Transfer of Business – What About Employee Entitlements?

One of the reasons you might buy a particular business is that it employs people with a lot of skill and experience in that type of business. If you want to keep those workers on, you will need to know about employee entitlements under the Fair Work Act 2009 in a transfer of business.

Sometimes when you sell a business, the new owner doesn’t want to keep on any of your workers. In that case you need to look at the relevant Enterprise Agreement or Modern Award, calculate the notice period for each worker, give appropriate notice, and pay out any redundancy payment and accrued leave which is owing.

Big sums can be involved in paying out accrued annual leave and long service leave, and so there is motivation for a vendor to facilitate transfer of its employees to the business buyer.

The Fair Work Act and transfer of business

In this article, we look at opportunities for certain items in the business sale contract to be negotiated, concerning the transfer of employees on the transfer of business.

A “transfer of business” is defined by the Fair Work Act (section 311) to include what commonly happens with “transferring employees” under a Contract for Sale of Business, namely:

  • A person’s employment with the vendor/seller of a business is terminated; and
  • within 3 months of termination that person is reemployed by the buyer to do the same or substantially the same work as before; and
  • The buyer uses the assets of the sold business in connection with that work.

Related company transfers

If a transfer of business is between related companies (‘associated entities’), as might happen in a corporate restructure, then the industrial conditions of the workers involved remain exactly as they were before the transfer. So if, for example, the new owner wanted to let people go to cut overheads, they would have to bear the cost of paying out notice and redundancies etc. All forms of leave entitlement, paid and unpaid, would transfer across with the worker.

Other transfers of business

A business buyer who is also taking on the employees within 3 months of the transfer can choose not to honour certain aspects of the employees’ industrial entitlements, in which case the business vendor will have to pay out the employees for these entitlements, as discussed below at items 1 – 4. If the buyer chooses not to honour the entitlement, they must write to employees or prospective employees and inform them of the situation so that employees can negotiate payout of entitlements with the business vendor. (The Law Society of NSW template form Contract for Sale of Business – 2015 Edition allows for the business purchaser to make an “election” either to recognise the employees period of prior service in the business, or not to recognise that.) Otherwise, all employee entitlements will transfer to the new owner.

There are some accrued employee entitlements which the business buyer must honour based on the period of prior serve (as discussed at items (A) – (E) below), and these may be points of negotiation with the vendor as to a possible price adjustment for the business.

  1. Notice periods: When terminating an employee, the length of service determines how many weeks’ notice you must give. The transfer of the business will end the employee’s employment with the vendor, so the vendor has to give the appropriate notice or pay it out. After that, the buyer only has to give notice to the employee based on their length of service for the buyer.
  2. Unfair Dismissal Rights: Employees only have the right to bring Unfair Dismissal actions after either six months or twelve months (for businesses with less than fifteen employees) of service. The buyer of the business can stipulate that the length of service for Unfair Dismissal purposes will begin again at zero upon transfer.
  3. Annual Leave: The buyer can choose not to honour annual leave accrued under the vendor, in which case the vendor must pay out the accrued leave.
  4. Redundancy: A buyer who wants to make employees redundant can choose not to honour length of service under the vendor, in which case the vendor has to pay out the appropriate redundancy package. If a transferring employee is being offered a new job very similar to the old job, and they refuse it, then they are not entitled to a redundancy package.

The following industrial entitlements are automatically transferred to the buyer and are calculated on the total length of service for both the vendor and the buyer of the business:

(A) Sick leave;

(B) Carer’s leave;

(C) Parental leave;

(D) Right to request flexible working arrangements; and

(E) Long service leave.

It should be straightforward to calculate the cost to the buyer of taking on responsibility for items (A) – (D) above, and seek adjustments to the purchase price accordingly.

Long service leave is not so easy to calculate. In New South Wales it does not arise as a statutory employee entitlement until after 5 years’ service (and then only in certain circumstances, and pro rata), and the rate of remuneration of the employee upon accrual of 10 years’ service would likely be unknown as at the date of business acquisition.

What Award or Agreement applies?

If the employees are already covered by an Award or Enterprise Agreement, then that usually continues to apply to the buyer’s business. However, it is advisable to check into all aspects of employees’ industrial rights and to get legal advice on them. In some instances, a different award may apply to the same work done in a business operated by the buyer. The buyer may already have its own registered Enterprise Agreement which can apply to the transferring employees, with permission from the Fair Work Commission under Section 318 of the Fair Work Act 2009.

Bear in mind that sometimes unwritten customs or practices can form part of the legal situation, which need to be clarified. You should do this before you close the purchase and transfer the business, because employee entitlements may have a bearing on the price you pay and how you handle the transfer of employees.

Often, employment terms and conditions are not in writing – or what is in writing is incomplete. So, you as a buyer of a business won’t necessarily know exactly what are the “existing terms and conditions of employment” with the vendor, that you may receive on the transfer of business.

As a business buyer, you can start from scratch and inform employees that they will be on a new employment agreement. In that case they will look to the vendor to pay them out and then negotiate new conditions with you. The Fair Work Act 2009 takes a dim view of using this as a strategy to reduce employee pay or conditions for substantially similar work, so this must be done carefully. If an Enterprise Agreement applies, you will have to honour that until it expires, though there are provisions which allow you to apply for a variation of the EA in certain circumstances.

Employment and industrial law are surprisingly tricky areas of the law, and you should get legal advice on them just as you would for other areas of law if you are contemplating buying or selling a business.