Sale of Business - Liability for Employee Entitlements (part two)
Posted on April 11, 2018
The allocation of liability for accrued employee entitlements requires careful treatment in the sale and purchase of a business. Last month we published the first part of this article. This second part finishes with an analysis of entitlements of directors and casual employees, income tax adjustments and sales of companies.
Directors’ leave entitlements
It is not unusual that where a company is the seller of the business, the directors are employees of the company and have substantial accrued entitlements, particularly long service leave and personal leave. As “owners” they have probably worked long and hard over the years without taking much leave. If they agree to continue working in the business for the buyer, there will be substantial risk for the buyer in taking on liability for their entitlements. However, the owners often do not want to pay the buyer a substantial adjustment for this liability. In such situations, it is possible to agree offset and indemnity arrangements that substantially lessen these risks.
Casual employees
It is not unusual for employers to try to minimise the accrual of employee entitlements by hiring staff as casuals. Nevertheless, casual employees do accrue some entitlements. Also, labeling an employee as a casual does not mean they really are employed on a casual basis. A proper examination of the terms of employment may show that the position is not casual at all and may be something different, such as permanent part time. In these situations, the employee could have substantial accrued entitlements that a buyer of a business could end up being liable for.
Income tax adjustments
Where it is agreed that the seller will pay an adjustment to the buyer for a liability taken on by the buyer, it is usually also agreed to reduce the amount of the adjustment to the after tax position. When the buyer pays an employee an entitlement, they buyer receives a tax deduction for the payment. If the seller pays the adjustment to the buyer at settlement, the seller is not entitled to a tax deduction. Thus it is usually agreed that the seller only pays 70% of the amount to be adjusted (after applying the 30% company tax rate – where a lower tax rate applies this should be varied).
Sale of company
The above applies where a business is sold. Where a company that owns a business is sold by the sale of its shares, there is no change of employer and the liability for employee entitlements remains in the company. This liability needs to be considered in an overall review of all of a company’s assets and liabilities in determining the price to be paid for the shares and agreeing other terms of the sale. Should it be agreed in such a sale that any employees are to be terminated, the company’s liability for the termination needs to be factored in.
Summary
It is evident from the above analysis that buying a business that employs people can result in significant extra liabilities for a buyer unless the issues are carefully considered and dealt with. It is important that a buyer, at an early stage, finds out from the seller on what basis people are employed and their accrued entitlements. With this information, appropriate provisions need to be included in the contract to deal with the risks and liabilities.
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.
