Purchasing a business? Your obligations to transferring employees

Purchasing a business (i.e. assets, rather than shares in a company) can be a complex process.

Proper due diligence is essential to determine exactly what is being purchased. The purchaser is under no obligation to take on the current employees of the business, however employees are often a vital part of successful businesses.

If the purchaser decides to keep some or all of the vendor’s employees or employs them within three months of termination by the vendor and the work performed for the “New Employer” (the purchaser) is substantially the same as the work performed for the “Former Employer” (the vendor), then careful consideration should be given to the transferring employees in relation to the sale of the business. Why? –

Generally, when an employee moves to a new employer they are starting their period of service afresh. This means that no recognition is given to the employee for former service or any accrued entitlements.  A New Employer however may be required to recognise an employee’s prior service with a Former Employer following the purchase of a business.

The New Employer has no obligation to recognise entitlements in relation to:

  1. redundancy payments;
  2. annual leave accrued; and
  3. unfair dismissal.

A New Employer that is not an associated entity of the Former Employer is entitled to elect to not recognise the transferring employee’s annual leave entitlements. In this case the Former Employer has to pay out the untaken accumulated annual leave to the employee upon termination.

Long service leave entitlements are more complicated. The National Employment Standards provide no uniform long service leave entitlement. Long service leave entitlements therefore depend on the terms of the employment contract and applicable Awards and legislation.

A New Employer must recognise an employee’s service with the Former Employer when working out the following entitlements:

  1. personal and carer’s leave;
  2. requests for flexible work arrangements; and
  3. parental leave.

The risk regarding personal leave is something that the Former Employer and the New Employer should share. The sale price should be adjusted accordingly. A transferring employee may have had a good run with his or her health resulting in the accumulation of months of personal leave entitlements over a long period of service. If the employee’s health were to deteriorate after the business has transferred to the New Employer, the employee will be entitled to be remunerated by the New Employer for all of their time off work up to the limit of their accrued personal leave entitlement. This could potentially cost the New Employer tens of thousands of dollars.

The New Employer will also have a number of superannuation related matters to consider before purchasing a business. The New Employer should ensure that they are not acquiring an unexpected superannuation liability.

This summary is for general guidance only and should not be regarded as legal advice. Legal advice should be obtained before taking any action on any issue covered in this article.