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
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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