The acquisition or sale of a business is a potentially complex process and therefore a proper due diligence process is required to clearly identify what exactly is being acquired or sold.
As each business has its own particular requirements, it is important to be wary of unexpected traps and costs before you sign on the dotted line.
As you are aware, key employees are a vital component of any business, however, uncertainty about employee entitlements and redundancies on the transfer of a business can create issues with employees at the time of transfer or later on, and if you get it wrong, there can be unexpected costs.
The Example
In the case of CFMEU v Amcor Ltd (2002), the Federal Court held that Amcor was required to pay approximately $6million in redundancy payments, where Amcor had transferred its employees to a wholly owned subsidiary on the same terms and conditions and with continuity of service.
The relevant enterprise agreement had an ambiguous transfer of business clause. On appeal, the High Court overturned the requirement to pay redundancy, but the case shows that you need to be very careful about lurking dangers when changing employment arrangements.
The Contract
A Sale of Business Contract must cover who has to pay accrued employment entitlements of continuing employees. Generally, the Contract should deal with the following entitlements:
- Annual Leave;
- Personal (sick and carer's) Leave; and
- Long Service Leave
On the transfer of business, each of the above leave entitlements will need to be considered to determine employees' entitlements and hence the liabilities to be taken into account.
The Legislation
The Fair Work Act 2009 ('Act') allows a purchaser of a business to decline to accept continuity of service for the purposes of annual leave and redundancy, but not personal leave.
The Act otherwise maintains continuity of service where there is a "transfer of business" (and while this expression can be uncertain in meaning in other situations, it clearly applies to a sale and purchase.)
The Act also provides for current enterprise agreement conditions to transfer across to the new employer. Generally, this is a matter requiring close attention to ensure the new employer does not take on any unexpected additional pay obligations or end up with unduly complicated payroll arrangements from having different groups of workers on different deals.
In contrast to annual leave and redundancy, the Long Service Leave Act 1955 does not allow a purchaser to break an employee's continuity of service with respect to long service leave.
Does the Purchaser take on the employees and liability for leave entitlements?
A purchaser does not have to take on the employees: the purchaser could refuse to be obliged to employ the employees, in which case the vendor would presumably need to re-allocate the employees or terminate them and bear the costs associated with their redundancy.
However, if the purchaser does take on the employees (which is usually the case) within three months of the transfer, then it has a choice as to whether to accept continuity of service or not for annual leave and any future redundancy purposes. If it does not accept continuity of service, the vendor will be liable for those entitlements, including redundancy, as the terms of the proposed new employment will be less favourable than the old employment.
Adjustments
If the purchaser is taking on entitlements, the purchaser and vendor usually come to a commercial decision to adjust the purchase price to take account of accrued employee entitlements and to reasonably compensate the purchaser for the transfer of accrued entitlements. The "ifs and buts" of this are definitely a matter for legal advice.
How adjustments are made depends on the nature of the entitlement:
- annual leave and long service leave for greater than 10 years is usually apportioned in full, as they will have to be eventually paid out;
- under NSW legislation, "pro rata" long service leave for 5-10 years service is subject to qualifications (for e. g., employee is made redundant), and adjusted on a sliding scale to reflect the fact that the entitlement may never arise; and
- personal leave is frequently not adjusted at all as it is contingent and a large part of the potential liability may never arise, but how best to deal with this varies from case to case. If the vendor's liability for personal leave is substantial, then from a purchaser's point of view it may be a good idea to apportion some of it. It is also worth noting that there has been a substantial change since 1 January 2011 whereby personal leave entitlements do now transfer on a transfer of business.
The tax deductions available to the purchaser, who ultimately pays out the leave entitlements, are also frequently reflected in adjustments.
Conclusion
As you can see, it is important for purchasers and vendors to consider these issues before setting the commercial deal in stone. As such, each party should seek legal advice to ensure that a solution to these issues is included in the deal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
