When you sell a business, there are two potential paths your employees may take. They can transfer with the business and commence employment with the new business owner. Alternatively, their employment can end. Which path they take depends both on whether the new business owner wishes to employ them and whether the employee wishes to continue working in the business. However, whether the business is sold by a share or asset sale may influence these choices. This article explains what happens to employees in a sale of business, including when you must pay their leave entitlements.

Employees Transferring with the Business in a Share Sale

If you are selling your business via a share sale in your company, this means that the entity that operates the business stays the same. The only change is to the shareholders and directors of the company, which will become the purchaser and the purchaser’s nominated directors.

In this situation, the employees do not ‘transfer’ but stay where they are. Once you sell your shares, the employees of the business will continue in their positions. They will also keep all their entitlements, including annual and long service leave, rates of pay and conditions.

Employees Transferring with the Business in an Asset Sale

An asset sale means that the purchaser’s entity (such as a company) buys the business from your operating entity. In this case, the rules for transferring employees are more complicated.

The purchaser can purchase the business with or without taking on the existing employees of the business. This issue is open to negotiation, with the agreed terms included in the sale of business agreement. If the purchaser agrees to purchase the business and take on its employees, the employees will need to be transferred to the purchasing entity. For example, the purchaser’s company will need to re-employ the employees.

Fair Work Requirements in an Asset Sale

If the purchaser does take on employees, they must comply with Fair Work legislation requirements. These include honouring employee entitlements such as personal leave, existing flexible working arrangements and parental leave.

However, depending on what is negotiated between the parties, there are certain employee entitlements that the purchaser does not have to recognise. These entitlements include:

  • redundancy payments;
  • annual and long service leave;
  • unfair dismissal; and
  • notice of termination entitlements.

If the purchaser does not agree to recognise these entitlements, the vendor will need to pay them to the employees before the sale of business settlement.

Furthermore, employee entitlements are not the only items that may be transferred with the business. The vendor will need to provide the purchaser with up to date records of the transferring employees. The purchaser must keep these records for seven years. It is also best practice for the purchaser to enter a new employment agreement with the transferring employees. This gives both the purchaser and employees clarity on their rights and entitlements.

Departing Employees in a Sale of Business

If the purchaser does not agree to take on any employees in their purchase of the business, or the employees do not wish to continue with the purchaser from settlement, then there is no transfer of business under the Fair Work legislation.

This means the vendor will need to terminate all employees of the business and pay for all outstanding employee entitlements on or before settlement. The entitlements that the vendor must pay include:

  • annual and long service leave payments;
  • redundancy entitlements; and
  • termination notice payments.

The vendor will need to provide their employees with written notice outlining their termination of employment. The notice will need to be delivered personally or sent to the employee’s last known address.

Key Takeaways

Selling a business can be a rewarding but challenging experience for the vendor and their employees. It is important that you understand the rights of employees in a sale of business. This is especially the case if you are selling your business via an asset sale, rather than a share sale.

If you have any questions about employees in a sale of business, call LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

Joshua Elloy
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