Your Employer Sold the Business: Section 73 and Your Service

Where the ownership or management of an establishment is transferred to a new employer, every worker with not less than one year of continuous service immediately before the transfer is entitled to notice and compensation as if he had been retrenched. That is the rule in Section 73 of the Industrial Relations Code, 2020. The exception is narrow, and it is the part worth understanding, because a buyer only escapes paying if it satisfies all three conditions in the proviso, not one or two of them.

Part of the employment and labour law practice at S Jain & Attorneys, Bangalore.

This matters far beyond formal mergers. Slump sales, business unit carve outs, outsourcing transitions and the rebadging of a captive team onto a vendor payroll all involve a change of employer, and all of them raise Section 73.

What Section 73 actually provides

The section applies where ownership or management is transferred, whether by agreement or by operation of law, from the employer to a new employer. A worker with one year of continuous service immediately before the transfer becomes entitled to notice and compensation in accordance with Section 70, as if retrenched. That means one month's notice or wages in lieu, and fifteen days average pay for every completed year of continuous service and any part beyond six months.

Key takeaway. The default position on a business transfer is that you get paid as if you were retrenched. The buyer avoids that only by taking you across on terms good enough to satisfy every limb of the proviso.

The three conditions are cumulative

The proviso disapplies Section 73 where there has been a change of employer by reason of the transfer, but only if all of the following are true.

Because the conditions are cumulative, a transfer that looks generous on salary can still trigger the entitlement if the paperwork breaks continuity or the buyer's liability for past service is not preserved. Three practical markers follow.

A share sale is not a transfer of the establishment

The distinction that decides many of these questions is between selling a company and selling a business. If the buyer acquires the shares of the employer company, the employer is the same legal person before and after. There is no change of employer, no transfer of ownership of the establishment in the sense Section 73 uses, and continuity is unaffected by the deal itself. New management can still change things afterwards, but that is a different question governed by other provisions.

If instead the business or an undertaking is sold as a going concern, whether described as a slump sale, an asset sale or a business transfer, the employing entity changes and Section 73 is engaged. Employees are frequently told a transaction is a mere internal reorganisation when it is in fact the second kind.

Continuity of service is the real prize

The compensation under Section 73 is often smaller than what continuity is worth. Continuous service drives gratuity, notice entitlement, seniority, leave accrual and, in a later dispute, whether you cross the one year threshold in Section 70 at all. An employee who accepts a fresh appointment letter with a new date of joining may have traded several years of accrued entitlement for a signing formality.

In my experience the single most useful thing to secure at this stage is not extra money but a written confirmation from the incoming employer that past service is recognised for all purposes, expressed in that language. It costs the buyer nothing where the deal was structured properly, and where the buyer refuses, that refusal tells you exactly which of the three conditions is not satisfied.

Who actually pays, the seller or the buyer

Employees often assume the incoming employer is the one on the hook. Section 73 is framed the other way. The entitlement crystallises against the employer in relation to the establishment at the moment of transfer, which is the outgoing employer, and it is disapplied only if the buyer has picked up the continuity obligation described in the third condition. So the seller pays unless the buyer has agreed to stand in its shoes.

That is why the business transfer agreement matters so much to a person who is not a party to it. Where the buyer has assumed past service, nobody pays anything now and your service simply continues. Where it has not, the liability sits with the seller and should be settled at the transfer, not deferred. The structure employees should be most alert to is the one where the seller treats the transfer as ending its obligations and the buyer treats your service as beginning on the transfer date, leaving the accrued years with neither of them.

What continuity is worth in rupees

An illustration makes the point better than the principle does. Take an employee with eight years of service at the time of a business transfer. If continuity is preserved, nothing is payable on the transfer and those eight years keep counting towards gratuity, notice and any future retrenchment compensation. If continuity is broken and Section 73 is triggered, the entitlement is one month's notice or wages in lieu plus roughly four months of average pay, being fifteen days for each of the eight years.

That sounds like a reasonable outcome until you look at what was given up. The eight years also stop counting for gratuity, and the employee restarts on day one with the new employer for every purpose that depends on length of service. Figures here are indicative and depend on average pay as defined under the Code, but the direction is consistent: the one-off payment is usually worth less than the continuity it replaces.

Rebadging and outsourcing transitions

A captive team moved onto a vendor payroll raises every issue in this guide at once. The work is the same, the desk is often the same, and the employer is different. Watch for the pattern where the transition is documented as a resignation from the outgoing employer followed by a fresh offer from the vendor, with a settlement of dues in between. That structure breaks continuity by design, and settles the accrued liability at a moment when the employee has little bargaining power and usually no advice.

Common mistake. Treating a full and final settlement from the outgoing employer as a routine formality. Accepting it can close off the past service argument, and it is normally the buyer, not the employee, who benefits from that closure.

If the business closes instead of transferring

Closure has its own provisions and they are worth knowing, because a transfer that falls through often becomes a closure. Section 74 requires an employer intending to close an undertaking to serve at least sixty days notice on the appropriate Government stating the reasons, and that duty does not apply to establishments employing fewer than fifty workers, or to construction projects.

Section 75 then entitles every worker with one year of continuous service to notice and compensation as if retrenched. There is a cap, but a narrow one. Where the closure is on account of unavoidable circumstances beyond the employer's control, compensation under clause (b) of Section 70 shall not exceed three months average pay. The Explanation then removes most of what employers would call unavoidable: financial difficulties including financial losses, accumulation of undisposed stocks, and expiry of a lease or licence are expressly not unavoidable circumstances.

What to check before you sign anything

1. Ask in writing whether the transaction is a share sale or a transfer of the business or undertaking, because only the second engages Section 73.
2. Ask whether your date of joining with the original employer is carried forward for all purposes, and get the answer in writing rather than in a town hall.
3. Compare the new terms line by line against the old ones. Notice period, leave, gratuity treatment, incentive plan, probation and benefits, not just fixed pay.
4. Ask whether the incoming employer has assumed liability for past service under the transfer documents. This is the third condition and it is the one you cannot verify yourself.
5. Do not resign in order to join the buyer unless you have been told in writing why a transfer of employment is not being used instead.
6. Keep your appointment letter, every increment letter, and the payslips that establish continuous service, because the one year threshold is proved from these.

Karnataka, and the clock

For employees outside the definition of worker, Section 39 of the Karnataka Shops and Commercial Establishments Act, 1961 still applies. It survives the four labour codes, requires reasonable cause and one month's notice for an employee with six months of service, and allows compensation not exceeding one month's pay for every year of service, with an appeal to the prescribed authority and a revision to the District Judge.

Whichever route applies, act early. Conciliation cannot be held more than two years after the dispute arose, and the Tribunal application must follow within ninety days of the failure report. On a transfer the dispute arises at the transfer, not when you later discover your gratuity was calculated from the wrong date.

Frequently Asked Questions

This article is for general informational purposes only and does not constitute legal advice. Consult a qualified advocate for advice on your specific situation.

Related Guides

If a transfer or a transition is live rather than hypothetical, our employment and labour law practice and our corporate and commercial practice act for both employees and employers in Bengaluru. These guides go further on the points above.

• Are You a Worker Under the Industrial Relations Code?
• Tech Layoffs Are Not Lay-Offs: Why the Word Changes the Money
• Wrongful Termination in India: Employee Rights and Remedies
• Gratuity Under the Code on Social Security
• Legal Due Diligence in Mergers and Acquisitions
• Employment Agreements in India