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- Introduction: Labour Law as a Transaction Risk in Modern M&A
Mergers and acquisitions (M&A) are among the most effective tools for business expansion, market consolidation and operational optimisation. In India, however, the success of an M&A transaction is no longer driven only by valuation, tax structuring or regulatory approvals. Labour and employment issues have emerged as a central transaction risk, particularly after the enactment of India's New Labour Codes.
Employees are not merely operational resources; they are legal stakeholders whose rights, continuity of service, accrued benefits and consent can directly impact deal timelines, integration strategy and post-transaction stability. With the consolidation of India's labour laws into four comprehensive Labour Codes, acquirers and investors must reassess how workforce transitions are structured, documented and implemented in M&A transactions.
This article examines key labour and employment issues in M&A transactions in India, analysing their treatment across different transaction structures and evaluating the impact of the Code on Wages, Industrial Relations Code, Code on Social Security and Occupational Safety, Health and Working Conditions Code on workforce restructuring post-acquisition.
- Understanding M&A Structures and Their Employment Impact
The labour law implications of an M&A transaction depend fundamentally on the transaction structure adopted. While Indian corporate and tax laws recognise different forms of M&A, labour legislation focuses primarily on whether there is a change in the employer and whether employee service continuity is preserved.
2.1 Mergers and Schemes of Arrangement
A merger typically involves the consolidation of two or more entities into a single surviving entity, with the transferor entities being dissolved. Mergers are implemented through schemes of arrangement approved by the National Company Law Tribunal (NCLT) or, in certain cases, the Regional Director of the Ministry of Corporate Affairs.
From an employment law perspective, merger schemes must expressly address employee transition. Courts and regulators expect that the scheme clarifies whether employees of the transferor entities will become employees of the resulting entity on the same or better terms, with continuity of service and protection of accrued benefits. Any ambiguity in the scheme can result in objections, litigation or labour unrest post-merger.
2.2 Share Purchase Acquisitions
In a share purchase acquisition, the buyer acquires shares of the target company, but the employing entity remains unchanged. Since there is no change in the employer, labour law consequences are comparatively limited.
Employees continue to be employed by the same legal entity, and provisions relating to transfer of undertakings under labour laws generally do not apply. However, post-acquisition restructuring, changes in management control, and harmonisation of employment policies can still trigger labour disputes if not carefully managed.
2.3 Slump Sale Acquisitions
A slump sale involves the transfer of an entire business undertaking as a going concern, including assets, liabilities and employees, without cherry-picking. In such transactions, employees are transferred with continuity of service, and the transferee assumes all employment-related obligations, including gratuity, leave, pensions and other accrued benefits.
Slump sales attract heightened labour law scrutiny because they involve a direct change of employer. Compliance with industrial relations legislation, consent requirements and severance protections becomes critical.
2.4 Asset Purchase Acquisitions
In asset purchase transactions, the buyer acquires selected assets and may choose whether or not to hire employees of the seller. Employment transition is purely contractual, and employees typically resign from the seller and are re-employed by the buyer.
This structure provides flexibility but also exposes the parties to risks of wrongful termination claims, retrenchment compensation obligations and misclassification disputes if statutory safeguards are ignored.
- Classification of Employees: Workmen and Non-Workmen
Labour law protection in M&A transactions depends significantly on whether employees qualify as "workmen" or "non-workmen." This classification continues under the Industrial Relations Code, 2020, which largely retains the principles of the Industrial Disputes Act, 1947.
3.1 Workmen Under Indian Labour Law
Workmen are employees engaged in manual, skilled, technical, operational or clerical work, excluding those employed in managerial or administrative roles or in supervisory roles earning above the prescribed threshold.
In modern organisations, particularly in IT, SaaS and technology-driven businesses, determining whether white-collar employees qualify as workmen remains contentious. Courts have consistently held that the dominant nature of duties, rather than job titles, determines workman status. This issue frequently arises in M&A due diligence and post-transaction disputes.
3.2 Non-Workmen Employees
Employees performing managerial, administrative or high-level supervisory functions fall outside the statutory definition of workmen. Their rights during M&A transactions are governed primarily by employment contracts rather than labour statutes.
Despite the absence of statutory protections equivalent to workmen, prudent acquirers often extend similar benefits to non-workmen to ensure workforce stability and avoid reputational and integration risks.
- Protection of Workmen in Transfer of Undertakings
Indian labour law provides specific safeguards for workmen in cases involving transfer of ownership or management of an undertaking.
Where an undertaking is transferred, every workman with at least one year of continuous service is entitled to notice and retrenchment compensation equivalent to fifteen days' average pay for every completed year of service, unless continuity of employment is preserved on the same or better terms and the transferee assumes all accrued liabilities.
These protections apply to mergers, slump sales and asset transfers involving business undertakings. They do not apply to pure share acquisitions where the employer remains unchanged.
- Consent of Employees: Judicial Evolution
A landmark development in Indian labour jurisprudence is the Supreme Court's decision in Sunil Kr Ghosh v. K Ram Chandran, which emphasised that workmen cannot be compelled to work under new management without consent.
Although the statute does not expressly mandate consent, the Court introduced principles of natural justice, holding that unwilling workmen are entitled to severance compensation. This decision has fundamentally altered how employee transfers are managed in M&A transactions.
In practice, employers now seek written consent from workmen prior to effecting transfers pursuant to mergers or business acquisitions. While the ruling directly concerned workmen, risk-averse employers increasingly extend consent mechanisms to non-workmen as well.
- Termination, Retrenchment and Approval Requirements
Post-transaction restructuring often involves redundancies, role rationalisation or closure of business verticals. Such actions can trigger statutory approval requirements, especially in industrial establishments.
Under the Industrial Relations Code, establishments employing 300 or more workers may require prior government approval for retrenchment, lay-offs or closure, subject to state-specific rules. Although the threshold has increased from the earlier limit of 100 workers, compliance remains critical in large manufacturing and industrial M&A transactions.
Failure to obtain approvals can render terminations illegal and expose acquirers to reinstatement orders, back wages and penalties.
- Labour and Employment Due Diligence in M&A Transactions
Human resource due diligence has become a core component of M&A risk assessment. Buyers must evaluate not only legal compliance but also legacy workforce liabilities that may transfer post-transaction.
7.1 Trade Unions and Collective Bargaining
The presence of trade unions can materially affect deal feasibility. Collective bargaining agreements, union recognition disputes and political affiliations of unions must be carefully examined to assess resistance risks and negotiation strategies.
7.2 Statutory Social Security Compliance
Compliance with provident fund, employee state insurance and gratuity obligations is critical. Indian courts have consistently held transferees liable for historical defaults, regardless of contractual indemnities agreed between parties.
Gratuity liabilities, in particular, require careful provisioning. In several states, compulsory gratuity insurance is mandated, and failure to maintain adequate reserves can result in significant post-closing exposure.
7.3 Contractual Benefits and Executive Compensation
Employment contracts often provide benefits exceeding statutory minimums, including bonuses, severance pay, stock options and long-term incentives. These obligations may crystallise upon a change in control and must be factored into transaction valuation.
7.4 Employee Stock Options and Foreign Exchange Regulations
ESOPs granted by foreign parent companies to Indian employees raise additional complexities under foreign exchange laws. Cancellation, buyback or rollover of options in M&A transactions must comply with FEMA regulations and pricing norms.
7.5 Consultants, Contractors and Misclassification Risks
Long-term engagement of consultants performing employee-like functions can trigger misclassification claims. Buyers must assess whether independent contractors risk being recharacterised as employees, leading to retroactive liabilities.
7.6 Litigation, Claims and Industrial Disputes
Pending or threatened employment litigation, including wrongful termination claims, union disputes and wage claims, can materially affect transaction risk. Comprehensive disclosure and indemnity mechanisms are essential.
- Employment-Related Provisions in Transaction Documents
M&A agreements must comprehensively address labour risks. Representations, warranties and indemnities relating to employment law compliance, employee data disclosure, pending disputes and statutory defaults are critical for risk allocation.
Clear provisions on employee transition, severance costs, benefit continuity and post-closing integration responsibilities reduce ambiguity and potential disputes.
- Integration of Employment Policies Post-Transaction
Post-merger integration is often where labour disputes arise. Harmonising policies while ensuring that terms and conditions are not worsened for transferred employees requires careful planning.
Employers must ensure compliance with laws relating to sexual harassment prevention, maternity benefits, workplace safety, ethical conduct and anti-corruption. Absence of robust policies can expose acquirers to regulatory and reputational risks.
- Impact of the New Labour Codes on M&A Transactions
India's four Labour Codes aim to simplify and consolidate labour regulation while maintaining substantive protections.
The Code on Wages standardises wage definitions and bonus provisions, impacting compensation structuring post-acquisition. The Industrial Relations Code governs transfers, retrenchment and industrial disputes, increasing thresholds for government approvals but retaining core protections for workers. The Code on Social Security expands coverage to gig and platform workers, potentially affecting workforce classifications in digital economy M&A transactions. The Occupational Safety, Health and Working Conditions Code harmonises compliance across establishments.
While the Labour Codes do not radically alter M&A labour law principles, they increase compliance predictability and elevate workforce due diligence as a strategic necessity.
- Conclusion: Workforce Strategy as a Deal Imperative
Labour and employment issues are no longer peripheral considerations in Indian M&A transactions. With evolving jurisprudence, enhanced worker protections and the consolidation of labour laws, workforce strategy has become a deal-critical component.
Buyers, sellers and investors must proactively address employee classification, consent, continuity of service, statutory benefits and integration planning. A failure to do so can derail transactions, inflate costs and expose parties to prolonged litigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
