What happens with employees when a business is sold?

Upon the sale of a business, the employees of the business will not automatically transfer to the new owner, whether that happens depends upon what is agreed in the contract of sale for the business. Not dealing with ongoing employment during the sale negotiations can lead to negative and unexpected outcome for one or both of the parties.

There are three options available for dealing with the employees of a business, the purchaser may:

1. Not offer them employment at all;
2. Offer them employment but without recognition of their prior service (this is available in most but not all circumstances); or
3. Offer them employment and recognise their prior service with the Vendor.

It is possible for the purchaser to use a combination of the above options with different arrangements for different employees. For example you may wish to keep the sales team but not employee a manager as you intend to do that work yourself.

So how does this work in the real world? In reality this is part of the negotiations back and forth when you decide to buy the business. On a practical level this means that when you are looking at buying a business you need to think carefully about how you wish to handle the issue of employees and make sure you have an accurate picture of their employment terms and conditions and existing entitlements, particularly the value of leave balances.

If the purchaser elects not to offer an employee employment post settlement the employee will remain with the Vendor and become redundant on settlement on the sale of the business. This triggers all the ordinary entitlements that the employee has in the case of a genuine redundancy including accrued annual leave, termination notice pay, redundancy pay and pro-rata long service leave entitlements if they have vested.

This option is an expensive outcome for the Vendor and should be budgeted for when determining the terms of the sale.

If the purchaser offers employment without recognising prior service the employee’s employment with the Vendor is deemed to be terminated at settlement and new employment with the purchaser begins.

This means the Vendor must pay out the employee’s accrued entitlements at settlement and must provide notice and redundancy pay if the position is one that would normally attract redundancy pay.

However, things can get even tricker with service with the Vendor still counting as service with the Purchaser for some purposes including the right to request flexible working arrangements.

If the purchaser elects to recognise service the employee will effectively pick up where the Vendor left off. As the purchaser will become responsible for all of the accrued entitlements of the employees this needs to be reflected in the contract of sale and appropriate adjustments made on the sale price.

There are a number of approaches to this adjustment which can be adopted and this is a matter of negotiation between the parties and can carry risks or benefits as it is impossible to predict the actual cost when entitlements are accessed in the future. If the entitlements are adjusted in full, the purchaser may get a windfall, however if the parties adjust for less than the full value of these entitlements, the vendor may get a windfall depending on what happens in the future.

Sounds tricky? The impact of these issues can be significant and is why a person selling their business should get advice before thinking about a slae price or putting the business on the market. It also is why if you are thinking of purchasing a business you should get advice early so you understand the legal issues specific to that business when you are negotiating.

Our business lawyers Riley Driscoll and Josh Ennis can help you with these matters — please phone them to discuss on 03 5445 1000.