Posted Friday 25th November 2016

Employee issues on sale of business

When do I notify my existing employees?  Do they have any rights against me if I sell?  How and when do I introduce the new buyer? 

All of the above questions may arise when selling your business, so it pays to think about them ahead of time.

Notifying employees

If you don’t notify your employees until too late in the process, or they find out through sources other than you, you risk offending them, which can lead to problems - especially if the sale doesn’t proceed.  If you notify them too early, you risk disruption in the workplace at exactly the time when you need continuity.   Damned if you do, damned if you don’t!

Remember, like you, your employees have a personal stake in the sale of your business.  

Deciding when to notify is a line call and will depend on your management style and the nature of your workplace or industry.  It is usually best to do so before you show potential buyers around for due diligence or a trial period.

For some businesses, buyers may make the sale conditional upon the acceptance of offers by certain key employees so it certainly pays to introduce them to the buyer at the right time and make them feel comfortable with the process.

How it works - transmission of employees

Where the business for sale has permanent employees, those employees will typically be terminated from your employment and re-employed by the Buyer upon the sale.

Under the Fair Work Act 2009, when a transfer of employees to a new employer on the sale or restructure of a business takes place (called “transmission”), the employee is deemed to simply continue their employment with the new employer, meaning that:

  • they take all of their accrued employment entitlements with them; and
  •  are deemed to have continuous service for the purpose of the long service leave legislation.

Buyer’s choice

It is important to note that under the standard Real Estate Institute of Queensland Business Sale Contract (“REIQ Contract”) - used in most business sale transactions in Queensland - the buyer has two options in relation to the existing employees of the business:

  • Make an offer of employment to an employee.  If the buyer chooses to make an offer to an employee and the employee accepts that offer, the employee’s employment with you will terminate at settlement of the purchase and the employee will commence employment with the employee from that date; or
  • Choose not to make an offer to an employee.  In that case, you will make the employee redundant from the settlement date and will need to pay out any entitlements and redundancy pay.

Employee entitlements

For each permanent employee (not including casuals or contractors) that transfers to the buyer following settlement, the REIQ Contract allows the buyer a downward adjustment to the purchase price at settlement.

This will be calculated by you or your accountant and is typically calculated as the 70% of the value of all annual leave, sick leave and other entitlements, plus 70% of the proportionate value of any long service leave, which is taken to have accrued for each employee with over 5 years’ service.

These provisions are often difficult to negotiate as most buyers will insist on the adjustment – after all, they must honour entitlements that accrued while the employee was working for you.

Nonetheless, all matters are unique and it is important to note that the standard terms of the REIQ contract can be amended and negotiated.

Tags: Business Sale, Business Purchase, Business Conveyancing, Employee Transmission, Fair Work Act, Employment Law, Standard Contract

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