Selling a Business – What about employee entitlements?

Selling a Business – What about employee entitlements?

Selling or buying a business can be both exciting and daunting at the same time. However, it is important to consider the practical details of certain aspects of the proposed transaction. One such practical detail is employee entitlements.

Being unaware of obligations regarding employee entitlements (or not dealing with them correctly) can be costly. As a general proposition, where there is a transfer of business in accordance with the Fair Work Act 2009 (Cth) (the Act), an employee’s service with the old employer (the seller) counts as service with the new employer (the buyer). However, there are some exceptions to this general rule. It is also important to know that there are separate statutory principles which apply to each of annual leave, personal leave, redundancy pay and long service leave (if any). As such, there should be clear agreement as to how the employee entitlements will be dealt with in a sale of business contract.

The first thing that should be considered when determining how to deal with employee entitlements is whether in fact there is a transfer of business as described in section 311 of the Act. To this end, section 311 of the Act provides that there is a transfer of business if:

  • the employee’s employment with the seller has been dismissed;
  • within three months after the termination, the employee becomes employed by the buyer;
  • the work the employee performs for the buyer is the same, or substantially the same, as the work the employee performed for the seller; and
  • there is a connection between the seller and the buyer (ie there is a transfer of assets from the seller to the buyer; the seller outsources work to buyer; and/or the buyer is an associated entity of the seller).

If there is in fact no transfer of the business, an employee’s service with the sellerwill not count as service with the buyer. Therefore, the seller would simply deal with accrued annual leave, personal leave and redundancy pay in the same way that it would if it was an ordinary redundancy situation, and the buyer would not need to recognise the employee’s service with the seller for the purposes of accrued annual leave, personal leave and redundancy pay. However, if there is a transfer of the business, then entitlements should be dealt with is follows. 

Personal Leave

In a transfer of business, accrued personal leave entitlements cannot be paid out by the sellerand must therefore transfer with the employee to the buyer.

Annual Leave

In a transfer of business, accrued annual leave entitlements can be dealt with in one of two ways.

  1. If the buyer is not an associated entity of the seller and the buyer is not recognising service for annual leave purposes, the seller should pay out all accrued annual leave. As a result, the accrued annual leave entitlements will not transfer with the employee to the buyer.
  2. If paragraph number 1 above does not apply, accrued annual leave entitlements will transfer with the employee to the buyer.

Redundancy Pay

Section 122(1) of the Act provides that in a transfer of business, redundancy pay entitlements can be dealt with in one of two ways.

  1. If the buyer is recognising service with the seller for redundancy pay purposes, the employee is not entitled to be paid redundancy pay when his or her employment with the seller terminates (generally at completion). As a result, the employee’s service with the seller counts as service with the buyer for redundancy pay purposes.
  2. The buyer, provided it is not an associated entity of the seller, can choose to not recognise an employee’s service with the seller for redundancy pay purposes and the seller will be required to pay redundancy pay to the employee upon termination (generally at completion).

Long Service Leave

In WA, long service leave is governed by the Long Service Leave Act 1958 (LSL Act). There is a sliding scale which applies where a business is sold and an employee remains with the business. Ordinarily at completion an adjustment will be made in favour of the buyer for an amount determined by working out the accrued long service leave in respect of transferring employees, which is in turn determined by the length of service of each of those employees. As a general proposition, in a transfer of business an employee’s service with the seller will count as service with the buyer for the purposes of the LSL Act.

Conclusion

It is important for employers to be aware of how to deal with employee entitlements in thesale of business. As such, all details regarding employee entitlements should be provided during the due diligence stage so that the parties can have meaningful discussions, and reach agreement, regarding how employee entitlements will be dealt with in the sale of businesscontract.

Finally, if you have read this far and think that you need some practical advice or assistance in relation to your situation, then now is probably the time to get in touch. Austral Legal can help and we offer an initial discounted 30-minute SmartMove appointment for $80 by phone or in person at our office. Bookings can be made online through our website or simply by phoning our office on 08 9745 9550. Once we have a handle on what is required, we may well be able to offer a fixed fee for any further legal services, giving you cost certainty from the start. Austral Legal. Practical advice.