Acquisition Concerns: Can the New Company Legally Cut Our Salaries by 5-20%?

"Our organization has been acquired by another organization, and we have heard that the new organization wants to reduce our compensation (salaries) by 5 to 20% of our current. Is this possible legally, or are these all just rumors?"

Dear Heera Singh, After acquiring a company, organizational restructuring is common. In the course of restructuring, salary rationalization or the removal of employees is also common. Nevertheless, salary reduction across the board is unheard of. You could have provided a little more information, such as the nature of your industry and the main reason for the acquisition. Whatever the reason for the acquisition, businesses are driven by people. By reducing salaries, people become demotivated, and hardly any company can run the business with demotivated employees. Therefore, worrying on this count could be unfounded.

Communication and HR's Role

Your post suggests a failure in communication from the HR of the acquiring company. After acquisitions, a fear of uncertainty always lingers in the minds of the employees of the acquired company. At this stage, HR has a significant role in dispelling these fears. Has HR taken any steps in your company to address this issue?

Thanks,

Dinesh Divekar

While acquiring a company, the acquiring entity is typically stronger and more powerful, enabling it to purchase or acquire another business unit, company, or organization. It's very common that we see many mergers and acquisitions of large companies, where due diligence is conducted as the first step.

Nowhere in the labor law is it written that a company needs to give an increment every year, or that a company cannot reduce salaries. As long as the company is paying more than the minimum wages on time and fulfilling all statutory dues and legal compliances, it is fine from a labor law perspective. Hence, a reduction in salary or some allowances is normal, especially when the business is not sustainable with the current costs.

Business Transfer Agreement (BTA)

Normally, a BTA is signed between both parties in an acquisition, where a clause is always mentioned that states "No Less Benefit" than what is currently offered to employees. This clause is mainly included when one profitable unit is being acquired. The new company may change a few policies according to their standards or group norms.

Manpower reduction is very common because certain roles become redundant, especially in support functions. Rationalization is necessary and commonly understood as a means to reduce costs for the synergy of both businesses. Ultimately, people are running the business, not machines, so management definitely cares for performers and those who are assets to the company.

Regards,
HR Department
BrainLight HR Solutions

In case your company's salary is generally higher than industry standards, it is possible that the new company will want to reduce the salary levels. This is especially true if the salary it is paying for similar functions and experience is lower. Considering that your company is being acquired (and not merged), it is possible that the new management will dictate the terms.

In most cases, unlike what BrightLight says, the sellers do not care about what happens to the employees after they have sold. So, it is not necessary that "No Less Benefit" will be in the agreement. However, until you know the details, these are all gossip. For all you know, they may be acquiring the company because of its manpower and efficiency. In that case, they will definitely not be looking for a reduction in salary.

While the labor laws do not prevent lowering the salary as such, an across-the-board reduction, or even selective reduction, would come under the concept of "Changing Terms of Employment" and therefore can form an "Industrial Dispute" under the Industrial Dispute Act. The salary levels cannot be changed without the consent of the concerned employees.

Assessing Your Position

You need to assess where you stand.

1. Why is the company being acquired (loss-making, highly profitable, special skill sets, knowledge base, customers)?

2. What is the nature and structure of the company acquiring your employer?

3. What is your function, and how important are you to the business and its success?

4. Do you have any special skill sets due to which they can or will want to retain you?

5. Is the new company a brand name that will help you and make your CV stronger in the future?

6. Is it easy to get a new job in your segment? At the same salary levels?

Based on the analysis of these, you need to decide whether to stay on or leave. You can make the decision even before the sale takes place, or you can do it later once you see what your management is doing. Make a rational decision. Do not react to idle rumors.

Since no communication seems to have been made and no acceptance from employees has been obtained, it must not be possible to reduce the earned wages. Apparently, it is an acquisition with stock, flock, and barrel, and a change in service conditions might not be possible. All employees may unite to form a union/Works Committee and affiliate with trade unions to defend their interests.