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Selling or purchasing a business is an exciting milestone in any business owner’s career. However, it can be an overwhelming period of time contemplating issues such as leases, loans, due diligence periods just to name a few. However, another significant element is what happens with employees? What do new and exiting employers need to do? What happens with employee entitlements?

What happens if I don’t want the employees to transfer across?

If the purchaser of a business does not want employees to transfer across, or has elected to employ only a certain number of employees, the previous employer will need to terminate the employee’s employment, provide the relevant notice period under the applicable industrial instrument and (more than likely) attend to payments for redundancy as their role is no longer required to be completed.

In this instance, the purchasing employer needs to carefully review the terms of the Sale of Business contract to ensure that they do not have any obligations imposed on them to offer employment to the exiting employers workers.

What is a transfer of business?

Under the Fair Work Act 2009 (Cth) (the Act), a transfer of business is deemed to occur if:

  1. the employment of an employee (the transferring employee) has been terminated;
  2. within three months of being dismissed, the employee becomes employed by the new employer who has acquired the business;
  3. the work the transferring employee performs for the new employer  is substantially the same; and
  4. at least one of the following applies between the two employers:
    1. there is an arrangement that the new employer owns, or has use of some or all of, the old employer’s assets that relate to the work the employee is completing;
    2. the work the transferring employee is completing is outsourced by the old employer to be completed on behalf of the new employer; or
    3. the old and new employers are associated entities within the meaning of the Corporations Act 2001 (Cth).

Period of service

Under the Act, the new employer after a transfer of business must recognise an employee’s period of service with their previous employer for certain entitlements such as:

  1. sick and carer’s leave (also referred to as personal leave);
  2. requests for flexible working arrangements; and
  3. parental leave entitlements.

However, if the new employer elects not to recognise an employee’s period of service for certain entitlements and informs the transferring employees of this decision prior to their employment commencing (and prior to the transfer of business occurring), an employer may not be required to recognise prior service for the calculation of entitlements such as:

  1. redundancy entitlements;
  2. annual leave accruals;
  3. the minimum employment period required to be able to have standing to file an unfair dismissal application; and
  4. notice periods.

If the new employer wishes to restart the transferring employee’s minimum employment period, they will need to issue correspondence in writing confirming this decision prior to the transfer of employment occurring.

What about annual leave?

If an employee is transferring across as a result of a business acquisition, two main situations arise. Either the annual leave accruals will be transferred across to the new employer and everything will continue as per usual or alternatively, if the two employers are not associated entities, the new employer can decide not to recognise an employee’s service with the old employer and the old employer will be obliged to pay out the employee’s untaken accumulated annual leave, accrued up to the date of the transfer of business.

What happens to the terms and conditions of employment?

When there has been a transfer of business as outlined in the Act, certain types of industrial instruments may “follow” the employee to their role with the new employer. The types of industrial instruments which can transfer across and will continue to apply are:

  1. an Enterprise Bargaining Agreement or Collective Agreement which is a specific type of Agreement approved by the Fair Work Commission;
  2. a workplace determination;
  3. an Award which specifically names the Employer.

Depending on the circumstances, sometimes an individual flexibility arrangement or a guarantee of annual earnings may also continue to apply.

Will the new business owner get copies of the employee records?

The Regulations which accompany the Act require the previous employer to transfer the employment records for each transferring employee at the time the settlement or agreement is finalised. These records must then be kept by the new employer for a period of 7 years.

Do I need to pay for any entitlements at settlement?

The general position under the REIQ Business Sale Contract is that at settlement, the Seller (or old employer) must provide an adjustment to the Buyer for 70% of the transferring employees sick leave, annual leave and long service leave entitlements (if they have been employed for five years or more).  Of course, the percentage of that adjustment is negotiable between the Seller and Buyer, and this is often done where there are unusually high levels of sick leave (given there is no certainty that employees will take that sick leave).

Ensuring employees are properly managed in the purchase or sale of a business is critical to the success of the transaction and the ongoing operation of the business.  But unfortunately this is an area that is often overlooked. 

Please contact a member of our Workplace Team for advice regarding employee issues or a member of our Commercial + Property Team if you are considering buying or selling a business.