India’s labour law landscape has undergone a transformative overhaul with the consolidation of 29 central labour laws into four comprehensive Labour Codes. This reform represents one of the most significant changes in employment regulation since independence and has profound implications for mergers and acquisitions (M&A) transactions in India. Understanding these codes and their impact on deal structuring, due diligence, and post-transaction integration has become critical for dealmakers, corporate counsel, and investors.
The Government of India has enacted four Labour Codes that simplify and modernize the country’s complex labour regulatory framework.
1. The Code on Wages, 2019
This Code consolidates four laws relating to wage payment and seeks to ensure universal minimum wages across all sectors. It covers all employees regardless of the wage ceiling and mandates timely payment of wages. The Code introduces the concept of a statutory floor wage, below which no state can set minimum wages, ensuring baseline protection for workers across India.
2. The Industrial Relations Code, 2020
Replacing three labour laws, this Code governs industrial disputes, trade unions, and conditions of employment in industrial establishments. It introduces threshold limits for standing orders (300 workers) and prior government approval for layoffs and retrenchment (establishments with 300 or more workers, up from the previous threshold of 100). The Code also facilitates the formation and recognition of trade unions and aims to streamline dispute resolution mechanisms.
3. The Social Security Code, 2020
This Code amalgamates nine laws related to social security and welfare, extending social security benefits to gig workers, platform workers, and unorganized sector workers for the first time. It retains existing schemes like the Employees’ Provident Fund (EPF) and Employees’ State Insurance (ESI) while creating a framework for new-age employment relationships.
4. The Occupational Safety, Health and Working Conditions Code, 2020
Key changes introduced
The Labour Codes introduce several transformative changes that directly impact corporate operations and M&A activities:
Definition of ‘Employee’ and ‘Worker’: The Codes provide broader, more inclusive definitions that encompass gig workers, platform workers, and fixed-term employees, significantly expanding the coverage of labour protections.
Fixed-Term Employment: All four Codes recognize fixed-term employment, allowing employers to engage workers for specific projects or seasonal work with the same benefits as permanent employees, providing operational flexibility.
Threshold for Compliance: Many provisions now apply to establishments with higher employee thresholds, potentially reducing compliance burdens for smaller enterprises but creating new obligations as companies grow.
Simplified Compliance: The introduction of unified registration, single licensing systems, and digital record-keeping aims to reduce compliance complexity and administrative overhead.
Enhanced Social Security: Extension of social security coverage to previously excluded categories of workers, including gig and platform workers, creates new obligations for businesses operating in these sectors.
Impact on M&A Due Diligence
The Labour Codes have significantly altered the due diligence landscape in M&A transactions. Acquirers must now conduct more comprehensive employment-related reviews:
Enhanced Labour Law Compliance Review
Due diligence teams must assess compliance with the new codes, including verification of wage payments against statutory floors, review of fixed-term employment contracts, and confirmation of social security registrations across all employee categories. The consolidation means fewer laws to review, but each Code is more comprehensive and covers more ground.
With expanded definitions and the inclusion of gig and platform workers, acquirers must carefully analyze workforce composition. Misclassification of workers can lead to significant contingent liabilities, particularly regarding social security contributions and statutory benefits. The classification of contractors, fixed-term employees, and platform workers requires careful scrutiny.
Threshold Compliance Verification
As targets grow or cross the thresholds specified in various Codes (such as the 300-worker threshold for retrenchment approvals), new compliance obligations arise. Buyers must assess whether the target has properly implemented necessary systems and obtained required approvals as these thresholds are crossed.
Social Security Liability Assessment
The extension of social security to previously uncovered workers creates potential contingent liabilities. Due diligence must include a comprehensive review of EPF, ESI, and other social security contributions for all categories of workers, including those in the gig economy.
Industrial Relations Review
Understanding the target’s relationships with trade unions, history of industrial disputes, and compliance with standing orders becomes more critical. The Industrial Relations Code’s provisions on retrenchment and layoffs directly impact workforce flexibility post-acquisition.
Technology and Gig Workforce Evaluation
For technology companies and platforms relying on gig workers, the Social Security Code creates new obligations. Due diligence must assess the extent of these obligations and the systems in place to manage them.
Structuring Considerations in M&A Transactions
The Labour Codes influence how M&A transactions are structured and documented:
Asset v. Share Purchase Decisions
Representations and Warranties
Transaction documents now require enhanced representations regarding compliance with all four Labour Codes, proper classification of workers, payment of wages above statutory floors, social security contributions, and registration and licensing requirements. The scope of labour-related representations has expanded significantly.
Indemnities and Escrows
Given the potential for legacy non-compliance and the transition period in implementing the new Codes, specific indemnities covering labour law violations are increasingly common. Escrow arrangements may be structured to cover contingent social security liabilities or penalties for past non-compliance.
Conditions Precedent
Transactions may include conditions requiring the seller to obtain necessary clearances under the Industrial Relations Code, regularize worker classifications, or clear pending dues under social security schemes before closing.
Material Adverse Change Provisions
Labour-related events such as major industrial disputes, strikes, or significant adverse findings from labour department inspections may be carved out as material adverse change triggers, giving buyers the right to walk away from deals.
Post-Merger Integration Challenges
Harmonization of Employment Terms
When merging workforces from two companies, differences in wage structures, fixed-term employment practices, and social security schemes must be harmonized while ensuring compliance with minimum wage requirements and the principle of equal pay for equal work embedded in the Codes.
Trade Union Management
The Industrial Relations Code’s provisions on union recognition and collective bargaining require careful management when integrating businesses with different union structures. Acquirers must navigate existing collective bargaining agreements while establishing new industrial relations frameworks.
Workforce Rationalization
The increased threshold for mandatory government approval (300 workers) before retrenchment provides more flexibility for larger organizations but still requires careful planning. Companies must factor in notice periods, severance payments, and retrenchment compensation as prescribed in the Industrial Relations Code.
Technology Integration
Integrating HR systems to ensure uniform compliance with digital record-keeping requirements, unified registration systems, and social security contribution tracking across the merged entity presents significant operational challenges.
Cultural Integration
Different approaches to labour relations, varying levels of workforce flexibility, and differences in social security benefit administration must be reconciled to create a cohesive organizational culture post-acquisition.
Sector-Specific Implications
Technology and GIG Economy
Companies in the gig economy face increased scrutiny regarding worker classification and social security obligations. M&A transactions in this sector require careful evaluation of the target’s treatment of platform workers and the potential liabilities arising from the Social Security Code.
Manufacturing
Manufacturing businesses must navigate the provisions related to retrenchment thresholds, standing orders, and occupational safety. The relaxation of thresholds provides more operational flexibility but requires robust compliance systems.
Services and IT/ITES
The services sector benefits from clearer provisions on fixed-term employment and the ability to adjust workforce size with project cycles. However, wage compliance and social security obligations for contractual workers require careful attention.
Infrastructure and Construction
The Occupational Safety Code’s comprehensive coverage and the provisions related to inter-state migrant workers significantly impact this sector. M&A due diligence must thoroughly assess safety compliance and contractor management systems.
Compliance and Risk Mitigation Strategies
Early Engagement
Involve labour law specialists early in the transaction process to identify red flags and potential deal-breakers related to labour compliance.
Comprehensive Audits
Conduct detailed audits of the target’s labour practices, including worker classification, wage payments, social security contributions, and safety compliance across all locations and categories of workers.
Robust Contractual Protections
Draft transaction documents with specific representations, warranties, and indemnities covering all aspects of the Labour Codes. Consider extended survival periods for labour-related claims.
Transition Planning
Develop detailed integration plans that address workforce harmonization, union management, and compliance system integration well before closing.
Proactive Remediation
Where non-compliance is identified during due diligence, require the seller to remediate issues before closing or create escrow arrangements to cover the costs of post-closing remediation.
Stakeholder Communication
Develop clear communication strategies for employees, unions, and labour authorities about the transaction and its implications, ensuring transparency and maintaining industrial harmony.
While all four Labour Codes have received Presidential assent, their implementation remains subject to the finalization of rules by the Central and State Governments. This transition period creates uncertainty in M&A transactions as stakeholders must prepare for the new regime while continuing to comply with existing laws where the Codes are not yet in force.
The staggered implementation across different states adds complexity to multi-location transactions. Acquirers must assess compliance requirements on a state-by-state basis and prepare for varying timelines of implementation.
As the Codes are fully implemented, we can expect increased enforcement, higher penalties for non-compliance, and greater scrutiny of employment practices. This will likely lead to more conservative deal structures, increased use of contingent consideration mechanisms, and more extensive post-closing adjustment provisions in M&A transactions.
The Labour Codes represent a fundamental reshaping of India’s employment law framework with far-reaching implications for M&A transactions. While the consolidation and simplification of laws is welcome, the expanded coverage, new obligations regarding gig workers, and specific provisions on retrenchment and industrial relations create new considerations for deal structuring and execution.
This article is intended solely for general informational and knowledge dissemination purposes and does not constitute legal advice. The content should not be relied upon as a substitute for professional legal counsel. Readers are encouraged to seek independent legal advice tailored to their specific circumstances. Neither the firm nor the author accepts any responsibility for any actions taken based on the information provided herein. For any information or clarification, please get in touch with us as at anupam@aplawchambers.in
