Transfer of undertakings in India

Employees’ Rights in Case of a Transfer of Undertaking

There are specific provisions under the IR Code that protect ‘workers’ in cases of transfer of business undertakings. These however do not extend to employees that do not qualify as workers; thus, in case of such employees, the terms of the employment contract and/or the internal policies of the company would have to be examined.

In terms of Section 73 of the IR Code, where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, every worker who has been in continuous service with that undertaking for not less than 1 year, would be entitled to 1 month’s notice or that under their employment contract (whichever is higher), or payment in lieu thereof, and to compensation calculated at the rate of 15 days’ average pay for every completed year of service or part thereof in excess of 6 months.

However, Section 73 of the IR Code, would not apply to workers if:

a. the service of the workers has not been interrupted by such transfer;

b. the terms and conditions of service applicable to the workers after the transfer are not in any way less ‘favourable’ than those applicable to them immediately before the transfer; and

c. the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workers, in the event of their retrenchment, compensation on the basis that their service has been continuous and has not been interrupted by the transfer.

Requirements for Predecessor and Successor Parties

The requirements mentioned above relate to the obligations of the old employer (i.e. one whose business undertaking is being transferred). However, if for instance, the services of the employee are not ‘interrupted’ on account of the transfer or alternatively, the employees resign and join the new employer, then the successor entity would have to ensure that the salary and benefits that the employees were entitled to under the old employer (such as provident fund, employee state insurance, gratuity) will continue to be paid. Specifically, the liability of the successor entity will apply, where the predecessor has defaulted in remitting provident fund and state insurance contributions, prior to the date of the transfer of the undertaking.