Sale of a Business – employee entitlements – How can it go wrong?

The  cost of  failing to account or adjust for  employee entitlements can be huge so make sure on sale of a business you check the details carefully.

What you need to know:

• Generally, where there is a transfer of business in accordance with the Fair Work Act 2009 (Cth) (FW Act), an employee’s service with the old employer (the vendor) counts as service with the new employer (the purchaser). However there are exceptions to this general rule.
• Separate statutory principles apply to each of annual leave, personal leave, redundancy pay and long service leave.
• Long Service Leave is regulated at the State level, and different rules may apply in different States.
• Clear agreement as to how the employee entitlements will be dealt with in a sale of business should be reached prior to completion and  set out in the sale of business contract.

Dealing with employee entitlements (such as annual leave, personal leave, long service leave and redundancy pay) in a sale of business can be tricky.

 

Is there a transfer of business?

Is there a transfer of business as described in section 311 of the FW Act?.

Section 311 of the FW Act provides that there is a transfer of business if:

• the employee’s employment with the old employer (the vendor) has been dismissed;
• within three months after the termination, the employee becomes employed by the new employer (the purchaser);
• the work the employee performs for the new employer is the same, or substantially the same, as the work the employee performed for the old employer; and
• there is a connection between the old employer and the new employer (i.e. there is a transfer of assets from the old employer to the new employer; the old employer outsources work to the new employer; the new employer ceases to outsource work to the new employer; and/or the new employer is an associated entity of the old employer).

If there is not a transfer of business as described in section 311 of the FW Act, an employee’s service with the old employer (the vendor) will not count as service with the new employer (the purchaser). Therefore, the old employer 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 new employer would not need to recognise the employee’s service with the old employer for the purposes of accrued annual leave, personal leave and redundancy pay.

If there is a transfer of business as described in section 311 of the FW Act, accrued annual leave, personal leave and redundancy pay should be dealt with is follows.

Annual Leave

In a transfer of business, accrued annual leave entitlements can be dealt with in one of two ways depending on whether the new employer elects to recognise the employee’s service with the old employer:

1. If the new employer is not an associated entity of the old employer and the new employer elects not to recognise service for annual leave purposes, the old employer should pay out all accrued annual leave. As a result, the accrued annual leave entitlements will not transfer with the employee to the new employer; or

1. If 1 above does not apply, accrued annual leave entitlements will transfer with the employee to the new employer and appropriate terms should be included in the sale contract for an adjustment to the purchase price to reflect the liability for which the new employer is now responsible

Personal Leave

In a transfer of business, accrued personal leave entitlements cannot be paid out by the old employer and must therefore transfer with the employee to the new employer. Appropriate terms should be included in the sale contract to adjust the purchase price to reflect the (potential) liability inherited by the new employer.

Redundancy Pay

Section 122(1) of the FW Act provides that in a transfer of business, redundancy pay entitlements can be dealt with in one of two ways. Like Annual Leave, the outcome depends on whether the new employer elects to recognise the employee’s service with the old employer:

1. If the new employer elects to recognise service with the old employer for redundancy pay purposes, the employee is not entitled to be paid redundancy pay when his or her employment with the old employer terminates (generally at completion). As a result, the employee’s service with the old employer counts as service with the new employer for redundancy pay purposes; or

1. The new employer, provided it is not an associated entity of the old employer, can choose to not recognise an employee’s service with the old employer for redundancy pay purposes and the old employer will be required to pay redundancy pay to the employee upon termination (generally at completion).

Long Service Leave

Long service leave is governed at the State level depending on to the location of the employee:

·              Industrial Relations Act 2016 (Qld)

·              the Long Service Leave Act 1955 (NSW)

·              the Long Service Leave Act 1992 (Vic)

·              the Long Service Leave Act 1987 (SA

·              the Long Service Leave Act 1958 (WA)

·              the Long Service Leave Act 1976 (Tas)

In Queensland, the Industrial Relations Act 2016 (Qld) provides that where a business is sold and an employee remains with the business, or has less than a three month break between being dismissed by the old employer and being employed by the new employer, the new employer becomes responsible for the employee’s accruing long service leave entitlement. Importantly, in many cases this entitlement cannot be cashed out by the old employer, even with the consent of the employee. Arrangements in which the old employer undertakes to payout an employee’s long service leave entitlement should be treated cautiously. Advice specific to the relevant jurisdiction should always be obtained.

Conclusion

It is important for employers to be mindful of the extent of, and how to deal with, employee entitlements in a sale of business. The outcomes depend on the nature of the employees employment, length of service, relevant jurisdiction, buyer election and the terms of the sale contract.

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 business. Ask us how!

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What happens to your business when you die or become disabled?

Most business owners are flat out managing staff, payroll, creditors, customers and technical changes, which means there is little time left to plan for risks.

here are a few suggestions in getting things sorted:

1 Enduring Power of Attorney– Get this signed and make sure it covers trusts and companies as well as your personal capacity for financial and health matters;

2 General Power of Attorney– Where appropriate you should sign a General Power of attorney if you are sole Director of your company to make it easier to deal with banks and other companies with whom you contract;

3 Insurance- Get insurance to cover at least part of your business debt level, cash flow requirements for 6 months and immediate expenses. In terms of goodwill, if you have a shareholder or partner you must insure for the value of your business interest or equity.

4 Business Succession Agreement – You must have a written agreement with your shareholders or partners that provides for a conditional grant of an option to acquire the balance business from you or your family trust as owner of the share. If it is not written correctly stamp duty and capital gains tax will rise as at the date of the Deed leaving a worse revenue outcome for your family.

5 A Valid Will on the best terms – Everyone should take the opportunity to prepare a valid Will that covers all of their circumstances including business interests companies, shares, trusts and property, on terms that provide the best outcomes for their family. It is a small price to pay for a well drafted Will if it provides protection of beneficiaries for bankruptcy, disability and matrimonial disputes. By drafting key terms you can ensure that tax is minimized in the family group including children being taxed at adult rates and a wider class within which to distribute income such as trusts and companies. You can cover forgiveness of loans between family companies and trusts where there have been distributions for tax but no payments made.

6 Digital Assets – You should make sure adequate wording is included i your Enduring Power of Attorney and your Will to cover access to and ability to deal with digital assets. These include bank accounts, investment portfolios, family photographs and social media accounts. Make sure you cover ownership of domain names, email accounts and cloud based back up accounts so that your chosen attorney or executor can gain access to and control these assets according to your wishes.

7 Advance Health Directive Take the time to get this documents reviewed by your General Medical Practitioner and make your decisions regarding end of life treatment. Do not leave it open for family members to argue about pain relief, CPR, hydration surgery, antibiotics or other treatments when you may have lost the ability to communicate, are terminal  or end up in a permanent coma.

8 Binding Nominations for Superannuation- Many of our clients have not checked to ensure their Wills match the updated Binding Nominations that their accountant or financial advisor have put in place. Given the substantial changes in the legislation starting on 1 July 2017 we recommend all clients review this aspect as a matter of urgency. Do not wait until it is too late as your family will suffer the consequences of addition tax payable on your super nest egg built up over many years.

So these are just 8 simple points to tick off to ensure you are in the best possible position as a business owner. Take the time to get a review. It will only be 1 hour of discussion and is best done with your accountant/ financial and legal advisor together.