Merging Companies: How Should We Handle Employee Experience and Benefits Transition?

Hi team,

I need your assistance with a company matter. I work for a chocolate manufacturing company (YYY Food Products) with a total of 20 employees in the Head Office and 250 in the plant. When we make white chocolate, it's produced by YYY Food Products, and for dark chocolate, it's made by XXX Foods Pvt. Ltd. Both companies belong to us under different names. Recently, XXX Food Products underwent privatization and became XXX Foods Pvt. Ltd. As both companies are ours, we are considering merging them into XXX Food Pvt. Ltd. or having XXX acquire YYY.

My question is, in this context:

- How will the employees of YYY be treated concerning their work experience?
- What should be done with their PF accounts?
- How should I handle their confirmation letters?
- How should I fairly treat the employees who are already confirmed?
- What importance does PF have before and after October?
- What happens to the PF amount after 10 years of service?

Please advise me on what steps to take and if there are any other considerations I need to address.

Dear Moushumi,

The first thing you need to do if there are workers is to refer to the Industrial Disputes Act, 1947 (If you have a specific State Disputes Act, then refer to it) and allied State Rules.

The Act will give you the conditions for the Transfer of employment.

Now for the others:

(I) Clear all dues in the same way as you would for resigning/retiring employees of the previous Company and effect the necessary transfer of PF as you would for new recruits.

(II) Issue fresh appointment letters to all employees, as you would do for new joiners.

(III) Pay gratuity (even if they have not completed five years of continuous service) on an actual basis for 5 years and above service holders and on a pro-rata basis for less than 5 years.

(IV) The question of Seniority (whether it should be from the Date of Joining the Previous Company or the date of Transfer to the new Company) regarding this transfer should be decided by the top Management. Some Companies compensate for the loss of seniority by giving increments or compensation. This generally occurs for workers and supervisors. For Management Staff, I feel that instead of compensating for the loss in Seniority, there should be a system by which the Management employees of the previous Company should not lose their promotional opportunities.

(V) About probationers, follow (I), (II), (III) and can insert the following clause:

"Without creating any precedent, the Management has decided that due to the acquisition of ________, it has decided to reduce the probationary period by such a period (or can put ___ months __ days) as you have worked for _________ as a one-time dispensation. Kindly note that this reduction in your probationary period will in no way affect the length of your service, which will be calculated from ___________ (Date of Service).

And I did not understand your question no. 5.

And about Question No. 6, the transfer does not affect the length of Membership of PF. They are entitled to benefits as all others who are continuously employed in the same Company.

Hope I have been able to clear your doubts.

Kind Regards,

SC

Dear Moushumi,

Oops, sorry for the typo. The clause may be as follows:

"Without creating any precedent, the management has decided that, due to the acquisition of ________, your probationary period will be reduced by the period (or can be stated as ___ months ___ days) that you have worked for __________ as a one-time dispensation.

The amended probationary period is for ____ months ____ days.

Kindly note that this reduction in your probationary period will in no way affect the length of your service, which will be calculated from __________ (Date of Joining new Company).

OR,

You can also issue a circular that may be like this:

To all employees of ____________ (Previous Company),

Without creating any precedent, the management has decided that, due to the acquisition of ________, the period of probation for all probationers will be reduced by the period that they have worked for __________ as a one-time dispensation.

The length of their service will be considered from their date of entry in (New Company).

(Please put an example or illustrate with an example)

Kind Regards,

SC

Dear SC,

Thank you for your post. I am also facing the same problem, but I am more concerned about the gratuity matter. You have provided a suggestion on this as follows:

III) Pay gratuity (even if they have not completed five years of continuous service) on an actual basis for 5 years and above service holders and pro rata basis for less than 5 years.

Could you please elaborate on this?

Regards,
sj

Dear SJ,

When you are closing a company and starting a new one on paper, the best thing to do is to close all the accounts of employees by clearing their dues.

One such due is gratuity, which you must pay statutorily. Hence, for people with over 5 years of continuous service, the Payment of Gratuity Act is applicable.

For people with less than 5 years, you need not pay gratuity, but since the two companies have the same management and are merging, the Labor Courts can view such transfers as a way of evading liabilities by the employer. Therefore, it is better to clear the gratuity.

Let me elucidate.

Suppose an employee with 3 years of experience is working in Company A and is transferred to Company B, then leaves Company B after 2.5 years.

Is he entitled to statutory gratuity? The answer is no in both cases (Company A where he worked for 3 years and Company B for 2.5 years). Now, if the employee goes to court and claims that the company has done this to evade their gratuity liability, what defense can Company B put up? The issue in this case is that both companies have the same management.

Another problem is how to account for the period of service that a person has completed in one organization with another.

It will add to the individual's experience but not to the company's role. For example, if I try to merge the 3 years with 2.5 years, there will be significant challenges in administering statutory provisions and accounting procedures.

Kind Regards,

SC

Dear Swastik,

Your reply is of great help to me. Thank you very much for your response. Well, question number 5 was about the PF account of an employee. Now, if he wishes to transfer or withdraw it, does that make any difference if he does it before the month of October or after the month of October? Is there any assessment, or does it matter to the employee to claim or transfer his PF money at the October timeframe?

Swastikji, one more thing is about gratuity, I am still not able to understand it. Should the employee working for three years get his gratuity money up to three years? I am confused.

Regards,
Moushmi Pan

Dear Moushumi,

Since the management of both your companies is the same, as I have already stated in my earlier post, a person who works for 3 years in the company you are closing down and transferring him to the other company leaves after 2.5 years. As per the law, he is not entitled to Statutory Gratuity in either of the companies as he has not completed 5 years of service in either role.

However, he has actually worked for 5.5 years (3 + 2.5). So, if the company does not pay him gratuity, he can go to the Labour Court claiming that the change was made by management to evade gratuity. Another problem will be maintaining statutory records (HR problems).

Therefore, it is always advisable to settle all dues.

Regards,
SC