Labour Code Compliance in M&A Transactions – A Practical Guide

Harinie Seenivasan and Arjun Paleri 

The consolidation of 29 labour laws into 4 labour codes marks a paradigm shift for companies, especially those currently involved in corporate transactions. The consolidation now requires parties to undertake a rigorous reassessment of traditional due diligence and integration strategies. As the new framework introduces significant changes that directly influence deal valuation and post-closing liabilities, parties should focus on labour due diligence to precisely assess the potential financial impact of transactions.  

This guide outlines the essential steps and considerations that businesses should implement to navigate labour code compliance during an M&A process: 

Step	Actions	Evaluation Focus	Expected Outcome
Step 1	Conduct Comprehensive Labour Diligence	Review the existing workforce classification.  Audit existing wage structure against the new wage definition under the Code on Wages, 2019.  Identify legacy non-compliance such as statutory bonus calculations.  Assess engagement of gig workers for social security applicability.  Evaluate health and safety related infrastructure currently provided to employees.  Review employment documentation, such as employment agreement and employee handbooks	The reviews and audits should give the acquirer full visibility into legacy liabilities and allow the acquirer to quantify risk for purchase price adjustments (if possible) and indemnity baskets.
Step 2	Model Cost Impacts of Key Changes	Recompute the CTC for employees considering the takeaway and income tax implication.  Quantify re-skilling fund contributions for retrenchment (if any).	The focus of Step 2 is to develop financial models reflecting code-compliant cost structures.
Step 3	Determine Deal Structure	Analyze Step 1 diligence findings against Step 2 cost models to evaluate deal structures.   Assess employee absorption mechanics such as transfer of undertaking,  Determine liability allocation by creating carve-outs for labour non0compliances and determining escrow sizing.  Consider tax related implications, regulatory approvals (if any) and workforce continuity.	The focus of Step 3 is to identify a deal structure that minimizes labour code related risks and optimizes financial and operational outcomes.
Step 4	Reevaluate Boiler Plate Transaction Documents	Draft representations and warranties that align with the new mandates.  Require gap analysis report covering the differences in existing structure vs new mandate.  Re-evaluate boilerplate conditions precedent and conditions subsequent.  Include acquirer’s audit rights,	The focus of Step 4 is to include deal protections against unresolved non-compliances and potential gaps, thereby limiting the liabilities.
Step 5	Post-Closing Compliance Roadmap	Update payroll systems to embed new wage related mandates.  Update employment documentation to reflect the requirements under the labour codes.  Conduct comprehensive training for huma resources and management personnel to align with the labour codes.	The focus of Step 5 is to ensure full operational compliance and inspection ready systems.
Step 6	Monitor Developments and Report Long-Term Compliance	Track State-specific rules and implement any new requirements.  Schedule regular audits and monitor enforcement trends.	The focus of Step 6 is to ensure an embedded compliance framework and enhanced position for future transactions.