Summary
- When a business is sold, employees may either continue employment (in a share sale) or be terminated and re-employed by the buyer (in an asset sale).
- In a transfer of business, the new employer usually recognises some employee service and entitlements, such as personal leave, while others (like redundancy) may be handled by the old employer.
- If employees are not taken on by the buyer, the seller must terminate their employment and provide notice, final pay and potentially redundancy.
- This guide explains what happens to employees in a sale of business for Australian business owners, including transfer rules and entitlement risks.
- It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on employment law and business sales.
Tips for Businesses
Decide early whether employees will transfer or be terminated, and reflect this in the sale agreement. Confirm who is responsible for accrued entitlements and redundancy. Provide proper notice and documentation, and ensure the buyer’s offer is clear to avoid disputes or unexpected liabilities.
Employees in a sale of business must be carefully managed because their employment does not automatically transfer to the new owner and their entitlements must be addressed as part of the transaction. Depending on how the deal is structured, employees may be offered new employment with the buyer or have their employment terminated by the seller, with obligations arising around notice, redundancy, and accrued entitlements such as leave and service. This article explains what happens to employees during a sale of business, including how their employment and entitlements are treated.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
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.
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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.
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Frequently Asked Questions
Employees may either transfer to the new owner or have their employment terminated. This depends on the sale structure and whether the buyer offers ongoing employment.
In a share sale, employees remain employed by the same entity with unchanged entitlements. In an asset sale, the buyer can choose whether to employ existing staff.
Responsibility depends on what the parties agree. If employees transfer, the buyer may take on some entitlements. If not, the seller must pay outstanding wages, leave and redundancy before settlement.
Yes. Employees must accept an offer from the new owner to continue working. If they decline, their employment ends and the seller must finalise their entitlements.
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