Employees are a crucial part of a business. Having good employees ensures your business runs effectively and increases the likelihood of returning customers. During the business sale process, the buyer and seller need to consider what will happen to the employees when the business is sold. Both parties should comply with the Fair Work Act 2009 (Cth) when dealing with employees. This includes the handling of employees’ entitlements and notice requirements. In this article, we examine the different options for dealing with employee entitlements in a business sale. Specifically, buyers and sellers should consider:

  • termination;
  • not recognising prior service (terminating and rehiring); and
  • recognising prior service (transferring).

Terminating Employees

You should first look at the contract for the sale of business. This is because it sets out requirements for dealing with employee entitlements in a business sale. Generally, it is up to the buyer whether or not they offer employment to the seller’s employees. However, this depends on the provisions in the contract.

The parties can include a number of terms in the contract. For example, there may be a term which requires the seller to terminate all employees at settlement and pay all of their entitlements. If the buyer decides not to employ any of the seller’s employees at settlement, it is up to the seller to notify the employees of their termination. The seller must also pay the employees’ entitlements up until the date of termination of employment, including:

  • annual leave;
  • redundancy;
  • accrued pro-rata long-service leave;
  • wages; and
  • superannuation.

Terminating and Rehiring Employees

The buyer has the option to take on the employees from settlement. The sale of business contract should set out the process for this. For example, the contract may specify that the seller will terminate the employees and the buyer will rehire them by offering new employment in the business. The employees then start afresh in terms of their probation period and annual leave entitlements.

There are a few issues to consider if you are taking this approach. Say the buyer rehires the employee at settlement, or within three months of the seller terminating them. The employee is doing substantially the same role they did while employed with the seller. In this situation, the employee is a ‘transferring employee’ for some of their entitlements. This means their personal leave, parental leave and long-service leave entitlements, as well as their right to request flexible working arrangements, will be transferred.

However, the buyer can decide not to recognise the employee’s prior service with the seller for the purposes of annual leave and redundancy pay. This means the seller is responsible for paying these out to the employees upon termination or settlement, as well as paying out any termination notice periods.

A seller and buyer may choose this approach because it simplifies the adjustment process at settlement. This table provides an overview of what each party is responsible for in this scenario.

Responsibilities at Settlement

Party Responsibilities
Seller
  • annual leave;
  • redundancy pay (if applicable);
  • pay in lieu for termination period (unless the employee receives appropriate notice for termination); and
  • accrued pro-rata entitlement to long service leave (if applicable).
Buyer
  • accrued personal leave;
  • service towards long service leave;
  • service towards parental leave;
  • employee’s right to request flexible working arrangements;
  • any pre-existing enterprise agreement, workplace determination, registered agreement or award.

 

In the above scenario, personal leave, parental leave and long-service leave must be transferred to the buyer. However, the buyer may still request that the seller adjust the purchase price to reflect that they have taken on the seller’s employees.

Transferring Employees

Where a buyer wants to employ the seller’s employees from settlement and decides to recognise their prior service, all of the employees’ entitlements and service will be transferred to the buyer. This includes:

  • annual leave;
  • long-service leave;
  • personal leave; and
  • parental leave.

This can be a preferred option for a number of reasons, including:

  • it ensures continuity of the employees’ employment and causes minimal disruption to the employees during the sale process;
  • the buyer will pay a reduced purchase price as a result of the adjustments; and
  • the seller does not have to pay out the employees separately before receiving the purchase price funds.

If the buyer and seller want to take this approach, many adjustments will need to take place at settlement. This is to ensure the seller fulfils their obligations to the employees right up until settlement. Likewise, the buyer must meet their obligations to the employees from settlement.

The parties may, however, negotiate the reduction in purchase price. As long as the employees receive everything they are entitled to, the parties can negotiate the amount of the purchase price. It should be adjusted to reflect this liability.

Key Takeaways

There are various ways a buyer and seller can approach dealing with employee entitlements in a business sale. You will need to negotiate to get what you want. However, remember to ensure that your ultimate agreement is set out clearly in the sale of business contract.

If you are planning on buying or selling a business and require advice on how to deal with employees, contact LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

Bianca Reynolds
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