Transfer of an Undertaking, and Closure

In one line

If a business changes hands the workers must be paid as though retrenched, unless the new owner takes them on unbroken and no worse off; and if a business closes for good, sixty days' notice must go to the Government and every worker of a year's standing is paid as though retrenched.

In exam wording: section 2(h) of the Industrial Relations Code 2020 defines closure as the permanent closing down of a place of employment or part thereof; section 73 provides that where the ownership or management of an establishment is transferred, whether by agreement or by operation of law, every worker in continuous service for not less than one year immediately before the transfer is entitled to notice and compensation in accordance with section 70 as if he had been retrenched, unless his service has not been interrupted, the terms after transfer are not in any way less favourable, and the new employer is legally liable to pay compensation on the footing that service has been continuous; section 74 requires sixty days' notice to the appropriate Government stating the reasons for an intended closure; and section 75 entitles every worker in continuous service for not less than one year to notice and compensation under section 70 as if retrenched, subject to a cap of three months' average pay where the closure is on account of unavoidable circumstances beyond the employer's control.

Why the law has this at all

The last chapter dealt with an employer who reduces his workforce. This one deals with the two situations in which the workplace itself changes or disappears.

A transfer is dangerous to workers because it can be used as a reset. The owner sells the business. The buyer says he is a new employer with no obligations to anybody: fresh contracts, fresh terms, service counted from today. The workers have lost their seniority, their gratuity accrual and their retrenchment entitlement without anybody having retrenched them. Section 73 closes that route, and does so in a way that is fair to a genuine buyer: if he takes the workers on unbroken and no worse off, and accepts the accrued liability, nothing is payable; if he does not, they must be paid as though retrenched.

A closure is different, because there is nothing to be fair about. A business that ends, ends. The workers cannot be given their jobs back, and there is no successor to inherit them. So the law does two things instead: it requires warning, so that the workers and the labour administration know it is coming; and it requires money, on the same scale as retrenchment, so that the workers leave with something.

And a closure needs a defence against pretence, because a "closure" that is followed by a reopening is a lock-out, and a closure declared for a reason within the employer's own control is not really an act of God. Sections 74 and 75 both carry provisions aimed at exactly that.