Summary
- When selling a business, employee entitlements such as annual leave, long service leave, and redundancy pay must be carefully negotiated between the buyer and seller to avoid unexpected liabilities.
- The treatment of transferring employees depends on whether the buyer chooses to recognise prior service, which directly affects entitlement calculations and costs.
- Written agreements should clearly allocate responsibility for existing employee entitlements to prevent disputes after settlement.
- This article is a plain-English guide to negotiating employee entitlements during a business sale in Australia, intended for business owners and employers involved in a sale transaction.
- It has been prepared by LegalVision, a commercial law firm that specialises in advising clients on business sales and employment law matters.
Tips for Businesses
Identify all outstanding employee entitlements before entering negotiations. Decide early whether the buyer will recognise continuous service, as this affects costs for both parties. Record all agreed positions in the sale contract. Review relevant Modern Awards or enterprise agreements, as these may impose additional obligations on transferring employees.
When buying or selling a business, you must carefully manage employee entitlements as part of the transaction. Getting these adjustments right at settlement protects both parties and ensures employees receive what they are owed. If you are buying or selling a business, you need to account for the business’ employees. Specifically, you must make the proper adjustments regarding their entitlements at settlement. This article explains how a buyer and seller can negotiate employee entitlements in a sale of business. It also sets out the process for attending to adjustments at settlement.
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.
Negotiating the Adjustments
When adjusting employee entitlements at settlement, you should consider each of the entitlements separately. There are a number of entitlements and common approaches taken when dealing with each.
Annual Leave
Annual leave is an entitlement that an employee will be paid out upon termination. It is common for the parties to agree to deduct the full amount of the employee’s annual leave entitlements from the value of the purchase price for this reason.
Some standard form contracts such as the New South Wales (NSW) Law Society, Real Estate Institute of Queensland (QLD) and Law Institute Victoria contracts include an adjustment for 70% of the value of annual leave. This is because the buyer will receive a tax deduction when the employee entitlements are paid. There is a 70% allowance rather than 100% as the corporate tax rate was 30% when most of these standard form contracts were issued.
Personal Leave
Personal leave is not paid out to an employee when they are terminated. Some employees may also never take the personal leave they have accrued. For this reason, personal leave is a negotiation point between the parties.
Some factors that will affect this adjustment are:
- how much personal leave an employee has accrued. A buyer may be willing to assume the liability if there is a minimal entitlement; and
- whether there are other entitlements that parties can use to negotiate a reduced adjustment for personal leave. For example, if the seller is allowing a 70% adjustment for long service leave, they can use that as a bargaining chip to negotiate a lower percentage for personal leave adjustments.
Long Service Leave
An entitlement to long service leave may not necessarily be paid out to an employee when they are terminated. Long service leave accrues from when an employee has commenced their employment with the seller or the predecessor of the seller. However, employees can only take long service leave if they have been at the business for over 10 years. This is the case in most states and territories.
An employee may receive a pro-rata payment of their entitlement to long service leave if they have been an employee in the business for at least five years or seven years. The period of time depends on the relevant state or territory and whether the termination of employment was for specific reasons.
Most standard form contracts, such as the NSW Law Society, Real Estate Institute of QLD and Law Institute of Victoria contracts, include an adjustment for the accrued value of long service leave for employees who have at least five years’ service.
Similar to personal leave, the parties can negotiate the percentage. Generally, it is between 20% and 70% in the standard form contracts.
Redundancy
Most small business employers (those with less than 15 employees) do not have to pay redundancy pay unless an applicable award states otherwise.
If redundancy pay is required, the seller is generally responsible for paying it to the employees who are being terminated at settlement. The seller may also make the redundancy payment where the buyer has elected not to recognise the employees’ prior service. If the buyer does recognise prior service, the employees’ employment is continuous. This means the employee will not receive redundancy pay at settlement.
However, it is important that the provisions of the sale of business contract set out the parties’ agreement. For example, the Real Estate Institute of QLD standard contract requires the buyer to pay redundancy pay if they do not offer to employ the seller’s employees. If the parties do not agree to this, they will need to draft a special condition to the sale of business contract that reflects this. A special condition is another clause parties agree to include in the contract that is not already in the standard contract. Therefore, special conditions reflect circumstances and agreements specific to the parties.
Wages and Superannuation
Adjustments for wages and superannuation are usually not contentious. Essentially, the seller is responsible for all wages and superannuation payments up until settlement, and the buyer is responsible from settlement. This is the case for all transferring employees, whether the buyer recognises prior service for annual leave and redundancy purposes or not.
The method of calculating the above adjustments needs to be set out in the sale of business contract. Most standard form contracts have detailed provisions on how to deal with this. However, the position in the standard form contract may not be suitable for every transaction. The parties can amend it by including special conditions.
Calculating the Adjustments for Settlement
In order to calculate adjustments, the seller should liaise with their accountant and sale of business lawyer before settlement. This gives the seller the opportunity to provide the details to the buyer to review before settlement.
When the parties finalise the adjustment figures, the parties prepare a settlement statement. Usually, the buyer’s lawyer will prepare the statement. The statement sets out how the parties will amend the purchase price based on the value of the adjusted entitlements.
The seller and their lawyer review the settlement statement immediately before settlement. Once the parties agree to the figures, the buyer pays the final agreed value of the purchase price to the seller at settlement.
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Key Takeaways
Regardless of whether you are buying or selling a business, you should consider the negotiation of employee entitlements early on in the sale process. Specifically, you should seek advice on the most suitable approach for you and the other party. However, paying out employee entitlements in a business sale can be more costly than you anticipate.
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Frequently Asked Questions
When a business is sold, the buyer and seller must adjust employee entitlements at settlement. These include annual leave, personal leave, long service leave, redundancy, wages, and superannuation.
The buyer’s lawyer typically prepares the settlement statement, which outlines how the parties will adjust the purchase price based on employee entitlements.
Yes, parties can amend standard form contract provisions by including special conditions that reflect their specific circumstances and agreements.
The seller pays all wages and superannuation up until settlement. From settlement onwards, the buyer takes responsibility for all transferring employees.
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