Employee entitlements when a business changes hands

Staff are often the most valuable part of a business and the part most likely to be handled as an afterthought in a sale. What happens to employees, their accrued leave and their terms of employment depends on how the sale is structured, what the buyer offers and how employment law treats the change. Get it wrong and the cost can fall on either party, sometimes after settlement, when it is hardest to fix.

This article explains the principles. Employment law is detailed and changes over time, so get advice from an employment lawyer on your specific situation.

Share sale or asset sale

The first question is how the business is being sold. Our article on asset sale vs share sale covers the differences in full, but for employees the distinction is simple:

• In a share sale, the company that employs the staff does not change. Employment continues as before, and all accrued entitlements stay with the company. The buyer takes them on indirectly by buying the company, which is why they are usually reflected in the price.
• In an asset sale, the employer changes. Employment with the seller ends, and the buyer offers new employment to the staff it wants to keep. This is where the transfer of business rules become important.

The transfer of business rules in principle

The Fair Work Act contains rules about what happens when a business, or part of one, moves from one employer to another. In broad terms, a transfer of business can occur where:

• an employee's employment with the old employer ends;
• they start work with the new employer within a short period afterwards;
• the work they do is the same or substantially the same; and
• there is a connection between the two employers, such as the new employer acquiring or using assets of the old business.

A sale of business assets to a buyer who takes on the staff will often meet these conditions. When a transfer of business occurs, certain things can follow the employee to the new employer. In principle:

• the enterprise agreement or other industrial instrument covering the employee with the old employer can continue to cover them with the new employer;
• the employee's prior service may count with the new employer for some entitlements, depending on the type of entitlement and whether the employers are associated;
• where prior service is not recognised for some entitlements, the old employer may be required to pay out certain amounts on termination.

How each of these works in your case depends on the details, including whether the buyer and seller are associated entities, which entitlements are involved and what the buyer offers. This is an area where an employment lawyer's advice is essential.

The main entitlements to consider

Annual leave

Accrued but untaken annual leave is often the largest balance. In an asset sale, either the seller pays it out on termination or it is carried across to the buyer, with a price adjustment so the buyer is not paying for leave the seller's staff earned. The approach should be agreed and written into the contract.

Personal and carer's leave

Accrued personal leave is generally not paid out on termination. Whether it carries across depends on how the transfer is treated and what is agreed.

Long service leave

Long service leave is governed mainly by state and territory legislation, not the Fair Work Act, and the rules differ between jurisdictions. Many state laws treat service as continuous where a business is transferred and the employee keeps working in it. Because long service leave builds up over many years, it can be a significant hidden liability for a buyer, and a lump sum the seller may need to account for.

Notice and redundancy

If staff are not offered employment by the buyer, or decline an offer, the seller may need to give notice or pay in lieu, and may owe redundancy pay depending on the circumstances and the size of the business. Whether an employee who declines a reasonable offer from the buyer is entitled to redundancy pay depends on the facts and the rules that apply. Get advice before assuming either way.

Superannuation and wages

All wages, superannuation and payroll obligations up to settlement remain the seller's responsibility. Buyers should check through due diligence that superannuation has been paid correctly and on time, because underpayments are a common finding.

Pricing the entitlements

Accrued entitlements are a real cost. As an illustration, a business with ten staff might carry $60,000 of accrued annual leave and a further $40,000 of long service leave, depending on tenure. If the buyer takes on that liability, they will expect a reduction in the price or for the amount to be handled as an adjustment at settlement. See working capital and stock adjustments for how adjustments are typically handled.

Sellers should prepare an accurate schedule of every employee's entitlements well before a sale. Buyers should test it against payroll records.

Agree early which staff will be offered employment, on what terms, and who bears each accrued entitlement. Leaving it to the contract stage invites a late dispute over money.

Keeping key people

Beyond the legal mechanics, buyers care about whether key staff will stay. Sellers can help by:

• reducing the business's dependence on any single person, including themselves;
• ensuring employment contracts are current and accurate;
• considering, with advice, how and when staff are told about a sale;
• agreeing with the buyer on any retention arrangements for critical people.

Telling staff too early can unsettle them; telling them too late can damage trust. Timing is a judgement best made with your advisers and the buyer.

A checklist for sellers

1. Prepare a full schedule of employees, roles, start dates, pay rates and accrued entitlements.
2. Confirm which award or enterprise agreement covers each employee.
3. Check that wages, superannuation and leave records are accurate and up to date.
4. Get employment law advice on the transfer of business rules before signing heads of agreement.
5. Agree with the buyer who will be offered employment and how entitlements are handled.

How we can help

Kainos prepares entitlement schedules, tests payroll and superannuation records, and calculates the price adjustments needed for accrued leave so that both parties negotiate on accurate figures. We advise and represent clients through the sale, working alongside their lawyer and employment law adviser. To discuss your situation, contact us or read about our business sales and purchases service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.