Closure and Transfer of Undertakings | Labour and Industrial Law - CLAT PG PDF Download

The Law Relating to Closure of Undertaking

The Industrial Disputes Act, 1947, did not originally include provisions for the closure of an industry. These provisions were added in 1957 following a Supreme Court judgment. Over time, the law regarding closure has been amended multiple times and was consolidated in 1982. This area of law has been subject to close judicial scrutiny since the late seventies and is unique to India, differing from practices in industrialized countries.

• The recognition of the right to security in the event of unemployment, though delayed, is now legislatively acknowledged in India. Job security is crucial for both workers and industries. Experienced workers contribute to increased efficiency and production. The protection of workers was facilitated by an amendment to the Industrial Disputes Act in 1957.
• The Supreme Court's decisions in cases like Hariprasad Shivshankar Shuka v. A.D. Diwelkar and Barsi Light Railway Co., Ltd., v. Jogelkar prompted policymakers to amend the Act. In the Barsi Light case, the Court ruled that workers terminated due to genuine and bona fide closure of business or transfer of ownership were not entitled to relief under the Act. This led employers to declare closures, leaving workers without compensation. To address involuntary unemployment and provide security to workers, Section 25-FFF was introduced.
• Before 1953, the term "closure" in the Act was associated with "lock-out." The Labour Appellate Tribunal, High Courts, and Supreme Court emphasized that lock-out referred to the closing of the business itself. Over time, there was a shift towards investigating the reasons for closure, scrutinizing the bona fides of management actions.

Definition of Closure

• Closure of an industry refers to the permanent shutting down of a workplace or a part of it, as per Section 2(cc) of the Industrial Disputes Act.
• Previously, the term "closure" was used in the Act without a clear definition, leading to legal disagreements about when shutting down a part of a workplace constituted closure versus retrenchment.
• The definition clarifies that closure applies even if only a section of the workplace is permanently closed.
• Industrialists typically avoid closing a profitable industry unless faced with compelling circumstances such as severe labor issues, ongoing losses, difficulty in finding suitable management, lack of raw materials, or challenges in replacing damaged machinery.

Closure in Case Where Chapter V-A is Applicable

• Notice Requirement: Employers intending to close down an undertaking must provide at least 60 days' notice to the appropriate government, stating the reasons for closure.
• Exemptions: Notice requirements do not apply to undertakings with fewer than 50 workers or certain construction projects.
• Compensation for Workers: When an undertaking is closed, workers with continuous service of at least one year are entitled to notice and compensation as if they were retrenched.
• Unavoidable Circumstances: If closure is due to unavoidable circumstances beyond the employer's control, compensation is limited to three months' average pay.
• Financial Difficulties: Closure due to financial difficulties, stock accumulation, lease expiry, or mineral exhaustion does not qualify as unavoidable circumstances.
• Mining Operations: Specific rules apply to closures in mining operations, especially regarding mineral exhaustion and alternative employment.

Procedure for Closing Down an Undertaking Where Chapter V-B is Applicable

• Application for Permission: Employers must apply for prior permission to close an undertaking at least 90 days before the intended closure. The application should clearly state the reasons for closure and a copy must be served on the workers' representatives.
• Government's Role: The appropriate Government will review the application, considering the reasons for closure, public interest, and other relevant factors. It will grant or refuse permission with a written order.
• Deemed Permission: If the Government does not respond within 60 days, permission is deemed granted.
• Finality of Order: The Government's decision is final and binding for one year. It can be reviewed or referred to a Tribunal for adjudication.
• Illegal Closure: If no application is made or permission is refused, the closure is illegal, and workers are entitled to benefits as if the undertaking was still operational.
• Exceptional Circumstances: The Government can waive the 90-day notice requirement in exceptional cases like accidents or the death of the employer.
• Compensation for Workers: If closure is permitted, workers are entitled to compensation equivalent to 15 days' average pay for each completed year of service.

Penalty for Closure

Closure Without Compliance

• If an employer closes down an undertaking without following the rules set in sub-section (1) of Section 25-0, they can face:
• Imprisonment for up to six months, or a fine of up to five thousand rupees, or both.

Contravention of Closure Orders

• If an employer goes against an order that denies permission to close down an undertaking (as per sub-section (2) of Section 25-0) or a direction given under Section 25-P, they can face:
• Imprisonment for up to one year, or a fine of up to five thousand rupees, or both.
• If the contravention continues after conviction, the employer may incur a further fine of up to two thousand rupees for each day the violation persists.

Transfer of Undertakings: Compensation to Workmen

Section 25 FF of the Industrial Disputes Act outlines the compensation entitlements for workmen when the ownership or management of an undertaking is transferred.

Entitlement to Notice and Compensation

• When the ownership or management of an undertaking is transferred to a new employer, either by agreement or by operation of law, every workman who has been in continuous service for at least one year in that undertaking immediately before the transfer is entitled to notice and compensation as per Section 25-F, as if they had been retrenched.

Exemption from Section 25 FF

• Section 25 FF does not apply to a workman in cases where:
• The transfer does not interrupt the workman's service.
• The terms and conditions of service after the transfer are not less favorable than those before the transfer.
• The new employer is legally liable to pay retrenchment compensation based on continuous service, as if the transfer had not occurred.

Notice of Change

Section 9-A

• Employers intending to change any conditions of service applicable to workmen, as specified in the Fourth Schedule, must provide notice to affected workmen before implementing such changes.
• Notice should be given in the prescribed manner and at least twenty-one days before the proposed change takes effect.
• Exceptions: No notice is required if the change is:
• Implemented in accordance with a settlement or award.
• Applicable to workmen governed by specific civil service rules or regulations.

Power of Government to Exempt: Section 9-B

• The appropriate Government has the authority to exempt certain classes of industrial establishments or workmen from the provisions of Section 9A if its application is deemed prejudicial to employers and in the public interest.
• Such exemptions can be granted through a notification in the Official Gazette, specifying the conditions under which the provisions apply or do not apply.

Conditions of Service During Pendency of Proceedings

Section 33

• During the pendency of conciliation proceedings, arbitration, or any proceedings before a Labour Court, Tribunal, or National Tribunal regarding an industrial dispute, employers are prohibited from altering the conditions of service to the detriment of workmen concerned in the dispute.
• Discharge or Punishment of Workmen: Employers cannot discharge or punish any workman involved in the dispute for any misconduct related to the dispute without the express permission of the authority overseeing the proceedings.

Permissible Actions by Employers

• Employers may alter conditions of service not connected with the dispute or discharge/punish workmen for misconduct not related to the dispute, following the applicable standing orders or terms of the contract.
• Protected Workmen: No action can be taken against protected workmen during the proceedings without the express permission of the authority.
• Protected Workman Definition: A protected workman is a member of the executive or office bearer of a registered trade union recognized according to specific rules.
• Number of Protected Workmen: The number of protected workmen in an establishment is determined by a percentage of total workmen, with minimum and maximum limits set by the appropriate Government.

Approval of Action by Employer

• If an employer seeks approval for actions taken against a workman, the concerned authority must hear the application and issue an order within three months, with the possibility of extension for valid reasons.
• Proceedings should not lapse due to the expiration of the specified period.

Special Provision for Adjudication of Changes in Conditions of Service

Section 33A

• If an employer violates Section 33 during ongoing proceedings before a conciliation officer, Board, arbitrator, Labour Court, Tribunal, or National Tribunal, any affected employee can file a written complaint.
• The complaint should be submitted to the conciliation officer or Board for consideration in mediating and promoting settlement of the industrial dispute.
• Upon receipt of the complaint, the arbitrator, Labour Court, Tribunal, or National Tribunal will adjudicate the complaint as if it were a dispute referred to or pending before it, following the provisions of the Act.
• The authority will submit its award to the appropriate Government, and the provisions of the Act will apply accordingly.

Recovery of Money Due from an Employer

Section 33C

• If a workman is owed money by an employer under a settlement, award, or specific chapters of the law, the workman or an authorized person can apply to the appropriate Government for recovery.
• The Government will issue a certificate to the Collector for recovery if satisfied that money is due.
• Applications must be made within one year from the due date, but can be entertained after the period for valid reasons.

Determination of Money Due or Benefit Value

• If a workman is entitled to money or a benefit computable in money, and there is a dispute about the amount, it can be decided by a specified Labour Court within three months.
• The Labour Court may appoint a Commissioner to ascertain the money value of a benefit.
• The Court’s decision will be sent to the Government, and any due amount can be recovered as per sub-section (1).
• A single application for recovery can be made on behalf of multiple workmen entitled to money or benefits from the same employer, subject to rules.