Commercial Law

Staffing and Sales of Business: What are my legal obligations?

The obvious emphasis on the commercial aspects of a sale of business can obscure the important employment law obligations that both outgoing and incoming business owners need to consider when engaging in a transfer or sale of business.

There are three main employment law considerations that arise in a sale of business that can significantly influence the commercial and legal position of the parties:

These include:

1. Recognition of transferring staff’s continuous service;
2. Accrued leave liabilities;
3. Enterprise Agreements.

Continuous Service and the Minimum Employment Period

The default position under the Fair Work Act 2009 (Cth) [the Act] is that existing staff transfer from the old employer (the vendor) to the new employer (the purchaser) upon the sale of a business.

The Act also mandates that a transferring staff member’s service is deemed as continuous and their start date of employment remains the date upon which they commenced employment with the old employer.

This has important implications for the purposes of any minimum employment (probation) period and unfair dismissal protection. Staff with longer than 6 months service with the old employer (or 12 months service for those businesses with less than 15 employees) will be protected from unfair dismissal and deemed to have passed their probationary period during their service with the old employer.

In these circumstances, should a new business owner move to terminate transferring staff, they will face the risk of an unfair dismissal claim. To avoid this scenario, an incoming purchaser must stipulate in writing to each employee that service will not be recognised for the purposes of the minimum employment period under the Act. This allows the incoming purchaser/owner to assess whether transferring staff are suitable for ongoing employment, without running the costly risk of an unfair dismissal claim.

A less common scenario that does not trigger a transfer of service is where the vendor makes the existing staff redundant, and pays the relevant severance pay as required, prior to the transfer. This can, however, be expensive for vendors and create difficulties for the incoming purchaser in obtaining the required skilled and experienced staff.

Leave Liabilities

Employees are entitled to long service leave, annual leave and personal/carer’s leave (sick leave) by virtue of the National Employment Standards (NES) in the Act.

It is common for the parties to a business sale contract to provide that the vendor is liable for all leave liabilities up until the date of completion/transfer of business. This usually means that the vendor pays out to the employee(s) any accrued annual leave entitlements prior to the transfer and the remaining leave liabilities (long service leave and personal/carer’s leave) are added as an adjustment to the purchase price. 

If the annual leave entitlements are paid out by the vendor prior to transfer (and are not part of the adjustments) it is again important for the purchaser to inform the transferring staff in writing that their service will not be recognised for the purposes of annual leave accrual to avoid the risk of incurring a liability that has already been discharged.

Enterprise Agreements

Lastly, it is also important for the purchaser of a new business to ascertain whether an Enterprise Agreement applies to the transferring employees. An Enterprise Agreement entered into between the old employer and its staff will automatically transfer with those transferring staff as part of the sale of business under the Act.

Similarly, if an Enterprise Agreement applies to the purchaser’s existing business and the transferring staff will perform the same or similar work, the Enterprise Agreement will apply to the transferring staff upon the completion of the sale of business provided that they are not already covered by an Enterprise Agreement with their old employer.

Enterprise Agreements contain more generous entitlements than the base standards under the NES and Modern Awards. It is therefore important that potential purchasers assess whether an Enterprise Agreement applies to existing staff and whether it is an Enterprise Agreement that they are satisfied with moving forward for transferring staff.  

Summing Up

Many of the above employment law implications involved in sales of business are often overlooked and incoming purchasers/owners have found themselves subject to costly legal obligations that they thought had been extinguished by the previous employer.

It is therefore vital for both parties to a business sale transaction to be aware of these employment law obligations and to take steps to minimise those risks from occurring.

MKL Legal specialises in both the commercial and employment law aspects of sales of business and can assist you in the process of analysing the risks to your business and implementing appropriate strategies to manage those risks moving forward.

For more information reach out via email at [email protected] or alternatively via phone on 0450 290 197.

Recent Commercial Law Reforms

Unfair Contract Terms (UCT) Reforms: The Australian government has introduced reforms to expand the scope of UCT laws. These changes include financial penalties for contraventions and protection against standard or template commercial contracts used by organisations that unfairly favour one party or create an imbalance in the rights of the parties to the contract.

Some examples of unfair contract terms include:

• Terms that allowed one party to unilaterally vary the contract and limit its liability;
• Automatic renewal clauses;
• Class action waiver clauses.

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