Indian labour law already mandates compliance and employee safeguards in mergers, acquisitions, and takeovers where the employing undertaking continues and labour-law undertakings are required for regulatory approval. The novel gap identified here lies in acqui-hiring transactions followed by lawful dissolution, which fall outside these safeguards by extinguishing the employer entity itself. Such structures create a “vanishing employer” problem for non-retained employees. The blog argues the need to address this gap through measures such as successor employer liability and pre-dissolution employee safeguards, while preserving startup agility.
Introduction
Imagine working tirelessly to develop a product and a culture at a promising startup, only to discover one day that the business has been “acqui-hired.” The acquisition is hailed as a success since the staff are promised exciting new opportunities, investors are pleased, and the product may continue under a larger brand. However, the dilemma arises as the original startup company is dissolved and consequently there is no legal “employer” left to owe employees notice, benefits, or severance, leaving employees in a grey zone where their rights are unclear.
This phenomenon is increasingly common globally. Yahoo’s acquisition of Tumblr for $1.1 billion aimed primarily to bring the founder, David Karp, and his team on board. Similarly, Facebook acquired the Lightbox team in 2012, shutting down the app but integrating the employees into its mobile development wing. In both cases, the original employer vanished, creating a potential legal vacuum in case the employees had to seek formal employment remedies.
Acqui-hiring is quietly but dramatically growing in India. For example, Stripe bought Recko to build banking infrastructure in India, while Razorpay acquired PoshVine to strengthen its product-led engagement capabilities. Such deals preserve talent and redirect it to scalable projects, employees remain in legal limbo regarding notice, retrenchment, or continuity rights. While existing literature mainly discusses employee protections in mergers or layoffs, it rarely considers situations where the employer entity ceases to exist immediately after an acquisition.
The blog explores the “vanishing employer” issue, its implications for employee protection and examines the current legal framework to assess whether the existing laws protect employees when a company dissolves post-acquisition. Further, it explores the global approaches such as the “successor employer” concept, and proposes reforms to balance startup agility with meaningful employee safeguards. Ultimately, it argues that India’s legal regime must evolve to prevent acqui-hiring from becoming a zone of diluted accountability.
The Legal Landscape: What the Indian Labour Law Says
Understanding acqui-hiring
Acqui-hiring, in simple words means, buying of a smaller start-up by the big company in order to acquire its people and talent and not merely companies products or assets. For instance, a larger company, acqui-hires a startup, solely for its engineering team. The team is absorbed into the larger company, and the startup is dissolved within weeks. Although the employees now work for the larger company, their original employer, that was the startup company, no longer exists. This dissolution, often seen as a routine “clean-up” step, effectively erases the legal identity of the employer.
Legal framework
The Industrial Disputes Act (“IDA”), 1947 and the Industrial Relations Code (“IRC”), 2020 talks about what happens when an establishment shuts down. The term “closure” is defined under Section 2(cc) of the IDA as the permanent shutting down of a place of employment. Further, the IRC includes provisions for employer obligations in a closure situation under Section 77. These laws require notice to be given to the government and compensation to affected employees.
However, in acqui-hiring situation, the central question boils down to when a startup is dissolved right after an acqui-hire, does that count as a “closure” under the IDA or IRC? In theory, it qualifies as a closure since the original entity ceases to exist immediately after the acquisition The labour law focuses on the survival of the employing establishment and not the continuity of the employee while employees may be absorbed by the acquiring entity in an acqui-hire. The original employer permanently ceases to exist where the startup is dissolved post-acquisition which amounts to “closure”. This is different from investment-led acquisitions as therein despite the loss of managerial control, the startup continues as a legal entity and therefore does not constitute a closure under labour law. However, in practice, the requirements of a closure are seldom met. The company is dissolved so quickly that there’s no legal employer left to send notice, pay compensation, or fulfil statutory obligations. This exposes a critical gap in the Indian labour law regime that while protections exist in theory, acqui-hiring structures allow employers to bypass notice and compensation requirements. As acqui-hiring becomes increasingly common in the startup ecosystem, failing to address this gap risks normalizing a structure where human talent is transferred but employment rights are not, undermining both fairness and trust in India’s labour law framework.
The Legal Vacuum: When No Employer Remains
The most striking challenge in acqui-hiring transaction is that once the target company is dissolved, there is simply no legal “employer” left. At this stage, it is important to highlight thatacqui-hiring affects two categories of employees, that is, ones absorbed by the acquirer under fresh contracts, who do not face an employer-less situation, and those not retained. The “vanishing employer” problem arises for the latter, as the startup is dissolved or rendered defunct, leaving no employer against whom statutory labour rights can be enforced.
Indian labour jurisprudence is built on the premise that employee rights survive only when the undertaking itself continues. The Supreme Court (“SC”) has repeatedly reiterated in the case of Gujarat Agricultural University v. Rathod Labhu Bechar and Deepali Gundu Surwase v. Kranti Junior Adhyapak Mahavidyalaya that employee rights, such as retrenchment compensation, continuity of service, gratuity, and reinstatement can operate only where the undertaking itself survives and remains capable of bearing statutory liability. While successor employers remain liable for pending labour claims where the undertaking continues, acqui-hiring followed by dissolution extinguishes the undertaking itself, leaving non-retained employees without any employer against whom statutory rights can be enforced.
The SC in Anakapalle Co-operative Agricultural & Industrial Society v. Workmen (SC,1963) held that statutory liabilities transfer to the purchaser only when the business is acquired as a going concern. Similarly, in Management of Mettur Beardsell Ltd. v. Workmen (SC, 2006), the Court held that continuity of service arises only when the identity of the undertaking is preserved after transfer. Acqui-hires invert this framework as they dissolve the undertaking entirely, ensuring that none of these protective doctrines can apply.
Recently, in Armed Forces Ex-Officers Welfare Society v. Union of India (SC, 2022) the employer terminated 55 drivers by falsely claiming closure. The Court emphasised that a closure must be real, bona fide, and should be accompanied by compliance with notice and compensation requirements. A mere assertion of organisational restructuring or cessation of work cannot defeat employee rights where the employer continues to exist or operate in substance. By declaring the termination illegal and directing reinstatement with continuity of service and 75% back wages, the Court reaffirmed that labour protections are grounded in economic and functional realities rather than formal corporate labels. The judgment underscores that judicial intervention is effective where closure or restructuring is a façade and the employer continues to exist in substance. However, it also highlights the limitation that such protection depends on the survival of the employer entity, leaving a gap in cases where acqui-hiring is followed by a lawful dissolution that genuinely extinguishes the employer itself.
However, acqui-hires present a far more troubling scenario. Unlike the 2022 case, the dissolution in an acqui-hire is legally valid. Once the target company is wound up, the employer-entity ceases to exist. The employees lose the juridical respondent required to enforce their rights, and the acquiring firm is not treated as a successor employer under Indian law unless it expressly assumes employment contracts, something that acqui-hires rarely involve. The 2022 judgment shows how courts intend to protect workers from evasive or sham closures. While sham closures invite judicial scrutiny, acqui-hires reveal a structural gap where even a lawful dissolution, though subject to regulatory approval under corporate law, can still result in a complete escape from labour liability due to the absence of any mechanism linking dissolution approval to the settlement or transfer of employee claims..
In India, acqui-hiring enables talent acquisition without legal transfer of the employment relationship, allowing accrued benefits and service rights to vanish with the dissolved employer. As acqui-hires continue to shape the economy, this gap represents a serious threat to the stability and fairness of India’s employment ecosystem, besides legal oversight.
Comparative Analysis: Successor Employer Doctrine
While Indian law struggles with dissolutions following acquisition, other jurisdictions have evolved doctrines to ensure that employees are not left stranded when ownership changes.
In the United Kingdom, the Transfer of Undertakings (Protection of Employment) Regulations, 2006 (“TUPE”) ensure that when a business or undertaking is transferred, all rights, liabilities, and obligations under existing employment contracts automatically pass to the transferee under Regulation 4. Further, TUPE prohibits dismissals solely due to the transfer under Regulation 7, ensuring continuity of employment and protection against arbitrary termination during restructurings. In the case of Daddy’s Dance Hall A/S (ECJ, 1988), the Court affirmed that employee rights survive despite restructuring.
In the United States, the Worker Adjustment and Retraining Notification (“WARN”) Act, 1988 requires employers with 100 or more employees to provide 60 days’ advance written notice before a mass layoff or plant closure. Under Section 2101(b)(1), this obligation may extend to successor employers in cases of mergers or acquisitions, holding them accountable when operational control passes and employees are affected.
The frameworks operating in both countries rely on the idea of a “successor employer”, that is, a company that inherits not only the assets or teams but also the employment responsibilities of the previous entity. This concept bridges the gap between business restructuring and employee protection, ensuring continuity of rights even when the corporate structure changes.
Policy Recommendations
In acqui-hiring transactions, the “vanishing employer” issue exposes a serious structural gap between India’s corporate and labour law regimes. To safeguard employee rights without stifling startup innovation, India needs a balanced approach, one that recognizes modern business realities while ensuring fairness and accountability.
Recognising the Successor Employer Doctrine
The IDA, 1947 under Sections 25FF and 25FFA protect employees during transfers and closures. However, they assume a continuing employer leaving a gap in acqui-hires where the entity dissolves immediately. This provision can be amended and a statutory “successor employer” clause should be added to the IRC to ensure that when a company or a part of its workforce is transferred through acquisition, the acquiring firm automatically assumes obligations for continuity of service, unpaid dues, and severance benefits.
Mandate Pre-Dissolution Employee Escrow or Indemnity
To ensure that employees are not left unprotected when a company is dissolved post-acquisition, it should be mandatory for the entity to deposit sufficient funds in a dedicated employee escrow account covering statutory obligations such as gratuity, retrenchment pay, and notice compensation. Moreover, under the Insolvency and Bankruptcy Code, 2016, a comparable protection already exists, where employee wages and dues are treated as priority claims and must be provided for before dissolution under Section 53(1)(b). Extending a similar pre-dissolution safeguard to acqui-hiring transactions would ensure that corporate exit does not occur at the cost of employee rights. This account could be monitored and certified by the Ministry of Corporate Affairs (“MCA”) or the Registrar of Companies, similar to mechanisms used for creditor protection during liquidation. By locking these funds before dissolution, employees retain a clear and enforceable source for their dues, even if the original employer ceases to exist.
Model Guidelines for Startup Acquisitions
The Ministry of Labour and Employment (“MoLE”) and Department for Promotion of Industry and Internal Trade (“DPIIT”) could work together to create model guidelines for startup acquisitions that spell out the best ways to treat employees, such as minimum notice periods, options for continuity of service, and standard compensation norms. The guidelines would promote transparency, consistency, and fairness in acqui-hire transactions, encouraging a culture of compliance and safeguarding employee interests during corporate transitions.
Critics may argue that a successor employer clause could make compliance difficult or deter acquisitions. They may also contend that mandated employee escrows could hurt a startup’s cash flow, and that model guidelines could be perceived as bureaucratic. However, these can be mitigated by applying the successor employer rule only to larger transactions with flexibility for indemnities, allowing staggered or shared escrow funding for smaller startups, and keeping guidelines non-binding to promote transparency without restricting deal structures.
Conclusion
To address the “vanishing employer” problem in acqui-hiring, a phased implementation model in the Indian context is quintessential to balance practicality with enforceability. To begin with, the first stage can concentrate on regulatory clarification, with MCA and MoLE releasing a joint circular requiring employee dues to be settled prior to dissolution and offering companies voluntary disclosure forms for declaring employee treatment after purchase.
In the second phase, the IRC would be amended to include a statutory successor employer provision and regulations for escrow or indemnification certification before dissolution approval.
Finally, the third phase would encourage industry organisations like NASSCOM and Startup India to adopt voluntary codes of conduct for equitable employee transitions while establishing institutional coordination through an interministerial compliance portal that links company strike-off procedures with employee settlement verification. This phased approach would ensure legal clarity, enforceable safeguards, and practical oversight, providing a structured framework to protect employees while preserving the dynamism of India’s startup ecosystem.
Author Bio: Aaransha Shankar is a second-year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow. She is particularly interested in Dispute Resolution and Corporate Law, with a focus on regulatory and transactional challenges emerging within India’s evolving legal and business landscape.
[Ed Note: This piece was edited by Arnav Mathur and published by Vedang Chouhan from the Student Editorial Team.]