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Rights of Employees in Case of a Transfer of Undertaking in India

The ID Act, mainly determines transfer of undertakings in India. The workmen are protected in the event of the business transfers but non-workmen cannot have the same remedy where the undertaking of a business or business in itself is getting transferred.

1. Employees’ Rights

Under the section 25FF ID Act, compensation has to be paid to workmen in case of transfer of undertakings. The transfer of undertaking can either be by an agreement or by operation of law between the old employers and the new employers and in either case, every workman who has been in continuous service for not less than 1 (one) year in that undertaking immediately before such transfer, shall be entitled to notice and compensation in accordance with the provisions of the ID Act, as if the workman had been retrenched. However, Section 25 FF of the ID Act, shall not apply to workmen, if:

  • The service of the workmen has not been interrupted by such transfer;
  • The terms and conditions of service applicable to the workmen after such transfer are not in any way less favourable to the workmen than those applicable to them immediately before the transfer; and
  • The new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workmen, in the event of their retrenchment, compensation on the basis that their service has been continuous and has not been interrupted by the transfer.

Section 25F of ID Act, elaborates that in the case of transfer of undertaking, workmen who have been in continuous service for not less than 1 (one) year under an employer shall not be retrenched by the new employer until;

  • The workmen have been given 1 (one) month notice in writing indicating the reasons for retrenchment or the workmen have been paid in lieu of such notice, wages for the period of the notice;
  • The workmen have been paid, at the time of retrenchment, compensation which shall be equivalent to 15 (fifteen) days’ average pay for every completed year of continuous service or any part thereof in excess of 6 (six) months; and
  • Notice in the prescribed manner is served on the appropriate Government or such authority as may be specified by the appropriate Government. These benefits are payable to the employees in addition to the normal terminal benefits payable by the employer such as gratuity, provident fund, etc.

2. Requirements for Predecessor and Successor Parties

When the services of an employee are “interrupted” due to transfer of an undertaking, Section 25 FF of the ID Act, provides that notice and compensation by the old employer has to be provided to the employee in accordance with Section 25F of the ID Act, since this condition qualifies to be a retrenchment. However, in case of “uninterrupted” services of the employee during the transfer of undertaking, if the conditions of the provisos under Section 25FF are met, the liabilities of salary and post-retirement benefits which the employees were earlier entitled to under the employment of the old employer, are transferred in favour of the new employer. Further, Section 25B of the ID Act, provides for the definition of continuous service which is applicable to section 25FF of the ID Act. In terms of Section 25B of the ID Act, a workman shall be said to be in continuous service for a period if he is, for that period, in uninterrupted service, including service which may be interrupted on account of sickness or authorized leave or an accident or a strike which is not illegal, or a lock- out or a cessation of work which is not due to any fault on the part of the workman.

The Supreme Court has held that the proviso to section 25FF of the ID Act, provides that payment of compensation on the transfer of an undertaking will not be applicable where employment has not been interrupted, if the terms and conditions of service are as favorable as they were before such transfer, and the acquirer is committed to pay the employees their dues as if their employment had been constant and uninterrupted by the transfer.

Given the above, the Company has to give notice and pay adequate compensation if the employment of the employees of the department is interrupted while transfer of undertaking.

The successive employer shall have to bear the liabilities of salary and post-retirement benefits which the employees of the company were earlier entitled to when the employment of the employees of departments are “uninterrupted”. The following provide the liabilities of the successive employer:

  • The successive employer may have to pay gratuity to the employees in accordance with PGA Act, if the employees have completed five years of continuous service, which includes the number of years served by the employees under the company.
  • When the terms and conditions of service applicable to the employees are less favorable than those, which were applicable immediately before the transfer of an undertaking, Section 25 FF of ID Act, provides that notice and compensation by the old employer has to be provided to the employee in accordance with Section 25 F of the ID Act, since this condition qualifies to be a retrenchment.
  • If the services of employees are interrupted or the terms of employment are changed during the transfer of undertaking, it may become a potential ground for dispute, exposing the company to litigation.
For more information on these articles or any other issues involving labour and employment matters in India, please contact Avik Biswas, Partner at IndusLaw (www.induslaw.com) at avik.biswas@induslaw.com
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