Business Sales – What About Employee Entitlements?

There is a lot to consider when buying or selling a business. One important consideration that is often overlooked is what happens to employee entitlements when the business changes hands?

It is important for the parties to a transfer of a business to understand their legal rights and responsibilities regarding the existing employees and the financial cost of terminating or transferring employees.

What happens to employee entitlements when a business is sold?

There are several different ways to carry on a business, including:

Like any other asset, a business can be sold. In some cases, the owner of the business changes entirely. For instance, where a business owner sells the assets of their business (plant and equipment, intellectual property, and goodwill) to another person. This is referred to as an “asset sale”.

In some situations, though, the direct owner of the business may remain the same—for instance, where a company carries out the business and it is the shares in the company that are transferred, rather than the assets of the business. This is referred to as a “share sale”. In this case, the legal owner of the business stays the same (i.e., the company).

This article focuses on the first of these situations—an asset sale, rather than a share sale.

Some of the key questions that arise when a business is sold include:

  • What are the responsibilities to the employees of the seller of the business?
  • What are the responsibilities to the employees of the buyer of the business?
  • Who is responsible for accrued or ongoing employee entitlements?
  • What are the rights of the existing employees?

The answers to these questions will be found in the Fair Work Act 2009 (Cth), as well as in the contract that is negotiated between the buyer and the seller for the transfer of the business.

The future of employees when a business is transferred

A contract of employment is personal between an employer and an employee.

The contract cannot be transferred to a new employer without the employee’s consent and, even if the employee consents, certain terms under the existing contract must be dealt with before a transfer takes place.

When purchasing a business, the buyer will need to determine its ongoing needs and decide whether to offer employment to any or all of the existing employees. The buyer may:

  • not offer an existing employee employment with the new business;
  • offer employment but not recognise the employee’s prior service in the business; or
  • offer employment and recognise the employee’s prior service in the business.

In each case, the buyer and seller will have legal obligations to the employees and financial adjustments will be made on the settlement of the business to reflect the negotiations.

No offer of employment by the buyer

If the buyer does not offer employment to an existing employee, the employment will terminate when the business is transferred. The position will become redundant and the seller will need to pay out the non-transferring employee’s accrued entitlements (annual leave, termination notice and long service leave) as well as entitlements for a genuine redundancy, if applicable.

An existing employee who rejects an offer of employment made on terms and conditions that are substantially similar to, and no less favourable than the employee’s previous working conditions, and where the employee’s service for redundancy pay would be recognised by the new employer, is not entitled to redundancy.

An offer of employment by the buyer

If the employee is offered and accepts a position with the new employer, the buyer must recognise the employee’s prior service with the outgoing employer with respect to entitlements for sick and carer’s leave, requests for flexible working arrangements and parental leave.

Provided the buyer is not an associated entity of the seller, it is not required to recognise the employee’s prior service with respect to redundancy, annual leave, long service leave, unfair dismissal and notice of termination.

If the buyer makes an offer of employment but does not recognise the prior service of the employee, the seller will need to pay out the transferring employee’s accrued entitlements up to the date of settlement of the business, with respect to wages, salaries, commissions and bonuses and long service leave.

If the buyer makes an offer of employment and the buyer recognises prior service of the employee, then the appropriate adjustments are made between the buyer and seller on the settlement of the business and the buyer becomes responsible to the employee for all accrued entitlements of the employee.

Practical aspects

Generally, the contract for the sale of the business will set out a process for the seller and the buyer to follow when dealing with employees.

A typical example of the process is:

  • The seller must, before the settlement date, provide the buyer with details of all employees including their commencement date, applicable award, remuneration and bonuses, rostered days, superannuation contributions and accrued annual and long service leave as at the settlement date.
  • The buyer will determine which employees, if any, the buyer wishes to employ.
  • The seller will notify its employees that the business has been sold and that their employment will effectively cease on a specified date.
  • Simultaneous with the notice, the buyer will make an offer of employment (to those employees it wishes to retain) setting out the terms and conditions and confirming (if relevant) the accrued entitlements (during the employee’s service to the seller) that the buyer agrees to recognise.

The appropriate adjustments are then made on the settlement date between the buyer and the seller.

Conclusion

Whether you are selling or buying a business, arrangements for existing employees and the parties’ respective obligations must be carefully considered.

Employee entitlements can have a significant financial impact on the adjusted sale price and it is important these are factored into negotiations.

If you or someone you know wants more information or needs help or advice, please contact us.

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