Sale of business - liability for employee entitlements
Posted on March 05, 2018
The allocation of liability for accrued employee entitlements requires careful treatment in the sale and purchase of a business.
Some potential buyers of a business have the misapprehension that the seller can terminate all employees and pay them out their entitlements so that the purchaser can re-hire them with a clean slate. However, various laws protect employee entitlements by transmitting to the buyer legal liability for some of their accrued entitlements. Following is a summary of the laws that apply to the various types of employee entitlements and how liability for them can be covered appropriately in a contract for the sale and purchase of a business.
Salaries, wages and bonuses
Legal liability for these entitlements does not transmit to a buyer. Almost always it is agreed that the seller must pay out such employee entitlements to the employees as at the date their employment by the seller ceases. However, it can be agreed with the buyer that the buyer will take on this liability, in which case the seller should be required to make an adjustment to the purchase price in the buyer’s favour at settlement.
Long service leave
The Long Service Leave Act 1987 of South Australia ensures that an employee’s entitlement to long service leave transmits to a buyer of a business. Not only does the buyer become responsible for existing entitlements, (including any pro-rata entitlement), but the period of service of the employee with the seller and with any previous owners of the business, is retained by an employee as if there was continuity of employment. This time counts towards calculating a future entitlement to long service leave. Thus, an employee with 5 years of service by the seller when the business is sold would have no entitlement to long service leave as of that date, but if the employee works for another 2 years in the business, the employee may have an entitlement to pro-rata long service leave, which the buyer will be liable for.
It is usual for a contract to require an adjustment in the buyer’s favour at settlement for long service leave entitlements that are transmitted to the buyer. Alternatively, the Long Service Leave Act 1987 allows the seller, with the agreement of an employee, to pay out an employee’s long service leave entitlements in full when the business is sold. That does relieve the buyer of the obligation to pay out any long service leave to which the employee is entitled at that time, however all continuous service with the seller will continue to count as service with the buyer.
Where employees have accrued time but are not yet entitled to any long service leave, as in the example above, it is usual for the contract to require an adjustment in the buyer’s favour at settlement for all employees with around 5 years service or more. This can give the buyer a windfall if the employee does not remain in the employment long enough to reach their entitlement. A requirement to refund the adjustment made can be included in the contract if this occurs. However, as there is usually no adjustment for employees with time accrued with less than 5 years, it is often agreed that there is an appropriate balance of the liabilities without having to make a refund.
Redundancy
When a seller terminates the employment of employees on sale of a business, the employees may be entitled to a redundancy payout. However, if the buyer offers them employment on the same or no less favourable terms from the acquisition of the business under a requirement in the contract, the employees are not entitled to a redundancy payout. If the buyer offers them such employment, any employee who does not accept the offer will not be entitled to payment for redundancy.
Where an employee accepts an offer of employment by the buyer of a business, the service accrued while working for the seller and any previous owners of the business will count towards calculating any future redundancy payment. This is as a result of the Fair Work Act 2009 (Cth). It is possible for a seller and buyer to agree that service will not continue to run in the contract for the sale and purchase of the business and by making it clear in the offer of employment made by the buyer to the employee.
Personal leave
Entitlements to personal leave such as sick leave, parental leave and bereavement leave present awkward issues for buyers and sellers of businesses. This is largely because it is unknown whether an employee with significant accrued entitlements will ever take the leave. If they do, the Fair Work Act 2009 requires the buyer of a business to pay the personal leave entitlements. For example, long term employees who rarely get sick or rarely take “sickies” may have substantial accrued personal leave. The seller will be reluctant to pay the buyer of the business for all of this accrued leave because there is a good chance the leave will never be taken. On the other hand, the buyer carries the risk of having to pay a lot of sick leave if the employee becomes seriously ill. In many contracts it is agreed to apportion these risks by adjusting in the buyer’s favour at settlement an amount equal to half of the accrued personal leave.
Next month we will publish the second part of this article, which will look at directors’ and casual employees’ entitlements, income tax adjustments and sales of companies.
Joe Subic and other members of our commercial team including partners Malinda Kuo and John MacPhail assist sellers and buyers of businesses. Our specialist industrial and employment team headed by Sonia Bolzon can assist with any specific employment related matters.
