Issues with transfer of staff during M&A transactions

Merger and acquisition (M&A) transactions involve not only the transfer of assets, equity and debts, but also issues with the transfer of staff. Here there are two major concerns: how working hours are counted in the original working unit; and how economic compensations are paid. In this article, the authors briefly analyze these two concerns under different M&A transaction scenarios.

Transformations in labour relations

First, we need to understand how contracted labour relations are transformed under different kinds of M&A transactions. M&A transactions entail acquisitions as well as mergers, which are categorized into two areas:

1. Merger by absorption. This refers to the situation when two or more companies merge, and one of the merging companies takes over the other companies and continues to exist and operate. The contracted labour relationships for employees of the absorbing company do not have any material changes as their employer continues to exist. For employees of the absorbed companies, contracted labour relations will be subject to change as their employing unit changes, even though the work location, nature of work, salary and compensations may not have any material changes.
2. Merger by amalgamation. This refers to when two or more companies are merged in a way that both lose their identities and a new separate entity is founded. For employees under each of the merging companies, contracted labour relations will change according to the changes made to their employing entities.

According to the content of the transactions, acquisitions can be categorized in the following ways:

1. Acquisition of assets. This refers to a situation where the acquiring company takes over all or part of the assets of the acquired company, which then becomes a subsidiary of the acquiring company. For employees of the acquiring company and the acquired company, contracted labour relations with their employers do not change because their employers still continue to operate, even though assets under their employing business entities may have changed.
2. Acquisition of equity. This refers to a situation where the acquiring company takes over all or part of the equity ownership of the acquired company. For employees of the acquiring company and acquired company, contracted labour relations between the employees and the employers remain unchanged as these employers still operate.

Based on the above analysis, we can see that there are situations in which the labour relations between staff and employers change in some M&A transactions, but there are also situations in which contracted labour relations remain unchanged.

So if contracted labour relations are changed during an M&A transaction, how should we calculate the working hours of the staff employed in the original unit, and how should we calculate and pay the economic compensation accordingly?

Before regulations became effective

Before the Labour Contract Law and the Implementing Regulations of the Labour Contract Law became effective on 18 September 2008, regulations governing the ways in which the working hours of the staff in the original unit were counted, and the ways in which economic compensation was calculated and paid, are set out below:

Working hours at the original unit. According to article 4 in the Reply Letter of the General Office of the Ministry of Labour on Answering to the Request for Instructions on the Calculation and Payment of Economic Compensation While Labor Contract is Terminated or Dissolved, the working hours in the original employing unit should be accumulatively calculated on to the working hours of the employer after the M&A transaction.

Economic Compensation. According to the Ministry of Labour on Issuing and Distributing the Opinions on Several Issues concerning the Implementation of the Labour Law of the Peoples Republic of China, in article 37 (now effective), employers need not pay any economic compensation to staff if the employing unit renews its labour contract with staff after an M&A transaction.

After regulations became effective

After the Labour Contract Law and the Implementing Regulations of the Labour Contract Law became effective, regulations regarding how working hours are calculated in the original unit and how economic compensations are paid state that:

Working hours at the original unit. When employees are employed in a new business entity for factors such as company M&A, other than personal reasons, the working hours in the original unit will be calculated along with the working hours in the new employer after the M&A transaction, according to article 10 of The Implementing Regulations of the Labour Contract Law.

Economic Compensation. According to article 10 of The Implementing Regulations of the Labour Contract Law, the original unit has the legal right to pay economic comp
ensation, or choose not to pay economic compensation, in the event of an M&A, until such compensation is accumulatively calculated when the labour contract is terminated or dissolved after the M&A transaction. However, as the regulations do not confer the right for the employer to make a unilateral decision on this, the original unit must seek the agreement of the employees as to whether the employer may temporarily cease to pay economic compensation.

Subject to change?

Contracted labour relations may change or remain unchanged, depending on the ways in which the M&A transactions are performed. In an M&A transaction in which the contracted labour relations are changed, regulations governing the issues on how the working hours are calculated in the original unit do not have any major changes after the Labour Contract Law and the Implementing Regulations of the Labour Contract Law become effective.

However, after these laws became effective, regulations concerning how economic compensation was calculated and paid have changed in such a way that the original unit can only opt to cease paying economic compensation after it seeks the approval/agreement of the employee(s).