Transfer of an Undertaking, and Closure

Some words this chapter uses

Transfer in section 73 covers the transfer of ownership or management, whether by agreement or by operation of law.

Undertaking is the business or unit being closed. Sections 74 and 75 use it alongside "establishment".

Unavoidable circumstances beyond the control of the employer is the expression that triggers the three-month cap in section 75(1), and the Explanation tells you four things it does not include.

Average pay is defined in section 2(d) and is the measure used by section 70(b), which both sections 73 and 75 borrow.

Permanent, in section 2(h), is the word that separates closure from lock-out.

Section 2(h): what closure is

Closure means the permanent closing down of a place of employment or part thereof.

Two words carry the definition.

"Permanent" distinguishes closure from a lock-out, which section 2(u) defines as the temporary closing of a place of employment, and from a lay-off, which is temporary by nature. A stoppage described as a closure but followed by a reopening was in substance a lock-out, and if it was declared without the sixty days' notice section 62(2) requires, it was an illegal one. That analysis is worked in ['Lock-out': Concept, Legality and Justification].

"Or part thereof" means a closure may be partial. Shutting one unit of a multi-unit establishment for good is a closure of that part, and sections 74 and 75 apply to it.

Section 73: transfer of an establishment

Where the ownership or management of an establishment is transferred, whether by agreement or by operation of law, from the employer in relation to that establishment to a new employer, every worker who has been in continuous service for not less than one year in that establishment immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 70 as if the worker had been retrenched.

So the default is that a transfer costs the transferor the full retrenchment package: one month's notice in writing with reasons or wages in lieu, fifteen days' average pay per completed year and any part over six months, and notice to the appropriate Government.

The proviso: the three conditions that displace it

Nothing in the section applies to a worker where there has been a change of employers by reason of the transfer, if:

• (a) the service of the worker has not been interrupted by the transfer;
• (b) the terms and conditions of service applicable to the worker after the transfer are not in any way less favourable to him than those applicable immediately before it; and
• (c) the new employer is, under the terms of the transfer or otherwise, legally liable to pay to the worker, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

All three must be satisfied. They are joined by "and", and each closes a different escape route.

Condition (a) closes the gap in service. The buyer cannot terminate everybody on Friday and re-engage them on Monday.

Condition (b) closes the reduction in terms, and note the strength of the words: not in any way less favourable. A package that is better in one respect and worse in another does not satisfy it.

Condition (c) closes the liability gap, and it is the one students forget. Even where service is unbroken and terms are unchanged, the new employer must be legally liable, under the terms of the transfer or otherwise, to pay retrenchment compensation on the footing that service has been continuous. Without that, the worker would keep his job and his terms but lose the accrued years he would be paid for if retrenched later. The condition makes the buyer inherit the accrual.

The practical effect is a choice for the parties. Either the buyer takes the workers over completely, service, terms and accrued liability, and nothing is payable on the transfer; or he does not, and the transferor must pay every qualifying worker as though retrenched.

Section 74: sixty days' notice of an intended closure

74(1): an employer who intends to close down an undertaking shall serve, at least sixty days before the date on which the intended closure is to become effective, a notice in the prescribed manner on the appropriate Government, stating clearly the reasons for the intended closure.

Notice the three features. It is sixty days, not the one month that section 70(a) requires for retrenchment. It goes to the appropriate Government, not to the workers. And it must state clearly the reasons.

Proviso: two exemptions. Section 74 does not apply to:

• (i) an industrial establishment in which less than fifty workers are employed, or were employed on any day in the preceding twelve months;
• (ii) an industrial establishment set up for the construction of buildings, bridges, roads, canals, dams or for other construction work or project.

The construction exemption has an obvious rationale: such an undertaking is set up to finish a job and then stop, so a closure is the expected end rather than an event requiring warning. Section 75(4), below, deals with the workers' money in that situation.

74(2): the emergency dispensation. Notwithstanding sub-section (1), the appropriate Government may, if satisfied that owing to such exceptional circumstances as an accident in the undertaking or the death of the employer, or an extraordinary situation such as natural calamities or the like, it is necessary to do so, by order direct that sub-section (1) shall not apply to that undertaking for such period as the order specifies.

Read sub-section (2) as the answer to an impossibility. Sixty days' notice presupposes sixty days in which to give it. An employer killed in an accident, or an undertaking destroyed by a flood, cannot comply, and the Government may relieve the requirement.

Section 75: compensation on closure

75(1): where an establishment is closed down for any reason whatsoever, every worker who has been in continuous service for not less than one year in that undertaking immediately before such closure shall, subject to sub-section (2), be entitled to notice and compensation in accordance with section 70, as if the worker had been retrenched.

"For any reason whatsoever" again, as in the definition of retrenchment. The employer's motive for closing does not affect the entitlement; it affects only the cap in the proviso.

The proviso: the three-month cap

Where the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid under section 70(b) shall not exceed his average pay for three months.

So the arithmetic changes but the entitlement does not. A worker with twenty years' service would ordinarily receive three hundred days' average pay under section 70(b). If the closure was on account of unavoidable circumstances beyond the employer's control, he receives no more than three months' average pay.

The Explanation: four things that are NOT unavoidable

An industrial establishment which is closed down by reason merely of:

• (i) financial difficulties, including financial losses; or
• (ii) accumulation of un-disposed stocks; or
• (iii) the expiry of the period of the lease or licence granted to it; or
• (iv) in the case of an undertaking engaged in mining operations, the exhaustion of the minerals in the area in which operations are carried on,

shall not be deemed to be closed down on account of unavoidable circumstances beyond the control of the employer.

This Explanation is the most examinable thing in the chapter and its logic should be stated, not just memorised. Every one of the four is a commercial risk the employer took on and could foresee. He chose to trade and might lose money. He chose what to make and how much. He took a lease knowing when it ended. He opened a mine knowing the minerals were finite. None of that is an act of God, and none of it justifies capping the workers' compensation at three months.

So the cap is confined to genuine external catastrophe. The examples in section 74(2), an accident in the undertaking, the death of the employer, a natural calamity, are the kind of thing it is for.

75(4): the construction undertaking. Where an undertaking set up for the construction of buildings, bridges, roads, canals, dams or other construction work is closed down on account of the completion of the work within two years from the date it was set up, no worker shall be entitled to any compensation under section 70(b); but if the construction work is not completed within two years, he shall be entitled to notice and compensation under that section for every completed year of continuous service or any part in excess of six months.

The two-year line is the point. A short construction project ends as everybody expected, and no compensation is payable. A project that runs beyond two years has become, in substance, ongoing employment, and its ending is compensated like any other closure.

Section 76: the Chapter is a floor

76(1): Chapter IX has effect notwithstanding anything inconsistent contained in any other law, including standing orders made under Chapter IV.

Proviso: where under any other Act, rules, orders or notifications, or under any standing orders, award, contract of service or otherwise, a worker is entitled to benefits in respect of any matter more favourable to him than those under the Code, he continues to be entitled to the more favourable benefits in respect of that matter, notwithstanding that he receives benefits in respect of other matters under this Chapter.

76(2): for the removal of doubts, nothing in the Chapter affects the provisions of any other law in force in a State so far as that law provides for the settlement of industrial disputes, but the rights and liabilities of employers and workers in respect of lay-off, retrenchment and closure are determined in accordance with this Chapter.

Sub-section (2) draws a careful line and it is worth a sentence. State laws about the machinery for settling disputes are untouched, which matters in Maharashtra, where the MRTU and PULP Act 1971 still operates. But the substantive rights and liabilities on lay-off, retrenchment and closure come from this Chapter.

The three events compared

A worked example

The facts. A packaging plant in Wada, 260 workers.

Situation one: the owner sells the plant to a new company. The default under section 73 is that every worker with one year of continuous service immediately before the transfer is entitled to notice and compensation under section 70 as if retrenched.

The buyer takes all the workers over, keeps their service unbroken, and keeps their terms exactly as before, but the sale agreement says the buyer is not responsible for any liability accrued before the sale. The proviso is not satisfied. Conditions (a) and (b) are met, but (c) is not: the new employer is not legally liable to pay retrenchment compensation on the basis that service has been continuous. So the workers must be paid as if retrenched, by the transferor.

Change it: the agreement provides that the buyer assumes all accrued liabilities and will treat service as continuous. All three conditions are satisfied and nothing is payable on the transfer.

Change it again: the buyer takes everybody on unbroken, assumes the liabilities, but reduces the night-shift allowance. Condition (b) fails, because the terms are in any way less favourable. Compensation as if retrenched is payable.

Situation two: the owner decides to close the plant permanently. He must serve notice on the appropriate Government at least sixty days before the intended closure is to take effect, stating clearly the reasons, section 74(1). The proviso does not help him: the plant employs 260 workers, well above fifty, and it is not a construction undertaking.

Every worker with a year's continuous service immediately before the closure is entitled to notice and compensation under section 70 as if retrenched, section 75(1). Meera, with 4 years 8 months, would receive seventy-five days' average pay, as calculated in the previous chapter.

The owner says the closure is because the plant has been losing money for three years and he cannot go on, and claims the three-month cap. The cap does not apply. The Explanation to section 75(1) provides that an establishment closed down by reason merely of financial difficulties, including financial losses, shall not be deemed to be closed on account of unavoidable circumstances beyond the control of the employer. Meera gets her seventy-five days.

Change it: the plant is destroyed by a flood. That is a natural calamity and is capable of being an unavoidable circumstance beyond the employer's control. The cap applies, and Meera's compensation under section 70(b) is limited to three months' average pay. The employer may also apply to the appropriate Government under section 74(2) for an order dispensing with the sixty days' notice, an extraordinary situation such as a natural calamity being expressly contemplated.

Change it again: the plant closes because its lease has expired. The Explanation, clause (iii), says the expiry of the period of the lease or licence is not an unavoidable circumstance. No cap.

Situation three: a separate site set up to build a warehouse closes when the warehouse is finished. If the work was completed within two years of the undertaking being set up, no compensation is payable under section 70(b), by section 75(4); and section 74's notice requirement did not apply at all, by clause (ii) of its proviso. If the work took more than two years, the workers are entitled to notice and compensation for every completed year and any part in excess of six months.

Finally, a better benefit. The plant's settlement with the union provides one month's average pay per year of service on closure. Under the proviso to section 76(1), that more favourable benefit prevails over section 70(b)'s fifteen days.

What this does NOT mean

It does not mean a transfer always costs the seller money. The proviso to section 73 excuses it where all three conditions are satisfied.

It does not mean two of the three conditions will do. They are cumulative.

It does not mean a closure needs the Government's permission. Section 74 requires notice, sixty days in advance, stating the reasons. Prior permission for closure is Chapter X, for larger establishments.

It does not mean notice of closure goes to the workers. Section 74 requires it to be served on the appropriate Government. What the workers get is the notice and compensation under section 70 that section 75 gives them.

It does not mean losses cap the compensation. The Explanation to section 75(1) expressly excludes financial difficulties, accumulated stocks, expiry of a lease or licence, and exhaustion of minerals from "unavoidable circumstances".

It does not mean a construction worker never gets compensation. Section 75(4) denies it only where the work was completed within two years.

It does not mean the Code displaces State dispute-settlement law. Section 76(2) preserves it, while fixing the substantive rights and liabilities on lay-off, retrenchment and closure by this Chapter.

Limits, criticism and amendments

The fifty-worker exemption in the proviso to section 74 means the smallest establishments may close without any notice to anybody, which is where the least secure workers are.

The three-month cap is generous to the employer where it applies, since a worker of twenty years' service loses more than three-quarters of what he would otherwise receive. The Explanation is what keeps the cap narrow, and its four clauses are the whole of the worker's protection on this point.

Section 73's proviso depends on the terms of a transaction the workers are not party to. They discover only afterwards whether the buyer assumed the accrued liability under condition (c), and by then the seller may have distributed the proceeds.

And section 74's notice goes to the Government rather than to the workers. They learn of an intended closure when the Government or the employer chooses to tell them, and the Code does not require the employer to tell them at all.

Against that, the Explanation to section 75(1) is unusually well aimed. By naming the four commercial risks that do not count as unavoidable, it prevents the cap from swallowing the rule, which is exactly the drafting failure such provisions usually suffer.

Quick revision

• Section 2(h): closure is the permanent closing down of a place of employment or part thereof. "Permanent" is what separates it from a lock-out, section 2(u).
• Section 73: on a transfer of ownership or management, by agreement or operation of law, every worker with one year of continuous service immediately before it is entitled to notice and compensation as if retrenched. Proviso, all three required: (a) service not interrupted; (b) terms not in any way less favourable; (c) the new employer legally liable to pay compensation on the footing of continuous service.
• Section 74(1): sixty days' notice, in the prescribed manner, on the appropriate Government, stating clearly the reasons. Proviso: does not apply to establishments with fewer than fifty workers employed or employed on any day in the preceding twelve months, or to construction undertakings. 74(2): the Government may dispense with the notice for exceptional circumstances such as an accident in the undertaking, the death of the employer, or an extraordinary situation such as natural calamities.
• Section 75(1): closure for any reason whatsoever, every worker with one year of continuous service gets notice and compensation as if retrenched. Proviso: capped at three months' average pay where the closure is on account of unavoidable circumstances beyond the employer's control.
• Explanation: financial difficulties including losses, accumulation of un-disposed stocks, expiry of the lease or licence, and exhaustion of minerals are NOT unavoidable circumstances. No cap for those.
• Section 75(4): a construction undertaking closed on completion within two years of being set up, no compensation; if not completed within two years, full notice and compensation.
• Section 76: the Chapter overrides inconsistent law including standing orders, but a more favourable benefit survives, matter by matter; and State law on the settlement of disputes is untouched, while the rights and liabilities on lay-off, retrenchment and closure come from this Chapter.

Test yourself

1. What happens to the workers when an establishment changes hands? Under section 73, where the ownership or management of an establishment is transferred, whether by agreement or by operation of law, every worker who has been in continuous service for not less than one year in that establishment immediately before the transfer is entitled to notice and compensation in accordance with section 70 as if he had been retrenched. The proviso displaces that entitlement only where all three of its conditions are satisfied: the service of the worker has not been interrupted by the transfer; the terms and conditions applicable after the transfer are not in any way less favourable than those applicable immediately before it; and the new employer is, under the terms of the transfer or otherwise, legally liable to pay the worker, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

2. What notice must an employer give before closing an undertaking? Under section 74(1) he must serve on the appropriate Government, at least sixty days before the date on which the intended closure is to become effective, a notice in the prescribed manner stating clearly the reasons for the intended closure. The requirement does not apply to an establishment in which fewer than fifty workers are employed, or were employed on any day in the preceding twelve months, or to an establishment set up for the construction of buildings, bridges, roads, canals, dams or other construction work or project. Under section 74(2) the appropriate Government may by order dispense with the requirement for a specified period where satisfied that it is necessary owing to exceptional circumstances such as an accident in the undertaking or the death of the employer, or an extraordinary situation such as natural calamities or the like.

3. An employer closes his factory because it has been making losses for three years and claims the three-month cap. Advise. The cap does not apply. Section 75(1)'s proviso limits compensation under section 70(b) to three months' average pay only where the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer. The Explanation provides that an establishment closed down by reason merely of financial difficulties, including financial losses, shall not be deemed to be closed on account of such circumstances. The same is true of the accumulation of un-disposed stocks, the expiry of the period of a lease or licence, and, in a mining undertaking, the exhaustion of the minerals in the area of operations. Each worker with one year's continuous service is therefore entitled to full compensation under section 70 as if retrenched.

4. Distinguish closure from lock-out. Section 2(h) defines closure as the permanent closing down of a place of employment or part of it; section 2(u) defines a lock-out as the temporary closing of a place of employment, or the suspension of work, or the refusal by an employer to continue to employ any number of persons employed by him. The employment relationship ends on a closure and continues through a lock-out. A closure requires sixty days' notice to the appropriate Government under section 74 and compensation under section 75; a lock-out requires sixty days' notice to the workers under section 62(2) and carries no compensation provision. Whether a stoppage is one or the other is a question of substance: a declared closure followed by a reopening was in law a lock-out, and if declared without notice, an illegal one.

5. When is a construction worker denied closure compensation? Under section 75(4), where an undertaking set up for the construction of buildings, bridges, roads, canals, dams or other construction work is closed down on account of the completion of the work within two years from the date on which the undertaking was set up, no worker employed in it is entitled to any compensation under section 70(b). If the construction work is not completed within two years, he is entitled to notice and compensation under that section for every completed year of continuous service or any part thereof in excess of six months.

6. Explain the effect of section 76. Section 76(1) gives Chapter IX effect notwithstanding anything inconsistent contained in any other law, including standing orders made under Chapter IV, so the Chapter overrides. But its proviso makes the Chapter a floor rather than a ceiling: where under any other Act, rules, orders or notifications, or under any standing orders, award, contract of service or otherwise, a worker is entitled to benefits in respect of any matter which are more favourable to him, he continues to be entitled to those more favourable benefits in respect of that matter, notwithstanding that he receives benefits in respect of other matters under the Chapter, so the comparison is made matter by matter. Section 76(2) adds that nothing in the Chapter affects any State law providing for the settlement of industrial disputes, while the rights and liabilities of employers and workers in respect of lay-off, retrenchment and closure are determined by this Chapter.