Buying or selling a business – what happens to the employees?

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One of the questions I am asked the most by clients when they are buying or selling a business is, what happens to the employees?

If you are selling your business your employees can transfer to the new business or you may be required to end their employment with the business if the new owners do not want them.

The new owner will have to determine whether they:

  • Decline to offer them employment going forward
  • Offer them employment but on the basis, they will not recognise their previous service
  • Offer employment and accept their previous service

If the new owner elects to take on your employees, you will be required to deal with the entitlements that are due to them as a result of their service.  These entitlements include such things as wages and leave.

No offer of employment

The employee will remain with you as their original employer and once the business is sold, their job will become redundant.

The employee will then be entitled to a redundancy and you will be required to pay out any entitlements owing to them pursuant to the law (including awards) and their contract.

You will have to pay:

  • accrued annual leave
  • long service leave entitlement if accrued
  • redundancy pay
  • termination notice pay

This can be an expensive exercise and it is important that your understand what you have to pay and make provision to cover these costs.

An offer of employment without recognition of prior service

It is important that this does not apply to a related entity, it must be a purchaser who is arm’s length from you.

In this scenario the purchaser will generally offer the employees employment but will decline to recognise any continuity of service.

If this occurs it is deemed there is a termination of the employee when the business sale is completed and then the employee commences employment with the business.

The benefit to the purchaser is that they get experienced employees, but they only have to recognise certain parts of their entitlements.

If this occurs, then you will be required to pay out the employees entitlements upon completion of the sales of the business.

You will have to provide termination notice (or pay in lieu) and redundancy pay to the employee.  It is important to note that redundancy may not be payable is the business is classified as a small (fewer than 15 employees) unless an award creates an obligation.

The Fair Work Ombudsman has a very good tool to assist in these calculations.

Whilst the purchaser does get to start afresh on certain items it must still recognise accrued entitlements relating to personal/carer’s leave and parental leave and the right to request flexible working arrangements.

Long service leave generally carries over to the purchaser for the purposes of calculating long service leave entitlements. If you pay out accrued pro-rated long service leave entitlements to the employee at the completion of the business sale, it will be counted towards eh employees total entitlement.

The terms and conditions of an employee’s employment with the purchaser will be covered by what is known as a ‘transferable instrument’, which is any enterprise agreement, workplace determination, other registered agreement or award that applied to their employment with you as the vendor.

The disadvantage for a seller is that it triggers an obligation to pay entitlements that they would not otherwise have to do.

An offer employment with recognition of prior service

This is generally what occurs in most sales of businesses.

Generally, this will result in a lower purchase price and generally is the favoured position for most employees.

The purchaser will become responsible for all the accrued entitlements of the employee that have not been taken or paid out.

How can FC Lawyers help?

There is no right or wrong way on how to deal with employees in the sale of a business. Most commonly, the actual accrued entitlements at the date of sale are adjusted in full. It is a matter for negotiation and our experienced team will be able to advise and guide you through the process.

We have assisted hundreds of businesses both large and small deal with how their employees need to be treated during the sale of a business. Contact our team of business lawyers if you are thinking of buying or selling a business.

The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.


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