Opinion divided on significance of employee consent ruling

Author: | Published: 1 Aug 2012
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On November 18 2011, the Indian Supreme Court pronounced its judgment in a dispute between a group of workers at Philips India and the management of Kitchen Appliances India. The Court's judgment was a demand for employee consent in the transfer of an undertaking. While some legal commentators believe this will likely have a significant impact on all future mergers and acquisitions activity, not everyone agrees.

The Supreme Court held that workers could not be compelled to join a transferee company against their wish. If a worker did not agree to a new job description assigned by a takeover company, that company could not force that worker to transfer their job role.

The case was filed by Sunil Kr Ghosh and others at Philips India against Ram Chandran and others at Kitchen Appliances. The workers at the Philips India consumer electronics factory at Salt Lake City, Kolkata, were informed that ownership of the factory was to be transferred to Kitchen Appliances India. The workers refused to give their consent to the transfer of ownership and to work under Kitchen Appliances.

India does not have a law that explicitly deals with the transfer of employment in relation to a business restructuring. The only related provision is Section 25FF of the Industrial Dispute Act, 1947. The provision states that the transferring company will not be required to pay retrenchment compensation to its workers if the following conditions are met: (i) the service of workers must not be interrupted by the business transfer; (ii) the terms and conditions of service after the transfer should be no less favourable than before; and (iii) the transferee must undertake to pay compensation to such workers (in the event of retrenchment) on the basis that the service has been continuous and uninterrupted.

If these conditions are not met, employees will be entitled to retrenchment benefits i.e. 30 days' notice or payment in lieu thereof and compensation equal to 15 days average wages for every completed year of service. Importantly, the provision did not explicitly state the power and the rights of employees in ownership transfers.

The Supreme Court has clarified the provision of the Act by explicitly requiring employee consent to the transfer of their employment in cases of restructurings. Those workers who do not give consent to work under new management are now entitled to retirement/ retrenchment compensation, as per the Industrial Dispute Act 1947. The employer is now required to compensate employees if they do not agree to a new job role being assigned by the company. It is also pronounced that the terms and conditions of the new job role being offered cannot be worse than the previous job role of the employee.

Trilegal partner Ajay Raghavan says that the Court ruling has implications for future mergers and acquisitions as the requirement for labour consent in restructurings is now clearly stated. "For foreign investors, the new Supreme Court pronouncement is something to be aware of as merging activities might be delayed or even stopped if consent cannot be obtained from the workers," he says. "Especially in India, employers are very aware of the reputation of a company. The relationship between the company and its employees is taken very seriously. If a company with a bad employer reputation is involved in a takeover, employees are often very reluctant to join the new company. The Supreme Court judgment has increased the power and say of employees in the restructuring process, and is something that investors will need to be cautious about."

But Rajiv Bakshi, executive vice-president of legal at Godrej Consumer Product, says. "The ruling states that employees are requested to either accept a new job role with the same terms and conditions or take the retirement compensation and leave the job role. The compensation rate demanded by the Court is within reason. Therefore, the procedures for obtaining consent are purely administrative. The most important step is to give a choice to the employee to stay in the company with conditions not worse off than before. As long as the legal procedures are complied with, it should not cause a serious delay in restructuring activities."

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