November 2013

Transferring employees upon the sale of a business - not as routine as it sounds

Whenever there’s sale of business, the seller and purchaser will want to make arrangements for transferring employees.  But whether an individual employee decides to make the transfer is more the decision of the individual then the negotiating parties.

When thinking of “transferring employees” it’s better to think in terms of employees who want to transfer, rather than employees who are transferred.  The distinction is important because employees cannot be transferred without their consent.

In the past, we used to talk of a “transmission of business”, but now it’s correct  to speak of a “transferring employee in relation to the transfer of the business”.

The very Fair Work Act

The Fair Work Act says a lot about protecting the entitlements of those employees who do transfer, and this bulletin covers the main points.  The bottom line is that the terms and conditions of employment pretty much continue although there are a few areas where there can be some push back by the purchaser of the business.

An important point to keep in mind is that a seller of a business is always interested in making sure that the purchaser takes on as many employees as possible.  That’s because any employee left behind will become the responsibility of the seller and may well be entitled to a redundancy payment if the seller no longer has a business in which to use the employee.

But the incentive for the vendor doesn’t end there.  If employees are moved across with the same terms and conditions and with service counted, then the vendor won’t have to pay out annual leave or any long service leave entitlements.  Those sums can be significant.

Whilst these amounts can be adjusted in the purchase price, it’s sometimes difficult to work out what ought to be the adjustment for long service leave given that the entitlement doesn’t usually kick in until after five year service and even then the entitlement is not certain until 10 years service.  The adjustment to be made to long service leave is really one of judgment based on the profile of the workforce and perhaps the nature of the industry.

 There’s no easy way to make adjustments for personal/carers leave service or parental leave service, as those entitlements  transfer but cannot be paid out.

But does a buyer want to take all the employees, even those who are not the most suitable?  Often a buyer finds out that the business is overstaffed and redundancies are in order; but the purchaser is carrying all the past service for those employees.  The purchaser will not want to take on any more employees than are absolutely necessary.

Both the seller and purchaser need to keep in mind that the Fair Work Act does a lot to protect the ongoing entitlements on the transferring employees.  If the employees are basically doing the same work that they were doing before the sale then they will continue to keep all of their statutory and award or enterprise agreement benefits, and service for all purposes will be counted as continuous and unbroken.

Options for the purchaser

However, there are still a few options for the purchaser, especially one who wants to send a message to staff that the business is under new management.

Under the Fair Work Act, a purchaser is entitled to say to a transferring employee that their service for annual leave and redundancy will not be counted.  If that is done the employee will no doubt look to the vendor to be paid out annual leave.  And although redundancy entitlements can be a little bit complicated, the usual case would be that if the purchaser does take on the service redundancy entitlements then the transferring employee will be able to obtain that redundancy benefit from the seller.

The redundancy problem is often solved by complicated terms of sale that allows some adjustments or reimbursements if there are redundancies within a short period of time.

But probably the best way to solve this problem is for the purchaser to take only those employees that are needed rather then making offers of employment which seek to carve out the redundancy service.

Early dismissal?

There is one more thing that the purchaser can do.  The general position is that an employee entitled to bring an unfair dismissal claim is unable to do so if their employment ends within the first six months.  Under the Fair Work Act, there is a mechanism for the purchaser to restart that six months period when they take on the transferring employees.  So if the person is dismissed in that first six months they will not be able to bring unfair dismissal claim.  However if the reason for that dismissal is redundancy then the person will still secure the redundancy entitlement.

Same terms and conditions?

Another area of risk for purchasers is that of carelessly making offers of employment on “the same terms and conditions” without knowing exactly what are those terms and conditions.  Quite often these “terms and conditions” aren’t written down, but the employees know exactly what are their entitlements.

Much better for the purchaser to introduce its own contracts of employment from the beginning.  The contracts can provide for the same hours and rates of pay, and with continuity of service in the way that it has been agreed with the vendor.  But at least the purchaser won’t be taking on any unknown “terms and conditions”.

Keep in mind that upon the transfer there is an ending of employment and the commencement of a new employment.  That means that if there are particular obligations of confidentiality or restraint of trade then those should be reintroduced when the employee transfers, and not just be left to the assumption that the old conditions continue to apply.  They don’t.

Overview

It is possible for employees to transfer quite comfortably from a seller of the business to a purchaser.  However, a sophisticated purchaser might well look at the opportunities to make some changes, and usually the best time to make those changes is at the time of acquiring the business.  Adjustments for some service based entitlements can be made as between the seller and purchaser, but once the deal is done the purchaser will be carrying all of the risk and cost of past service.

Whether a seller or a purchaser, it is worthwhile giving some thought to how to deal with those employees who are transferring, and also giving careful consideration to the content of the contract to be offered.

Author: Mark Paul