A sale or purchase of a business can involve complex issues relating to employees of the business.
The consideration in this article is appropriate only to an asset sale, in contrast to a share or equity sale.
The issues can be broadly put into three groups: Retention, Entitlements, and Compliance.
How important are the staff to the functioning of the business?
Would the business be valuable without the current staff?
Put another way, would the buyer purchase the business without the employees (or a particular key employee)?
This is a critical issue, particularly in smaller businesses which may be reliant on the knowledge or performance of one or two key personnel. Employees cannot be sold the same way as other business assets. An Employee must agree to become employed by the purchaser.
In such cases, consideration should be given to including special conditions to mitigate the risk of key staff leaving the business, including:
a) seeking warranties from the Seller that the Seller is not aware of any staff resignations, or intentions to resign;
b) providing that the sale contract is conditional on key staff signing new employment contracts with the Buyer
c) providing that, during due diligence, the Buyer has the opportunity to meet with key staff concerning their intentions, and an opportunity to offer incentives.
In this regard, the Buyer typically has no legal relationship with those employees that do not agree to come across with the sale. Where that person is a key employee, there is a risk that they may intend to trade in competition with the Business. In the absence of a legal relationship, there may no legal rights or recourse. Due diligence in these cases is critical.
Staff entitlements are an often-overlooked aspect of a business sale until far too late in the process. An unaware Buyer may be taking on significant accrued and future liabilities based on the length of service of the business staff. Similarly, a an ill-advised Seller may be surprised to learn that it must allow the Buyer a significant monetary concession at handover.
The range of potential liabilities for a Buyer and Seller to consider are very wide and include:
d) Accrued annual leave;
e) Accrued personal/carer’s leave;
f) Long service leave;
g) Length of service for the purposes of redundancy entitlements;
h) Length of service for the purposes of notice of termination;
i) Length of service for the purposes of accessing unfair dismissal remedies.
There are several key issues to understand when it comes to entitlements.
First, long service leave is a State (not federal) based entitlement. The accrual and treatment of long service leave in transfer of business situations will depend on the State where the employee works. For example, in Queensland, barring some very limited exceptions, an employee’s length of service transfers to the Buyer (s132 of Industrial Relations Act 2016 (Qld)). Despite any attempts to the contrary, the transfer of long service leave entitlements cannot be contracted out of in Queensland. Neither can it be cashed out in the event of a business sale.
Second, personal/carer’s leave can also generally not be cashed out or contracted out of. The Buyer in a transfer of business takes on the accrued personal/carer’s leave. However, an extra factor when it comes to personal/carer’s leave is that the employee may never take the personal/carer’s leave. Accordingly, although a potential liability for the Buyer, it is not inevitable.
Annual leave, and length of service for notice of termination, redundancy or access to unfair dismissal remedies purposes may be cashed out or contracted out of provided that certain conditions and documents are put in place (and usually require agreement from the employee) – refer to ss 22(5), 91, 122, 384(2) of Fair Work Act 2009 (Cth).
Where the parties agree that the Buyer will not take on certain entitlements, the Seller needs to also consider what that means for the Seller on the handover date. For example, if the Buyer does not recognise the employee’s length of service for redundancy purposes, then the Seller will generally need to pay the employee any redundancy entitlements as at the handover date. Similarly, if the Buyer does not recognise length of service for notice of termination purposes, the Seller must give the employee the required minimum notice of the handover, or payment in lieu of the same.
However, a Buyer should also consider the workplace disruption and anxiety that may be caused by not recognising certain entitlements. It may benefit a smooth transition to recognise all entitlements so that, from the employees’ perspective, nothing has changed.
Where the Buyer is required to recognise an entitlement (whether pursuant to law or the negotiated business sale contract), the next issue is whether Buyer should receive compensation in the form of a purchase price adjustment. This means, in short, that the Buyer receives a reduction to the purchase price to compensate for the accrued liabilities the Buyer is taking on.
Most standard form business sale contracts provide that the Buyer receive an adjustment in its favour equal to “70%” of the cash value of long service leave, sick leave and annual leave entitlements. The reason that an allowance of only 70% has become commonplace is that the Buyer, typically a company, will get a tax deduction when the entitlements are paid. Accordingly, an adjustment of 100% would create a windfall for the Buyer.
However, it is important to keep in mind that the tax rate for companies has changed over the past decade, and some Buyers may have different legal structures. In all cases, consideration should be given to the correct adjustment percentage. For reasons explained above (in relation to contingent nature of personal leave) in some cases, a lesser adjustment for personal/carer’s leave may be argued by the Seller.
A Buyer should never assume that a Seller is paying its staff correctly.
Where there is any doubt about employment practices of the Seller, the Buyer should conduct due diligence on the following aspects of the business:
a) assessment of the correct applicable modern award (if any);
b) the existence of any enterprise agreement that affects the Seller’s obligations to staff;
c) whether rates of pay and entitlements been minimum legal requirements;
d) whether employment contracts are up to date and lawful;
e) any history of workplace claims and workplace injuries;
f) company handbooks and policies;
g) payment of superannuation;
h) correct categorisation of contractors and employees.
If the Seller is not willing to permit this due diligence pre-contract, the Buyer would be wise to ask for a due diligence period post-contract.
An arm’s length Buyer will generally not be responsible for historical underpayment issues of the Seller, however, a Buyer may inherit bad policies and payment practices from its predecessor which it will be liable for after the handover date.
Crucially, the time for first addressing Retention, Entitlements and Compliance is at the time of negotiating the contract of sale not after the contract is signed. In many cases, by the time the contract is signed, it will be too late address these issues.
At NB Commercial Law can assist with the negotiation of business sale contracts, and special conditions to protect Buyers and Sellers alike.
Give NB Commercial Law a call, we offer an obligation-free consultation and are happy to help.
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About the Author
Daniel Dash has over ten (10) years of experience in commercial and corporate law and is a Senior Associate in the Commercial Law team at No Borders Law Group. His areas of focus include contractual disputes, commercial transactions, finance, corporate advisory services and trusts.
His practice areas also include business structuring, shareholder contracts, corporate law, commercial litigation, commercial property, intellectual property, taxation and business succession planning.
Daniel works with company directors and business owners to achieve results that align with client objectives. In all matters, he endeavours to provide practical recommendations and develop clear and effective strategies.
LinkedIn: Daniel Dash
(07) 3876 5111