Analysis of Section 25FF of the Industrial Disputes Act, 1947

An Analytical Study of Section 25FF of the Industrial Disputes Act, 1947: Compensation and Continuity on Transfer of Undertakings

1. Introduction

The Industrial Disputes Act, 1947 (hereinafter "the Act" or "IDA") is a cornerstone of labour legislation in India, primarily aimed at the investigation and settlement of industrial disputes, and for providing certain safeguards to workmen. Chapter V-A of the Act, titled "Lay-Off and Retrenchment," introduced by Act No. 43 of 1953, incorporates provisions designed to protect workmen against certain contingencies affecting their employment.[8] Amongst these, Section 25FF addresses the rights of workmen in the event of a transfer of the ownership or management of an undertaking. This provision seeks to balance the employer's prerogative to transfer their business with the socio-economic security of the workmen employed therein, by stipulating conditions for compensation or ensuring continuity of service. This article undertakes a comprehensive analysis of Section 25FF, its judicial interpretation, and its implications within the broader framework of Indian industrial jurisprudence.

2. Legislative Framework: Section 25FF in Context

2.1. Placement within Chapter V-A of the Industrial Disputes Act, 1947

Chapter V-A of the IDA, encompassing Sections 25A to 25J, deals with lay-off and retrenchment. Section 25A specifies non-applicability of Sections 25C to 25E to certain industrial establishments (e.g., those employing less than fifty workmen or those of a seasonal character).[5], [8] Section 25B defines "continuous service."[5] Sections 25C to 25E pertain to compensation for lay-off.[5], [8] Section 25F outlines the conditions precedent to retrenchment.[5], [7] Section 25FF specifically deals with compensation to workmen in case of transfer of undertakings, while Section 25FFA mandates notice of closure, and Section 25FFF prescribes compensation in case of closing down of undertakings.[5], [6] Sections 25G and 25H deal with the procedure for retrenchment and re-employment of retrenched workmen, respectively.[5] This contextual placement highlights that Section 25FF is part of a scheme to mitigate the adverse effects of employment disruptions not arising from disciplinary actions.

2.2. The Overriding Effect: Section 25J

Section 25J of the Act accords an overriding effect to the provisions of Chapter V-A. It stipulates that these provisions shall have effect notwithstanding anything inconsistent therewith contained in any other law (including Standing Orders made under the Industrial Employment (Standing Orders) Act, 1946).[5], [9] However, a proviso to Section 25J safeguards more favourable benefits to which a workman may be entitled under any other Act, rules, orders, notifications, standing orders, award, contract of service, or otherwise.[9] This ensures that Section 25FF provides a minimum standard of protection, without prejudice to any superior benefits available to the workman.

3. Deciphering Section 25FF: Core Provisions

Section 25FF of the Industrial Disputes Act, 1947, states:

"Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched."

3.1. Entitlement to Notice and Compensation

The principal mandate of Section 25FF(1) is that upon the transfer of ownership or management of an undertaking, every workman who has been in continuous service for at least one year immediately prior to the transfer is entitled to notice and compensation. This entitlement arises irrespective of whether the transfer is by agreement or by operation of law.[15] The quantum and manner of notice and compensation are to be in accordance with Section 25F of the Act.

3.2. The "As If Retrenched" Fiction

The phrase "as if the workman had been retrenched" is of critical significance. The Supreme Court and various High Courts have consistently interpreted this to mean that the termination of service due to transfer is treated as a form of statutory retrenchment for the limited purpose of calculating compensation under Section 25F. It does not imply that all conditions precedent for a valid retrenchment under Section 25F (such as the reasons for retrenchment or the procedure in Section 25G) must be fulfilled for the transfer itself to be valid.[1], [10]

In K. Sathiarthy v. The New Era Manufacturing Co. Ltd., the Kerala High Court, referencing Supreme Court jurisprudence, clarified that "the words 'in accordance with the provisions of s. 25f' in s. 25ff and 25fff are used only as a measure of compensation and are not used for laying down any time within which the employer must pay the compensation."[10] This means that while notice and compensation become due, their non-payment prior to or at the time of transfer does not invalidate the transfer itself, unlike in a typical retrenchment scenario under Section 25F where compliance is a condition precedent.[10] The liability for compensation accrues upon the transfer.[16]

3.3. Meaning of "Transfer of Undertaking"

The section applies when there is a transfer of "ownership or management of an undertaking." This transfer can occur "whether by agreement or by operation of law."[15] The term "undertaking" is not defined in the Act, but judicial pronouncements have clarified its scope. The Supreme Court in S.M. Nilajkar v. Telecom District Manager, (2003) 4 SCC 27, held that "undertaking" is more restricted than "industry" or "business" and can be a part of the whole industry or business.[13]

4. The Proviso to Section 25FF: Ensuring Continuity of Service

The seemingly absolute rule in Section 25FF(1) is subject to a significant proviso. The proviso carves out an exception where the workman is not entitled to notice and compensation under Section 25FF(1), effectively ensuring continuity of service with the new employer.

"Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer if—
(a) the service of the workman has not been interrupted by such transfer;
(b) the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and
(c) the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer."

4.1. Conditions for Non-Applicability of Section 25FF(1)

For the proviso to apply, and thus for the workman's service to be treated as continuous with the new employer without the old employer being liable for compensation under Section 25FF(1), all three conditions stipulated in clauses (a), (b), and (c) must be simultaneously fulfilled.[15]

  • Non-interruption of service: The transfer must not lead to a break in the workman's service.
  • No less favourable terms and conditions: The service conditions post-transfer must be equal to or better than those pre-transfer.
  • Transferee's liability for future retrenchment: The new employer must be legally bound (either by the terms of transfer or otherwise) to pay retrenchment compensation for the entire period of service (including service with the previous employer) should the workman be retrenched in the future.

If these conditions are met, the transfer does not trigger a deemed retrenchment, and the workman's employment continues with the transferee, preserving the continuity of service and associated benefits.

4.2. Judicial Interpretation of the Proviso

The Supreme Court in D.R Gurushantappa v. Abdul Khuddus Anwar observed that on transfer of an undertaking, workmen covered by the Industrial Disputes Act would, under Section 25FF, become employees of the new employer.[19] The Court noted, "In view of this provision of law, there was, in fact, no need for any specific contract being entered into between the Mysore Government [transferor] and respondent No. 1 terminating his government service, nor was there any need for a fresh contract being entered into between the Company [transferee] and respondent No. 1 to make him an employee of the Company."[19] This suggests that where the conditions of the proviso are met, Section 25FF facilitates a seamless transition of employment.

The Bombay High Court in Suresh Baburao Bhandare v. Administrator, Saswad Mali Sahakari Sakhar Karkhana Ltd., meticulously analyzed the proviso, emphasizing that if the three conditions are not simultaneously fulfilled, the service of the employee is deemed to have come to an end on the date of transfer, and the workman becomes entitled to notice and compensation from the transferor as if retrenched.[15]

5. Judicial Scrutiny and Interpretation of Key Concepts

5.1. "Undertaking" Defined

As mentioned, "undertaking" is a component of an "industry" and can refer to a distinct business unit or activity. The determination of whether a part of a business constitutes an "undertaking" for the purpose of Section 25FF is a question of fact depending on factors like functional integrality, interdependence, and whether it can be carried on as a separate unit.[2] (principles analogous to determining single establishment).

5.2. "Continuous Service"

The term "continuous service" is defined in Section 25B of the Act. A workman is deemed to be in continuous service if they have been in uninterrupted service, including service interrupted by sickness, authorised leave, an accident, a legal strike, a lock-out, or a cessation of work not due to any fault on the part of the workman. For a workman employed for one year, it means working for not less than 240 days in the preceding twelve calendar months.[5]

5.3. Distinction from Retrenchment (Section 25F) and Closure (Section 25FFF)

While Section 25FF adopts the compensation mechanism of Section 25F, it is distinct from actual retrenchment. Retrenchment, as defined in Section 2(oo), is the termination of service by the employer for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include voluntary retirement, superannuation, termination due to non-renewal of contract, or continued ill-health.[12] The Supreme Court in Hariprasad Shivshankar Shukla v. A.D. Divikar clarified that "retrenchment" implies termination from a running industry, not due to closure.[12]

Section 25FFF deals with compensation to workmen in case of closing down of undertakings.[5], [13], [14] Like Section 25FF, it provides for notice and compensation in accordance with Section 25F "as if the workman had been retrenched." However, the triggering event is closure, not transfer. The proviso to Section 25FFF offers reduced compensation if the closure is due to "unavoidable circumstances beyond the control of the employer," a concept distinct from the proviso to Section 25FF.[13]

5.4. Fictitious Transfers

The protection under Section 25FF is available only in cases of genuine transfer of undertaking. A mere sham or fictitious transfer, designed to circumvent labour laws or deprive workmen of their rights, would not attract the provisions of Section 25FF in the manner intended. The Supreme Court in Gurmail Singh and Others v. State of Punjab and Others held that fictitious transfers would not fall under Section 25FF.[21]

6. Enforcement of Claims under Section 25FF

6.1. Jurisdiction of Labour Courts (Section 33-C(2))

Workmen entitled to compensation under Section 25FF can approach the Labour Court under Section 33-C(2) of the Act for computation of the amount due. However, the scope of Section 33-C(2) is akin to execution proceedings.[3] The Labour Court can compute benefits based on pre-existing or adjudicated rights but cannot adjudicate upon the existence of the right itself if it is genuinely disputed.[3] Thus, if there is a complex dispute regarding whether a transfer occurred, whether the proviso to Section 25FF applies, or whether the claimant is a "workman," such issues may need to be determined by an Industrial Tribunal under Section 10 of the Act before a claim under Section 33-C(2) can be entertained.[3]

6.2. Claims under other Statutes (e.g., Payment of Wages Act)

The question of whether compensation under Section 25FF can be claimed under the Payment of Wages Act, 1936, has been subject to judicial consideration. In Payment of Wages Inspector, Ujjain v. Surajmal Mehta, the Supreme Court held that where the claim involves complicated questions of law or fact regarding the liability itself (e.g., whether the termination was due to transfer or closure, or whether the circumstances fall under the proviso), the authority under the Payment of Wages Act may not have jurisdiction.[17] The remedy under Section 15(2) of the Payment of Wages Act is generally considered summary in nature.[17]

In Inlac Grand Stone Limited v. The Management Of Inlac Grand Stone Ltd. Others, the Madras High Court affirmed that workers could resort to Section 25FF of the Industrial Disputes Act for compensation even in situations involving the SARFAESI Act, with such compensation being worked out beneficially.[20]

7. Broader Implications: Successor Liability and Employee Rights

7.1. Successor's Obligation: Beyond Monetary Compensation?

A key question that often arises is the extent of the successor employer's liability. While Section 25FF primarily addresses monetary compensation or continuity under its proviso, it does not automatically extend to all pre-existing liabilities or rights, such as re-employment under Section 25H.

In Maruti Udyog Ltd. v. Ram Lal And Others, the Supreme Court held that Section 25H (re-employment of retrenched workmen) would not apply against a successor employer if the workmen were retrenched by the predecessor prior to the appointed day of transfer.[1] The Court emphasized that Sections 25FF and 25FFF are primarily for computing compensation, using Section 25F as a measure, and do not inherently create an obligation for re-employment by the successor for those already retrenched by the transferor before the transfer took effect.[1]

7.2. Impact of Disinvestment Policies

In the context of large-scale transfers of undertakings, such as government disinvestment in public sector undertakings (PSUs), the principles of Section 25FF become highly relevant. While cases like Balco Employees' Union (Regd.) v. Union Of India And Others primarily dealt with the government's policy decision to disinvest and the limited scope of judicial review in economic policy,[4] the underlying concern for employee rights upon such transfers resonates with the protections envisaged by Section 25FF. Shareholder agreements in such disinvestments often include clauses to protect employee interests, which may align with or go beyond the statutory requirements of Section 25FF.

8. Conclusion

Section 25FF of the Industrial Disputes Act, 1947, serves as a vital safeguard for workmen facing a change in the ownership or management of the undertaking in which they are employed. It provides a dual mechanism: either compensation for the deemed termination of service or, under specific conditions outlined in its proviso, continuity of service with the new employer without any adverse impact on their terms and conditions or accrued benefits.

Judicial interpretations have clarified that the "as if retrenched" clause is a legal fiction for quantifying compensation and does not import all procedural requirements of Section 25F into the act of transfer. The proviso to Section 25FF is crucial, as its fulfillment ensures a seamless transition for employees, reflecting the legislative intent to protect employment continuity where possible. The effectiveness of this provision, however, depends on its robust enforcement and the careful adjudication of disputes regarding its applicability, particularly concerning the nature of the transfer and the fulfillment of the conditions in the proviso. In an economic environment characterized by frequent mergers, acquisitions, and restructuring, Section 25FF remains a cornerstone of employee protection in India.

9. References

  1. Maruti Udyog Ltd. v. Ram Lal And Others (2005) 2 SCC 638.
  2. Workmen Of The Straw Board Manufacturing Co. Ltd. v. Straw Board Manufacturing Co. Ltd. (1974) 4 SCC 681.
  3. Central Inland Water Transport Corporation Limited v. Workmen And Another (1974) 4 SCC 696.
  4. Balco Employees' Union (Regd.) v. Union Of India And Others (2002) 2 SCC 333.
  5. Gopi Lal Teli v. State Of Rajasthan And Others, 1995 Lab IC 1350 (Raj). (Summarizing sections of Chapter V-A).
  6. S.G Chemicals And Dyes Trading Employees' Union v. S.G Chemicals And Dyes Trading Limited And Another (1986) 2 SCC 624.
  7. Sunil Singh v. Union Of India And Ors., 2004 (3) GLT 605.
  8. J.J. Shrimali v. District Development Officer, (1988) 2 GLH 31.
  9. S. Anthony Raj And Another v. A. Shanmugam And Others, (1993) IILLJ 901 Mad.
  10. K. Sathiarthy v. The New Era Manufacturing Co. Ltd., (1970) ILLJ 41 Ker.
  11. YOGESHBHAI ZALA v. MUNDRA PORT AND SPECIAL ECONOMIC ZONE LTD., 2024 SCC OnLine Guj 593.
  12. HARIPRASAD SHIVSHANKAR SHUKLA v. A.D. DIVIKAR, AIR 1957 SC 121.
  13. Dal Singar And Ors. v. Material Movement Pvt. Ltd., 2018 SCC OnLine Del 9656.
  14. Tatanagar Foundry Co. Ltd. v. Workmen, AIR 1970 SC 190.
  15. Suresh Baburao Bhandare v. Administrator, Saswad Mali Sahakari Sakhar Karkhana Ltd., Malinagar And Another, 1991 SCC OnLine Bom 398.
  16. Modi Electric Supply Co. v. Commissioner Of Income Tax, (1980) 126 ITR 403 (P&H).
  17. Rameshwar Lal And Another v. Jogendra Das, 1969 SCC OnLine Ori 63 (citing Payment of Wages Inspector, Ujjain v. Surajmal Mehta, AIR 1969 SC 590).
  18. Chandamama Publications v. Commissioner Of Income Tax, (1989) 179 ITR 296 (Mad).
  19. D.R Gurushantappa v. Abdul Khuddus Anwar And Others, (1969) 1 SCC 466.
  20. Inlac Grand Stone Limited v. The Management Of Inlac Grand Stone Ltd. Others, 2008 (4) CTC 171 (Mad).
  21. The Management Of Eid Parry (India) Ltd., Pugalur v. The Govt. Of Tamil Nadu, Rep. By The Secretary To Government, Madras Others, 2007 (4) LLN 852 (Mad) (citing Gurmail Singh and Others v. State of Punjab and Others, (1991) 2 LLJ 76 (SC)).
  22. Commissioner Of Income Tax-Iii v. Ranjani Enterprises P. Ltd., (2009) 314 ITR 260 (Mad).