Clubbing of Units under Labour Laws and Judicial Trends

Introduction

In India, the applicability of many labour laws is based on an establishment meeting the prescribed employee thresholds. However, when an establishment has multiple units, branches or offices, employers are often faced with the question of whether each such unit, branch, or office should be treated as a separate establishment, or whether all units/offices should be collectively considered one establishment for the purposes of applicability of labour laws. While some statutes, such as the Employees’ Provident Funds and (Miscellaneous Provisions) Act, 1952¹ (EPF Act) and the Payment of Bonus Act, 1965² (Bonus Act) stipulate that various units, branches, and offices of an establishment should be treated as part of a single establishment (with certain qualifications in the case of the Bonus Act) other statutes are silent on the issue. Where a statute does not provide guidance on how different units of an establishment should be treated, the labour authorities or courts usually rely on considerations that determine the unity of an establishment “in the ordinary industrial or business sense”.³ In this article, we discuss the law and the evolution of judicial precedents on the clubbing of units.

The Law on clubbing of units

The typical tests labour authorities and courts apply for the purposes of clubbing of units include:⁴

(a) unit of ownership and management;

(b) unity of finance;

(c) unity of employment;

(d) geographic proximity;

(e) general unity of purpose or design; and

(f) functional integrality.

The test of ownership and management is intended to understand the level of commonality of control and supervision among different units, while the tests of unity of finance and employment are intended to examine the employer’s practice of mixing up capital and labour across different units by looking at their books of account, loans, and service conditions of employees, etc. On the other hand, the tests of geographical proximity, functional integrality, and general purpose/design are intended to assess the degree of independence among units — that is, whether one unit can conveniently and reasonably function without the other unit(s).⁵

Courts have consistently held that none of these tests can be considered absolute or decisive, and that the choice of which test or tests should be applied to the exclusion of others in a given case depends entirely on the facts and circumstances of that particular case, as well as the scheme and object of the statute or the immediate context under which clubbing of units is sought. In some cases, the factual matrix may call for the application of all tests as well.⁶ The choice of tests should be made keeping in mind their overarching purpose — namely, to find out the true/de facto relation between the parts, branches, units, etc. of an establishment,⁷ as a reasonable person would understand it.⁸

Judicial application of clubbing tests

While courts continue to maintain that there is no single decisive test, we see a dominant trend of favouring the tests of functional integrality and the general unity of purpose or design over the other tests in reaching their conclusions.⁹ This is particularly so in cases where courts are called upon to determine the relationship between various units engaged in different lines of business run by the same owner.

In one such case, a three-Judge Bench of the Supreme Court (Court) in Pratap Press v. Workmen¹⁰ held that of all the tests mentioned above, the most important appears to be that of functional integrality, along with the question of unity of finance and employment, and of labour. Unity of ownership exists ex hypothesi. Where two units belong to the same owner, there is almost always a likelihood of unity of management as well. In all such cases, therefore, the Court has to consider the degree of functional integrality among different lines of business, and whether in matters of finance and employment the employer has kept the two lines of business distinct or integrated. Many subsequent cases on clubbing of units have continued to endorse the reasoning in Pratap Press case¹¹ on functional integrality, regardless of nuances and factual differences.

This trend, however, ignores the equally important line of reasoning in other cases, such as Honary Secretary, South India Millowners’ Association v. ¹² and Management of Wenger and Co. v.¹³Workmen (judgment of a four-Judge Bench) where the Court explicitly rejected the supremacy of the functional integrality test and instead chose to apply the tests of unity of ownership, management, finance and employment.

This less dominant line of reasoning is what the Court adopts in its recent judgment in Torino Laboratories (P) Ltd. v. Union of India¹⁴, once again reviving the importance of the tests of unity of ownership, management and finance, and preferring them to the exclusion of the functional integrality test.

The recent Torino decision — Clubbing of different entities

In Torino decision¹⁵, the Court held that two different companies constituted a single establishment for the purpose of coverage under the EPF Act¹⁶, disregarding the well-recognised doctrines of corporate personhood and separate legal entity.

Torino Laboratories Private Limited (Torino) and Vindas Chemical Industries Private Limited (Vindas) are two separately incorporated juristic entities, with their factories located on adjacent plots. While Vindas was covered under the EPF Act¹⁷, Torino employed less than 20 employees and was not covered under the EPF Act. Following an inspection of Torino’s factory premises, the Assistant Provident Fund Commissioner noted several commonalities between the two entities and passed an order holding Torino and Vindas to be one establishment, thereby bringing Torino’s employees within the coverage of the EPF Act.

Challenging this order before the Court,¹⁸ Torino argued that Vindas and itself: (i) are two different entities incorporated separately under the Companies Act, 2014¹⁹ and hold distinct corporate identification numbers; (ii) have obtained separate registrations under various statutes including the Factories Act, 1948²⁰, the Drugs and Cosmetics Act, 1940²¹ and tax laws; (iii) are engaged in different activities — one manufactures tablets and syrups, and the other injections and capsules; and (iv) have no movement of employees and raw material between them. Therefore, Torino contended, there was no functional integrality or interdependence between the two entities and the same could not be clubbed.

The Court, however, rejected Torino’s argument on the ground that the test of functional integrality was not the sole or decisive test. It instead proceeded to lift the corporate veil of the two entities and found that both shared a common set of directors and a common source of capital — in this case, the same Hindu Undivided Family. The Court also noted that both had a common entry point and common security guarding their factories. They shared the same administrative office; the registered office of one entity was the head office of the other; and both used the same website and telephone numbers. Further, despite the varied nature of the products manufactured by both entities, the Court emphasised that they were engaged in the same pharmaceutical industry. Based on these findings, the Supreme Court concluded that there was unity of ownership, management, finance and purpose, and therefore the two entities could be clubbed together and considered one establishment for the purpose of coverage under the EPF Act²².

Practical considerations

While this is not the first time that different entities have been treated as a single establishment by the courts under the EPF Act,²³ this case further reinforces the continuing trend of clubbing entities, particularly for the purpose of bringing them within the ambit of social security laws. Given this, it is critical for companies, particularly group companies that usually have common functional and spatial points, to periodically assess whether they risk being considered a single establishment under various labour laws, as such treatment not only has consequences under labour laws but may also have far-reaching ramifications under other laws. This makes it important for companies to have arrangements involving resource sharing and common facilities regularly vetted by a legal professional.