What happens to employee entitlements when a business is sold?

There is much to consider when buying or selling a business. Of significant importance is, what happens to the employees of the enterprise once it is sold?

The sale of a business can be a curious time for existing employees and the incoming business owner – it is likely that neither parties have previously worked together and are unfamiliar with each other’s leadership and expertise.

Personalities and attributes aside, it is important for the parties to a business transaction to understand their legal rights and responsibilities regarding the existing employees and the financial cost of terminating and / or transferring employees.

This article explains the employee position when a business is sold in its entirety. (This may be compared to the sale of shares in a company which would result in a change of fundamental ownership but not affect the employee arrangements of the business.)

What happens when a business is sold?

Typical questions asked when a business is transferred include:

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

The Fair Work Act 2009 (Cth) defines the circumstances under which a transfer of business occurs for the purposes of dealing with employee entitlements.

A business is transferred when an employee commences work with the new employer within three months of ending his or her employment with the previous employer, the employee’s duties are substantially the same as they were previously, and either:

• the assets of the business are sold;
• the employers are associated entities (i.e. one has a controlling interest in the other); or
• the previous employer outsources the work of its employees to the new employer.

The future of employees on a transfer of business

A contract of employment is personal between the employer and employee. The contract cannot be transferred to a new employer without the employee’s consent and certain terms under the existing contract must be dealt with before a transfer takes place.

When purchasing a business, a 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;
• 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 settlement 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 a redundancy.

Offers 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 completion date with respect to wages, salaries, commissions and bonuses and long service leave.

• Annual leave is paid to the date of termination and reset from the start date with the new employer.
• Long service leave is paid out on a pro rata basis up to the date of termination and all previous years’ service with the old employer must be recognised by the new employer. This means that if the employee qualifies for long service leave in the future, the new employer will be liable for the difference between the employee’s full entitlement and what was already paid out when he or she transferred.
• Provided the new employer is not an associated entity of the previous employer, written notice may be provided to the transferring employees that the new employer will not recognise previous service for the purposes of probationary periods and unfair dismissal action. In other words, the clock is reset from the time the employee transfers to the new business.

If the buyer makes an offer of employment and the buyer recognises prior service, then the appropriate adjustments are made between the buyer and seller on settlement and the buyer becomes responsible to the employee for all accrued entitlements not taken or paid out at the date of termination of the old employer.

Practical aspects

Generally, the contract for sale of business will set out a process for the seller and buyer to follow when dealing with employees. The following steps are typical:

• The seller must, before completion, 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, it 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 made on settlement between the buyer and seller to reflect the negotiations.

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 on 1300 149 140 or email ch@lawbase.com.au