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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