Marino Law | Gold Coast Law Firm

How Employees and Their Entitlements are Dealt With Upon the Sale of a Business

An issue that often arises between the Buyer and the Seller of a business is how to deal with not only the employees of the business being sold, but also how any accrued entitlements (annual leave, sick leave, long service leave, superannuation etc) ought to be dealt with as part of the sale.

This article deals with the situation where the Seller, being an individual, company or a trust sells the business to the Buyer who is a separate and distinct individual, company or trust.

If however, the sale of a business simply involves the Seller selling the shares in the corporate entity that runs the business, then there will be no change of employer entity and the Buyer would simply assume control of the business and all accrued entitlements of its employees upon completion.

In general terms, the Buyer has three options for dealing with the employees of the business:-

  1. Not to offer the employees employment with the Buyer, in which case, upon completion of the sale, the employee becomes redundant and entitled to redundancy pay, including (without limitation) accrued annual leave, termination notice pay, redundancy pay and any pro-rata long service leave (if vested).
  2. Offer the employees (or some of them) employment, but without recognition of prior service. This is an option available to the Buyer under sections 22(5) to 22(8) of the Fair Work Act 2009 (Cth) (“the Act”) and essentially means the employment is terminated upon completion of the sale and a new term of employment commences with the Buyer. This is attractive to a Buyer who gains an experienced employee under a new employment arrangement, without continuing employee entitlements. In this scenario, the Seller is liable to pay out accrued entitlements as the employee’s continuity of service is severed on completion, subject to the following exceptions:-
  • personal/carer’s leave and parental leave must still be recognised and will transfer to the Buyer. An adjustment for those applicable entitlements will still need to be made under the sale Contract.
  • Long service leave will also carry over and if any payment is made by the Seller for same, it will be applied to the employee’s total entitlement, rather than be deemed a new employment arrangement with the Buyer. When eligible for long service in the future, the Buyer will pay the employee the difference between their entitlement and what they are paid by the Seller.
  1. Offer the employees (or some of them) employment with recognition of prior service. This is probably the most common option and results in continuity of employment and the least disruption to employment terms. In this scenario, the Buyer effectively picks up immediately where the Seller leaves off by assuming liability for all entitlements that are not taken or paid out and on completion and an adjustment is made between the parties to the Contract for same. In Queensland, clause 18 of the Real Estate Institute of Queensland (“REIQ”) Sale of Business Contract provides for an adjustment of 70% of the aggregate value of entitlements of transferring employees on completion in favour of the Buyer.

It should be noted that option 2 is not available where the Buyer and the Seller are “associated entities” within the meaning of s.50AAA of the Corporations Act 2001 (Cth) and a transfer of employment will occur, regardless of any agreement between associated entities to the contrary. In this scenario, the Buyer will receive a transfer of all accrued employee entitlements between associated entities.

A Seller receives the most benefit from a Buyer who takes on as many employees as possible because:-

  1. The number of non-transferring employees reduces and decreases the Seller’s liability for potential redundancy payments if such persons cannot be reassigned elsewhere; and
  2. If employees are transferring employees and their respective periods of service inherited by the Buyer, the Seller won’t have to pay out entitlements such as annual leave or any long service.

Conversely, the Buyer will not want to take on any more employees than are absolutely necessary for the operation of the business and will often advise the Seller that they will not recognise annual leave or redundancy pay, leaving these issues (and payments) in the hands of the Seller.

If the Buyer makes an offer to an employee that is rejected, then provided the offer is for continuity of service and is on terms and conditions that are reasonable and no less favourable to their current employment, the employee will not be entitled to redundancy pay but will still be entitled to their accrued entitlements.

It should also be pointed out that redundancy pay is governed by the Act and if the business is a small business employer (ie less than 15 employees) or the employee does not qualify for redundancy pay (for example, is a casual employee or has less than 12 months service) then no redundancy pay may be payable by either party, depending on the circumstances.

Non-transferring employees should receive notice of termination of their employment and regard will need to be had to the length of the employee’s employment, any relevant awards and any applicable employment contracts. It is always best to ensure that notice is served in writing using the most up to date addresses and contact information, to minimise the risk of any subsequent claims for unfair dismissal in the future.

The timing of when the Seller notifies the employees of the business sale is not governed by legislation in Queensland and is therefore a commercial decision of the Seller. That said, we often come across clauses in business contracts which place obligations on the Seller to introduce the Buyer to the employees upon the contract becoming unconditional or during any pre-settlement tuition or trial period. The timing of informing employees is a decision to be discussed between the Seller and the Buyer at the time of negotiation of the Contract.

From a Seller’s perspective, there are also a number of tax issues that need to be finalised upon the sale of the business, including (without limitation) superannuation, pay as you go (PAY-G), fringe benefits tax (FBT) and tax on any employment termination (ie redundancy etc) payments.

Two very important questions that ought to be considered at the time of formation of the Contract are:-

  1. What precautions ought to be taken to prevent non-transferring employees competing with the business, soliciting customers or employees away from the business; and
  2. What precautions ought to be taken to protect the disclosure or misuse of confidential information?

It should be remembered that on settlement of the contract of sale, the employee’s employment with the Seller is terminated and employment with the Buyer commences. In practical terms, this also means that any existing employer / employee agreements also come to an end. If there are particular confidentiality or restraint of trade covenants binding those employees, the Buyer ought to ensure that fresh employment contracts, non-disclosure agreements and similar should be immediately implemented.

To avoid any potential disputes between the Seller, the Buyer and/or any employees, the time for discussions between the Buyer and the Seller regarding how employees will be dealt with upon the completion of the sale is before the contract is executed. The parties ought to identify who will bear the ultimate liability for what payments to employees and take this into account when negotiating the sale price for the business.

Regardless of whether you are a Seller or a Buyer, contact Marino Law at the earliest possible opportunity to discuss your options for dealing with employees and negotiating appropriate terms into your sale contract, thereby saving or minimising what could be significant payouts for employee entitlements upon completion of the transaction.

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