What happens to employees when a business is sold
Sep 01, 2016It is commonly thought that when a business is sold, particularly if it is described as being sold as a "going concern", the employees will continue to work in the business, although under a new owner.
This is not necessarily the case.
When there is a transfer in ownership of the business:
- the outgoing business owner terminates the employment of the employee (by written notice);
- the incoming business owner decides whether or not to offer employment to the employee; and
- the employee decides whether or not to accept any offer of employment.
The incoming business owner may believe that the business is over-staffed, or staffed with the wrong people - so they will not want to take on any more staff than they have to.
Because the employment relationship ends with the previous owner once the business is sold, and whether or not the new owner wishes to offer employment to any of the employees, the outgoing business owner needs to ensure that sufficient notice (or payment in lieu) is given to the employees. If a transfer of business occurs before the notice period ends, then the outgoing business owner must still pay the rest of the notice period to the employees.
What happens with outstanding wages?
Whether or not the employee will be employed by the new business owner, the outgoing business owner is still liable for all outstanding wages up to the date of settlement of the business sale. The outgoing business owner may decide to pay the employees direct, or in the event that the settlement date does not accord with the particular pay cycle, the outgoing business owner may make an "adjustment" for the value of those unpaid wages, in favour of the new business owner, and the new business owner will then pay the outstanding wages in the next pay cycle.
What happens with leave entitlements?
In the event that:
- the employee becomes employed by the new business owner within 3 months after termination by the previous owner;
- the work the employee performs is the same, or substantially the same, as the work performed for the previous owner; and
- there is a "connection" between the previous and new owners (e.g. if the business is purchased as a "going concern"),
then service with the previous owner will count as service with the new owner - except if the new owner does not agree to take on the employee's annual leave and redundancy pay entitlements.
In any event, the new owner is still required to recognise the employee's entitlements for other types of leave that cannot be paid out - such as personal leave (that is, sick leave and carer's leave). This could potentially cause some issues (and cause the new business owner to incur a lot of costs) if an employee has worked for the outgoing business owner for a considerable period of time and has a significant amount of sick leave accrued, but then suddenly becomes seriously ill. The new business owner would have to pay the employee their sick leave entitlements. A possible solution to this is for the vendor to allow an agreed amount (say 70%) of all such accrued entitlements.
Given that it is sometimes difficult to calculate an employee's entitlement to long service leave (considering that the entitlement does not accrue until after 5 years of service), it is often preferred by outgoing business owners that the new owner takes over all existing entitlements.
What if the new employment arrangement doesn't work out?
Generally speaking, an employee is unable to bring an unfair dismissal claim within the first 6 months of employment. Because the employment relationship between the employee and the new business owner only commences once the business purchase is settled, this means that the new business owner is able to dismiss any employees that may not be suitable.
Contact the Shire Legal team if you have any questions.
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