishment, transfers that establishment in whole or in part, by sale, gift, lease or license or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall jointly and severally be liable to pay the contribution and other sums due from the employer under any provision of this Act or the Scheme or the Pension Scheme or the Insurance Scheme, as the case may be, in respect of the period up to the date of such transfer. Provided that the liability of the transferee shall be limited to the value of the assets obtained by him by such transfer.

Notwithstanding with the said provision of EPF Act, the Honorable Supreme Court, in the case of McLeod Russell India Limited vs. Regional Provident Fund Commissioner, has observed that since EPF Act is a beneficial legislation it needs to be construed in the best interest of the employees and held that “inter se covenants between the two entities would not insulate the new employer from the rigors of damages imposed by the EPF Act”. It also clarified that even though the default in the payment of dues was made by the transferor entity, the transferee entity shall remain responsible of the liabilities even if such liabilities are specifically assigned to the transferor by entering into a Memorandum of Understanding.

This specific judgment of the Honorable Supreme Court highlights the due diligence to be conducted by both transferor & transferee to clearly determine the liabilities of any monies pertaining to the compensation of the employees.

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