What happens to Employee Entitlements when a business is sold? – Part 1

June 30, 2021

There are many issues to deal with when you buy or sell a business.   One factor which needs to be carefully considered is how the existing employees of the business and their accrued entitlements are dealt with.  As we discuss in this two-part series, there are a number of scenarios that can arise, depending on whether the purchaser of the business decides to take on the existing employees of the business.  These issues are equally applicable to the sale of rural property where the vendor will not continue to employ its staff.

Scenario 1: Purchaser does not wish to retain the existing employees

If the purchaser chooses not to re-employ the existing employees, then the employees’ employment is terminated by the vendor (i.e. the old employer) at settlement.  The vendor is required to:

• pay all accrued annual and long service leave payments;
• pay redundancy pay if the vendor is not a small business (i.e. does not have less than 15 employees); and
• provide the required notice or payment in lieu of notice.

The amount of notice to be given will depend on how long the employee worked for the business.  Read about the minimum required notice periods here.  Instead of giving the required noticed, the vendor may wish to pay the employees an amount equal to their wages for the required notice period.

The vendor does not need to give notice to employees who:

• are casual;
• are employed for a specific period of time on-task (e.g. a fixed term contract); or
• do seasonal work.

Scenario 2: Purchaser offers employment without recognition of employees’ prior service

The purchaser can choose to offer employment to the existing employees without recognising their prior service with the vendor.  In that event:

• The vendor must pay out any accrued annual leave, redundancy pay (if the business is not a small business) and give the required notice periods or pay in lieu of notice.
• The purchaser must recognise any other type of accrued entitlements that cannot be paid out, such as personal leave and parental leave. In NSW, long service leave obligations also transfer to the purchaser.  It is likely that the purchaser will want to negotiate an adjustment for these entitlements at settlement, i.e. deduct an amount from the purchase price to compensate them for the transfer of the accrued entitlements.
• The employees’ probation periods start again and the time period that must be served before they are eligible to make an unfair dismissal claim is reset.

 Look out for part two of our series where we outline some further scenarios involving employee entitlements and the sale of a business.

For more information, please contact a member of our commercial team at Fox and Thomas.