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The consolidation of 29 labour laws into 4 labour codes marks a paradigm shift for companies, especially those currently involved in corporate transactions.
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The consolidation of 29 labour laws into 4 labour codes marks a
paradigm shift for companies, especially those currently involved
in corporate transactions. The consolidation now requires parties
to undertake a rigorous reassessment of traditional due diligence
and integration strategies. As the new framework introduces
significant changes that directly influence deal valuation and
post-closing liabilities, parties should focus on labour due
diligence to precisely assess the potential financial impact of
transactions.
This guide outlines the essential steps and considerations that
businesses should implement to navigate labour code compliance
during an M&A process:
Step
Actions
Evaluation Focus
Expected Outcome
Step 1
Conduct Comprehensive Labour
Diligence
Review the existing workforce classification.
Audit existing wage structure against the new wage definition
under the Code on Wages, 2019.
Identify legacy non-compliance such as statutory bonus
calculations.
Assess engagement of gig workers for social security
applicability.
Evaluate health and safety related infrastructure currently
provided to employees.
Review employment documentation, such as employment agreement
and employee handbooks
The reviews and audits should give the acquirer full visibility
into legacy liabilities and allow the acquirer to quantify risk for
purchase price adjustments (if possible) and indemnity
baskets.
Step 2
Model Cost Impacts of Key Changes
Recompute the CTC for employees considering the takeaway and
income tax implication.
Quantify re-skilling fund contributions for retrenchment (if
any).
The focus of Step 2 is to develop financial models reflecting
code-compliant cost structures.
Step 3
Determine Deal Structure
Analyze Step 1 diligence findings against Step 2 cost models to
evaluate deal structures.
Assess employee absorption mechanics such as transfer of
undertaking,
Determine liability allocation by creating carve-outs for labour
non0compliances and determining escrow sizing.
Consider tax related implications, regulatory approvals (if any)
and workforce continuity.
The focus of Step 3 is to identify a deal structure that
minimizes labour code related risks and optimizes financial and
operational outcomes.
Step 4
Reevaluate Boiler Plate Transaction
Documents
Draft representations and warranties that align with the new
mandates.
Require gap analysis report covering the differences in existing
structure vs new mandate.
Re-evaluate boilerplate conditions precedent and conditions
subsequent.
Include acquirer's audit rights,
The focus of Step 4 is to include deal protections against
unresolved non-compliances and potential gaps, thereby limiting the
liabilities.
Step 5
Post-Closing Compliance Roadmap
Update payroll systems to embed new wage related
mandates.
Update employment documentation to reflect the requirements
under the labour codes.
Conduct comprehensive training for huma resources and management
personnel to align with the labour codes.
The focus of Step 5 is to ensure full operational compliance and
inspection ready systems.
Step 6
Monitor Developments and Report Long-Term
Compliance
Track State-specific rules and implement any new
requirements.
Schedule regular audits and monitor enforcement
trends.
The focus of Step 6 is to ensure an embedded compliance
framework and enhanced position for future transactions.
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.
