Employment Law Newsletter – Employee Transfer Models: Understanding the Key Differences: April 2025
Introduction
When a business undergoes corporate restructuring activities such as mergers and acquisitions (M&A), that require transitioning of employees to a new employer, the transitioning can be met with operational challenges if not carefully planned. Thus, it is essential to handle employee transitions effectively to ensure continuity, minimize disruption, and comply with legal and contractual requirements. Managing this transition smoothly can determine whether the new entity retains its most valuable asset: its people.
While Indian law does not provide a single codified statute that governs employee transfer in M&A transactions, the process is shaped by a combination of employment contract law, labour legislation, judicial precedents, and commercial negotiation. There are several ways employees can be transferred in an M&A scenario. The appropriate mode of transfer largely depends on the legal structure of the deal, jurisdiction-specific labour laws, and the strategic intent of the transaction.
The method of transfer can have significant implications for the original employer (transferor), the new employer (transferee), and the employees involved. The approach taken during such business transfers can affect employee rights, consent requirements, and the overall success of the transition.
Let’s understand each of the common models adopted by organizations in the industry.
Transfer by application of law
Section 25FF of the Industrial Disputes Act, 1947 (“ID Act”) is the primary provision governing employee transfers during business transfer. It acts as a safeguard for worker’s rights by treating such transfers as retrenchment under Section 25F, thereby entitling workmen with at least one year of continuous service to compensation and notice. However, no such compensation is required if three conditions are met: (i) the transfer does not interrupt the workman’s service. (ii) the terms and conditions of service of the worker remain unchanged and (iii) the new employer assumes responsibility for past service, meaning, in the event of retrenchment, severance is calculated based on total service, including time with the previous employer. When these criteria are fulfilled, the transfer is deemed as a lawful transfer without the consent of the worker.
While the ID Act provides for transfer of the workers from one entity to another in case of change of ownership by agreement or by operation of law, it’s not a consent-based transfer and does not cover the rights of the ‘non-workmen’. Hence various companies in India tend to prefer a more consent-based approach such as the tripartite model and the resign-rehire model when transferring employees during restructurings, mergers, or acquisitions.
Tripartite Model
In the tripartite model, the employee’s service-based benefits (e.g., gratuity, leave), are typically rolled over to the new employer. The transferor (current employer) is required to make the following payments to the employee before the transfer takes place:
- Salary up to the last date of employment.
- Contractual pay-outs (if any)
- Reimbursements, if applicable.
Since this is a consent-based transfer, workmen category employees are typically not required to be paid severance or retrenchment-related compensation, as long as they agree to the transfer.
Challenges
One of the main challenges of the tripartite model is that it requires consent from the employees. If some employees refuse to consent to the transfer, it can result in termination of their employment. In such cases, the transferor would be required to pay statutory and contractual severance, including notice pay, pending salary, leave encashment, gratuity, and retrenchment compensation (if applicable).
To mitigate such concerns, the transferee should provide benefits that are comparable to what the transferor offered to ensure a smooth transition and maintain employee satisfaction.
Documentation required
Because the tripartite model is consent-based, it requires clear documentation to avoid future disputes. A “Tripartite Letter/Agreement” is typically executed to formalize the terms and conditions of the transfer. This letter should address following key points:
- Service continuity
- The assurance of no less favourable terms
- Cessation of employment with the transferor from a specific date
- A formal offer of employment with the transferee
Additionally, the transferee will need to issue new appointment letters/employment agreement to employees, while the transferor should ensure that employees receive a “No-Dues Clearance Letter” or a “Full and Final Settlement Letter”.
Resign-Rehire Model
In the resign-rehire model, employees voluntarily resign from their current employer and are subsequently rehired by the transferee (new employer). As this process involves voluntary resignation rather than a formal termination, there is no severance pay triggered under the ID Act.
However, service-based benefits can be addressed through a contractual agreement between the two employers.
Challenges
A major challenge with the resign-rehire model is the potential break in service. Employees might find it unfavorable if their tenure is interrupted, especially if they stand to lose long-term benefits tied to their service length, such as gratuity or retirement benefits. To address this, it is essential that the new employer offers comparable benefits and assures employees that the service break will not negatively affect their long-term rewards.
Further, there’s always the risk that some employees may not accept the resignation offer, which could result in legal disputes or a need for severance payments.
Documentation required
In the resign-rehire model, the first step involves the transferee offering employment to the employee. Those employees who accept the offer will then need to tender their resignation to the transferor, which must be accepted without qualification.
Once the resignation is accepted, the employee can join the transferee. The employees will also need to sign a “No-Dues Clearance Letter” or a “Full and Final Settlement Letter” to ensure that all dues are cleared.
Choosing the Right Model
Choosing the right employee transfer model is driven by factors like the nature of the business transfer, employee preferences, and legal requirements. Each model has its advantages and challenges, so businesses must carefully assess their situation, communicate clearly with employees, and ensure all documents are in order to facilitate a smooth transition.
While this newsletter has focused on employee transfer models in the context of M&A transactions, it’s worth noting that employee movements can also arise from a range of other business and strategic decisions — including internal restructurings, spin-offs, and global mobility initiatives.
If you would like to explore how employee transfers might apply to your organization, feel free to reach out to us at employmentlaw@legalogic.com
About us:
LegaLogic (www.legalogic.com) is a full-service law firm with more than 50 people team. Founded in 2013, LegaLogic has been advising across industry segments. It is a go-to firm for the Corporate Commercial Matters, M&A, Intellectual Property, Employment Law, Real Estate, Dispute Resolution, Litigation, Insurance Advisory, India Entry Strategy and Private Client Practice. To know more about our Employment Law Practice, please write to us at employmentlaw@legalogic.com.
Disclaimer:
This newsletter is for informational purpose only and should not be treated as legal advice or opinion. No part of this newsletter should be considered an advertisement or solicitation of professional services of LegaLogic.
