Employee issues in sale of a business

There are many tricky employment law issues which arise on the sale or transfer of a business and the following is a summary of them to which the vendor (transferor) and the purchaser (transferee) should be mindful.

Generally where there is a transfer of business the Fair Work Act will deem an employee’s service with the transferor to count as service with the transferee. However there are exceptions to this general rule.

Separate legal principles apply to annual leave, personal leave, redundancy pay and long service leave.

There should be clear and certain agreement between the transferee and the transferor as to how the employee entitlements are be dealt with in the sale of a business because dealing with employee entitlements such as annual leave, personal leave, long service leave and redundancy pay in a sale of business can be challenging.

The following identifies some of the fundamental issues.

Is there a transfer of business?

The first thing that should be considered when determining how to deal with employee entitlements in a sale of business is whether there is a transfer of business as described in section 311 of the FW Act.

Section 311 of the FW Act provides that there is a transfer of business if:

  • the employee’s employment with the old employer (the vendor) has been dismissed;
  • within three months after the termination, the employee becomes employed by the new employer (the purchaser);
  • the work the employee performs for the new employer is the same, or substantially the same, as the work the employee performed for the old employer; and
  • there is a connection between the old employer and the new employer (i.e. there is a transfer of assets from the old employer to the new employer; the old employer outsources work to the new employer; the new employer ceases to outsource work to the new employer; and/or the new employer is an associated entity of the old employer).

If there is not a transfer of business as described in section 311 of the FW Act, an employee’s service with the old employer (the vendor) will not count as service with the new employer (the purchaser). Therefore, the old employer would simply deal with accrued annual leave, personal leave and redundancy pay in the same way that it would if it was an ordinary redundancy situation and the new employer would not need to recognise the employee’s service with the old employer for the purposes of accrued annual leave, personal leave and redundancy pay.

If there is a transfer of business as described in section 311 of the FW Act, accrued annual leave, personal leave and redundancy pay should be dealt with is follows.

Annual Leave

In a transfer of business, accrued annual leave entitlements can be dealt with in one of two ways:

  1. If the new employer is not an associated entity of the old employer and the new employer is not recognising service for annual leave purposes, the old employer should pay out all accrued annual leave. As a result, the accrued annual leave entitlements will not transfer with the employee to the new employer; or
  2. If paragraph number 1 above does not apply, accrued annual leave entitlements will transfer with the employee to the new employer.

Personal Leave

In a transfer of business, accrued personal leave entitlements cannot be paid out by the old employer and must therefore transfer with the employee to the new employer.

Redundancy Pay

Section 122(1) of the FW Act provides that in a transfer of business, redundancy pay entitlements can be dealt with in one of two ways:

  1. If the new employer is recognising service with the old employer for redundancy pay purposes, the employee is not entitled to be paid redundancy pay when his or her employment with the old employer terminates (generally at completion). As a result, the employee’s service with the old employer counts as service with the new employer for redundancy pay purposes; or
  2. The new employer, provided it is not an associated entity of the old employer, can choose to not recognise an employee’s service with the old employer for redundancy pay purposes and the old employer will be required to pay redundancy pay to the employee upon termination (generally at completion).i

Long Service Leave

In Western Australia, long service leave is governed by the Long Service Leave Act 1995 (WA).

The Act provides that where a business is sold and an employee remains with the business, or has less than a three month break between being dismissed by the old employer and being employed by the new employer, the new employer becomes responsible for the employee’s long service leave entitlement.

Long service leave cannot be paid out on transfer of business, unless there is a termination of employment, and accordingly in a transfer of business service with the old employer will count as service with the new employer for the purposes of long service leave.