What Happens to Employees in a Business Sale?

Selling or buying a business is an exciting, multi-step process involving careful organisation and planning. With so much to juggle and consider, it is easy to get caught up in the process and not immediately consider what happens to employees in a business sale. Often, it is not until later in the process that parties start asking “what happens to employees?”

There are lots of factors that influence what happens to employees in a business sale. Below, we have outlined a few different circumstances that arise when a business changes hands and what happens to employees in these instances.

Asset sale vs sale of shares

An asset sale is where the purchaser buys some or all of the assets of the business. An example of an asset sale would be where the purchaser buys the goodwill, equipment, intellectual property, stock and the business records. In this type of sale, everything is transferred from the seller to the purchaser. Any leases, licences and permits must be transferred or re-issued to the new business owner.

However, sometimes a business may be operated through a company. This company may hold important licences or permits. Sometimes transferring these permits can be expensive or difficult. In these circumstances, it is sometimes simpler for the seller to sell all the shares in the company to the purchaser and then resign as a director. This type of sale is a business sale by way of sale of shares. If a business is being sold this way, the purchaser should ensure they undertake careful due diligence checks of all aspects of the business as this type of sale can transfer hidden issues and liabilities to the purchaser.

Share sale

If you are selling or buying a business by way of sale of shares, the entity that operates the business remains the same. As the company is the employer of all the staff, none of the employees need to “transfer”.  Each employee remains employed by the company and continues to be entitled to whatever entitlements they were entitled to when the business was purchased.

In these circumstances, it is important that the purchaser makes thorough inquiries regarding employees. The reason for this is that it will become the purchaser’s responsibility to ensure the company pays any long service leave, annual leave and other entitlements that are outstanding. Further to this, if any employees (or prior employees) are entitled to a claim, such as unfair dismissal, the company will remain liable for to this claim even after the shares have been sold.

Asset sale

In an asset sale, it is up to negotiations between the purchaser and the seller as to whether the purchaser takes on existing employees or not.

If the purchaser chooses to accept existing employees

If the purchaser agrees to take on existing employees, each staff members’ employment will need to be transferred to the purchaser. In doing so the purchaser must ensure that they comply with requirements under the Fair Work Act 2009 and the National Employment Standards.

There are certain employee entitlements that the purchaser doesn’t have to recognise, such as:

  • Redundancy payments
  • Annual leave
  • Unfair dismissal
  • Termination notice requirements

If the purchaser chooses not to recognise these entitlements, the seller will have to pay employees out for these entitlements before the business is sold. On the other hand, if the purchaser chooses to recognise these entitlements, it is common for the seller to compensate the purchaser for these entitlements by way of an adjustment to the purchase price.

If employees are to transfer, the seller must provide the purchaser with up-to-date records for all the transferring employees. The purchaser is legally required to store these records for at least seven years after the purchase. While not strictly required, it is advisable for the purchaser to enter new employment agreements with each employee to ensure there is complete clarity as to their rights, entitlements and duties.

It is important to understand that, regardless of whether the purchaser agrees to recognise employees service with the previous employer, long service leave (if applicable) must be recognised. This is because NSW long service leave legislation recognises service with the previous employer when calculating total service. Therefore, even if the seller pays out the employees accrued long service leave, the purchaser does not start with a “clean slate”. Instead, the purchaser is liable to pay out long service leave entitlements as if the employee’s employment carried on without a break from the old employer to the new.

If the purchaser chooses not to accept existing employees

If the purchaser chooses not to take on existing employees, the seller will need to terminate each staff members’ employment and pay out any entitlements. In this circumstance, employees must be provided with written notice of their termination, delivered personally or sent to their last know address.

It is important to remember that there are difference notice periods for casual staff as opposed to permanent staff.

Non-legal considerations for employees in a business sale

It is easy to get caught up in the legal requirements governing employees in a business sale and forget to take a humanist approach to the matter. For many people, their job is their pride and passion. Being frank, approachable and personable when it comes to employees can often be the key to a successful business sale or purchase.

If you are selling a business, it is likely that some or all of your employees have played an integral part in the success of your business. Therefore, it is important to ensure that they are taken care of in the sale process.

If you are purchasing a business, it is likely that any transferring employees will be key to the ongoing success of the business, especially during the changeover period. Being honest, fair and approachable to transferring employees will encourage them to assist you find your feet in the new business.

Looking for an experienced solicitor in Newcastle, Sydney or the Hunter to assist you with selling or buying a business? Call us on (02) 4929 7002, email us or complete an enquiry form.