Purchasing a Business – Transferring Employees and Their Entitlements

Purchasing-a-Business

When buying or selling a business, one of the key issues to deal with is the employment arrangements.

Accrued entitlements

If a buyer employs any of the seller’s employees within 3 months of completing the purchase, the employees will be transferring employees.

Transferring employees are given a great deal of protection under the Fair Work Act 2009.

Generally speaking, the period of a transferring employee’s service with a seller will count as service with a buyer.  This can mean the accrued entitlements, including: annual leave; annual leave loading; personal/carer’s leave and long service leave, become the responsibility of the buyer.

To compensate for these liabilities, it is common for the business sale agreement to adjust the purchase price in favour of the buyer.  If the buyer is a company, the adjustment is usually 70% because of the company tax rate, but the percentage is often the subject of negotiation.

From a seller’s perspective, 70% can seem unfair when it comes to personal/carer’s leave because that type of leave is not paid out when an employee’s employment ends (unlike annual leave).

Transferring instruments

If the seller has an enterprise agreement, the buyer can become bound by it (even though the buyer is not a party to it).

A buyer has the right to apply for a number of orders, including an order that the seller’s enterprise agreement will not apply to the buyer, but the Fair Work Commission has discretion as to whether or not such an order will be granted.

Recognition of prior service

An employee’s period of services is relevant for a number of reasons, not just accrued entitlements.  For example, to be eligible for unpaid parental leave, an employee must serve a minimum period of 12 months.  The period of service with the seller carries over to the buyer.

If a transferring employee has:

  • given the seller a notice about taking unpaid parental leave before completion; or
  • started a period of parental leave,

the buyer will be bound by it.

As parental leave is a National Employment Standard (NES), a buyer must not contravene it.  Otherwise, the buyer and any person involved in the contravention will be exposed to fines.

Refusing to recognise prior service

Under the Fair Work Act, a buyer can refuse to recognise prior service for:

If a buyer refuses to recongise prior service for annual leave, the seller should pay out annual leave entitlements when the employee’s employment ends with the seller.

If a buyer refuses to recognise prior service for redundancy, the employee must serve the qualifying period before being eligible for redundancy pay.  Redundancy pay entitlements vary depending on the applicable award or enterprise agreement.  If the NES redundancy provisions apply, the qualifying period is 12 months.

A buyer may have very different standards or expectations from its employees than a seller.  Quite often, a buyer will reset the qualifying period for unfair dismissal to give them time to observe the employee’s performance to determine whether an employee meets its standards and expectations.  To reset the qualifying period for unfair dismissal, a buyer must ensure their offer of employment is:

  • prepared correctly;
  • in writing; and
  • given to an employee before completion of the business purchase.

If you need assistance with business or employment law matters, please contact our Business and Employment Law team.

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