Employee Issues during a Business Sale

We have all heard the saying that the most important asset of any business is its employees, and yet, when it comes to buying a business, employment issues are commonly overlooked with due diligence usually focussed on financial performance.

However, a due diligence undertaken in relation to employees will assist buyers to make an informed decision as to whether they wish to offer employment to all or some of the employees. This will also influence the terms and conditions contained in the business sale agreement and will also be of some interest to vendors given the possible redundancy implications for any employees that do not receive an offer of employment from the buyer.

Buyers should also check any existing industrial agreements, employment contracts and policies, particularly any termination or other unusual clauses, in circumstances where they will be assumed by the buyer through the business sale process.

If there is a transfer of employees, then the Fair Work Act 2009 (Cth) (Act) generally imposes an obligation on the buyer to recognise the transferring employees’ period of service with the vendor for the purpose of such entitlements including annual leave, personal/carer’s leave, long service leave, notice, redundancy payments and unfair dismissal.

However, a combination of provisions in the Act means it may be possible for the buyer not to recognise an employee’s service with the vendor, and therefore, there is no continuity of service with respect to annual leave, notice and redundancy pay. Additionally, the buyer may, by notice, require the employee’s period of service to start again for the purposes of the unfair dismissal provisions of the Act.

This, in effect, means the transferring employees would need to serve another minimum period of employment (probation) – a handy option to allow buyers an opportunity to evaluate the employees of the business after settlement.

KEY POINT: When considering a business sale, decisions taken with respect to employees can have repercussions on the business after settlement. The parties should consider and treat employees just like any other asset of the business and ensure that the due diligence process does not overlook or underestimate their impact on the business.